Meet the New Money, Same as the Old Money

This month, Wired Magazine is running an interesting cover story entitled The Future of Money: It’s Flexible, Frictionless and (Almost) Free. The article was quite thought provoking, but the general focus of the article was pretty deftly summed up in the final paragraph:

A generation ago, when people made the choice to switch to plastic, credit cards did not just replicate cash; they fundamentally changed how we used money. The ease with which people could make purchases encouraged them to buy much more than they had in the past. Entrepreneurs suddenly had access to easy — though high-interest — loans, providing a spark to the economy. Now, while it may be hard to predict what innovations PayPal’s platform will enable, it’s safe to say that the payment industry is going to change dramatically. As money becomes completely digitized, infinitely transferable, and friction-free, it will again revolutionize how we think about our economy.

The technology discussed in this article is undeniably cool. It will make transactions for many purposes much, much easier than they’ve ever been. The acquisition of goods and information will become even easier.

Here’s the thing, though: each time there’s a new technology for exchanging money between people, there’s a cost for the people exchanging money.

Take cash, for example. We pay for the cost of printing cash with our taxes. With credit cards, we pay for the convenience with financing charges and higher costs at retailers. With electronic transactions, we pay for the convenience with a small surcharge in each of the transactions.

In each case, there’s an inherent cost of using the means of exchange. With cash, the people who have more of it pay more taxes and thus bear more of the burden of the cost. With credit cards, some of the burden is pushed to the retailer, but the consumer still pays for it. With purely electronic transactions, even if the fees are entirely pushed to the retailer, the customer still pays for it with higher costs on the items they buy.

The “future of money” is just a remix of the past of money. The more you spend, the more it costs you.

If you spend lots of cash, that means you have lots of cash and you’re going to be taxed for it. If you rack up large credit card balances, you’re likely paying finance charges, plus you’re paying higher costs at retailers because they’re covering some of the cost of that transaction. Similarly, if you make lots of electronic transactions, you’re losing more and more money to the overhead fees.

It doesn’t matter what format of financial transaction you’re using, the basic method of success stays the same. Don’t spend money with reckless abandon.

If you hold onto your cash, you can eventually move into a position where your savings supports you, either in part or in full. In that position, you pay less taxes than you did before.

If you don’t put balances on your credit cards, you’re not socked with the finance charges and you’re not paying the “surcharge” built into the prices of the stuff you buy.

If you don’t do lots of PayPal transactions, you don’t lose money to the fees charged on all of these transactions. The fewer transactions you make, the less money you give away.

The new money works the same way as the old money. The less you spend with reckless abandon, the better financial shape you’re in. The more you spend, the more money you simply give away in the form of fees, taxes, and surcharges.

The danger, though, is the same as it was with the move from barter to money and from money to credit cards. It’s now easier to spend the money. When we bartered, an exchange of value was difficult and time consuming. When we moved to currency, it became much easier to spend money and debt became prevalent. When credit cards appeared, consumer debt grew like crazy because it was so easy to spend. Electronic transactions are even easier – just a click of your mouse and it’s done. It becomes even harder to think through the buying decision, which means that there’s even more room for businesses to profit from you.

The best thing we can all do is separate what we’re buying from how we’re buying it. Do we need to buy this? If we do, buy it in a way that’s the most personally responsible. If we don’t need it, though, play it safe and careful. Shy away from the easy buy, because that’s the road that creates personal financial trouble.

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  1. Marc says:

    There’s a couple of things people need to realize about any hype of new payment methods:

    -Companies realize the value and profitability of creating the infrastructure for a popular payment system (such as Visa or Mastercard). It can be very lucrative to be on top of the next big thing. They have every reason to promote them and sign up as many people as possible.

    -Businesses will do whatever they can to remove obstacles to you buying their products. More channels through which to spend money (cash, debit, credit, department credit card, cell phone, paypal, etc) mean less obstacles such as “my card is maxed out”, “I don’t have the cash on me”, “I didn’t bring my bank card”.

    For anything we could need to buy, there are already plenty of options that are secure and generally convenient. Often I find payments that are the most convenient are also the easiest ones to lose track of.

  2. Katie says:

    Trent, I think you have a really good insight here. Furthermore, with credit cards, I think the costs are shifted to the less wealthy who are relying on the CC to get them through a rough patch. One can moralize all he or she wants about that, but it’s interesting. Poorer families who use CC’s may be taxed less (unless you look at the tax rate on dividends, which is lower than income, but that’s another argument!) but they are paying more finance charges when they carry a balance because they cannot really afford to pay their bill. Interesting.

  3. Morder says:

    “plus you’re paying higher costs at retailers because they’re covering some of the cost of that transaction”

    one thing I’ll say about that is *everyone* is paying higher costs as a result of credit card transaction fees – not just those who use credit cards.

  4. Dave says:

    Frugality shouldn’t be about what you need, but about personal value. If you buy a DVD and watch it once, maybe you should have rented it instead. These new electronic payments certainly allow transactions to be cheaper (Redbox wouldn’t be $1 if they had to pay someone to sit in the kiosk), but it shouldn’t fundamentally change how we value items.

  5. Des says:

    In addition to what Morder said, everyone pays taxes too, not just those who pay with cash.

  6. anne says:

    i thought this was going to be about people who are old money, in that they grew up w/ money, versus people who are newly wealthy. i really did.

  7. lurker carl says:

    Digital money is even faker that our existing fiat currencies. Even though our bills and coins are without sufficient assets to back them up, at least you can wave a fist full around like Scrooge McDuck. Try doing that with binary money.

