In 1915, the chancellors of a town in Norway passed a regulation stating that trucks should not go faster than 15 km per hour. This was not a safety measure; instead, the chancellors wanted to protect the market for horse-drawn wagons, which had this as their maximum speed. Of course, the regulation did not work. The trucks went faster and would soon dominate freight transport in the city.
The traditional model for the sale of music was albums: a collection of several tracks on the same vinyl record. Later, cassette tapes were also used. Then the record was offered as a compact disk. These changes of technology were sustainable for the industry. If the record shop sold a vinyl record, a cassette tape, or a CD, it was the same business model. The disruption came when “pirates” offered music for downloading or streaming online. Clearly, this was a much better model for most music lovers than retaining the physical media. On the Internet, one could have large archives of music, good search and recommendation systems, and stream to many different types of devices. However, the music industry wanted to retain the model that gave them a secure income; they fought back, but couldn’t win. The main thing was not that the pirates offered free music, but that it was much more convenient for users to get the music directly online. We see this today. When the industry is at last giving up on the physical media, a large number of customers are willing to pay for various added services on the new legal sites. For the most part the pirates have gone away—their job has been done.
These two very different examples show us that it is difficult to stop a new technology that has clear advantages. One may delay the introduction, but if the advantages are great enough, a momentum will build up that cannot be stopped. For music, this momentum was built when more and more people had access to the Internet, with increased bandwidth and inexpensive, portable digital music players. The nail in the coffin was the smartphone. When this became the unit of choice for playing music, there was no way back. In retrospect, we see that music on any type of physical media would have to be abandoned as the smartphone became the music player of choice. That is, in the first phase the alternative technology often comes as a replacement; in our example replacing physical media by streaming. In the next phase, a consumer explores the freedom that he or she gets when leaving the constraints of physical media. With every new breakthrough technology, some users retain the old. For music we see a thriving, albeit small, market for vinyl records. Some photographers, both amateurs and professionals, still use traditional film cameras. However, in this book we look at major trends, accepting that there always will be smaller niches that continue using a traditional technology.
While the record industry managed to maintain its business model for a few years, it may be argued that they would have been better off if they had taken control over the new technology instead of trying to stop it. At least they would then have avoided coping with the free services that the pirates provided. To make an impact after the pirates, this implied that they had to offer a free option when introducing their new services.
We often see that newcomers in an area have a better understanding of the potential of a new technology than the incumbents. This is probably because the incumbents, such as the record industry, are comfortable in a model that has served them for many years. It is difficult, and sometimes impossible, to break out. A good example is Kodak, which invented the digital camera but was too entrenched in its very successful business model of selling photographic film and analog cameras to exploit any other alternatives.1 The companies that sold expensive mainframe computers had a business model that could not incorporate new mini-computers.2 Later on, the same thing happened with the successful mini-computer manufacturers. Their organization