    Look how easily our governments burn through their digital funds. That leads me to think we need to experience more friction – not less.

  8. anne- I thought exactly the same thing…

  9. “separate what we’re buying from how we’re buying it”…if people would’ve done that–our economy may not be in the credit mess we are in. Interesting…..

  10. Deborah says:

    I’m with Anne and Steven… Wasn’t what I expected but… the conversation re paypal is interesting. I was flabbergasted when I figured out how much they added to the cost of doing business on ebay.

  11. Kai says:

    @ Katie (#2)
    The costs are not shifted to the poor. The costs are shifted to those who carry a balance (ie. use their card poorly).
    There are many people with little money who manage it carefully, and might use cards to defer payment to the end of the month, but no further.
    There are those with money who pay no attention to it and pay massive interest fees.

    There is no direct poor-penalty here. Just for usage.

  12. Great points….but IF we don’t have balances on our credit cards, and IF we only use the ones that have 0 fees associated with them, and IF we intelligently use the ones with cash back options on them, it seems as though the built in fees associated with these cards can be minimized and you can actually get some of your money back.

    That’s my basic philosophy anyhow.

  13. deRuiter says:

    I love airlines reward cards, but you have to game them. YOU MUST ONLY SPEND WHAT YOU WOULD PAY FOR IN CASH, NEVER RUN A BALANCE FROM MONTH TO MONTH. The free miles are there, and if you don’t take advantage of them it’s your loss. Get an airline card for one year, the first year has no card fee, and you are gifted 20,000-25,000 miles. Use the card for 11 months, and then apply for a card from a different airline with more bonus miles. AFTER YOU GET THE NEW CARD, cancel the first one and you won’t have to pay the annual fee. This is great for husband / wife. Wife gets first card in her name, gets free miles from airline. The wife puts husband on as SIGNER only, not responsible for payment. After 11 months, Husband gets card with same airline in HIS name alone, wife cancels original card. Husband puts wife on his card as signer only. Voila! TWO FREE DOMESTIC TICKETS ON THE SAME AIRLINES, IN 12 MONTHS, WITH NO CREDIT CARD FEES BECAUSE THEY DON’T CARRY A MONTH TO MONTH BALANCE. Poor people pay interest on credit cards because they have spent money which they don’t have. Don’t spend more than you can pay off each month, and you won’t have to pay fees, while you will fly free (except for the gvt taxes.) At this point airline miles are collected income tax free!

  14. Sandy says:

    When our family lived in Europe, there was only the option of a Debit card…credit cards as we use them in the states were not available to most if not all regular people. You did have a choice of payment, and it was this: $ can come out per transaction OR at the end of the month the balance would be withdrawn, and you were always up to date on paying everything off by the end of the month.
    I could be wrong, and they have also seen their fair share of financial difficulties, but I have to imagine that keeping everyone paid in full keeps businesses going, not to mention households knowing exactly how much they have to spend every month. I believe it’s called Government Regulation…which everyone has their own viewpoint of, I’m sure.

  15. dagny says:

    I think the next major change in money will be a return to gold and silver coins when the debt based fiat money system combined with fractional reserve banking colapses. Maybe in this decade.

  16. Geoff Hart says:

    Wired noted “As money becomes completely digitized, infinitely transferable, and friction-free, it will again revolutionize how we think about our economy.”

    This kind of shameless and uncritical tech boosterism is why I stopped reading Wired many years ago. Friction-free? What universe are they living in? Friction will always be there as long as someone can make a profit on the transaction, and so long as there’s little competition (as in the case of Paypal), the profit margin will be as high as the market will bear. Anyone remember the original Bell, pre-breakup?

    When it comes to moving money between services, Paypal is a particularly egregious offender in terms of friction — though in fairness, I can’t say they’re solely responsible, since there’s always at least one other party involved in the transaction. In addition to a per-transaction fee*, their exchange rates between currencies are poor, even compared with my bank, and they hang onto money during the transfer for days so they can bank the interest on the float.

    * I use a business account because I’m a business. It would be pretty hard to justify (ethically) pretending to be anything else just to save a few dollars per year on transaction fees.

    Electronic transfers cost next to nothing because of their high volume, even after you account for the hardware and staffing costs. and should be nearly instantaneous. The fact that they aren’t tells us something.

  17. Salsaram says:

    How much does Paypal add to cover their overhead. I haven’t heard this before and would like to know. Thanks in advance.

  18. triLcat says:

    #16 Geoff, Paypal does not hang on to money for days – I transferred money to a friend yesterday and it was in his account yesterday.
    I didn’t notice the exchange rate. I was only transferring $40, so I didn’t look at the exchange rate that closely (I don’t live in the USA), but it didn’t seem horrible.

    Yes, I could have sent him a check (could have even gotten one in dollars at a good exchange rate from someone here), but it would have taken a week for him to get the money, he would have to go to the bank to deposit it, and the international stamp is also not free.

    Basically, it’s a matter of using the right tool for the job, and remembering that Paypal, credit cards, etc are tools for spending money and money is still a very real construct.

  19. prodgod says:

    Let’s not assume that all credit card balances are the result of poor spending habits and that those who spend more than they earn are irresponsible. Let’s say for instance that I am self-employed and business is down, or collections are slow. Bills still need to be paid, whether I have the money or not. I’m certainly not going to cancel my family’s health insurance just because I don’t have the money to pay the premiums. It will be charged on a credit card. Obviously, this is not a sustainable solution long-term, but it can be a temporary fix when one has cut every other expense to the bone and income is temporarily insufficient.

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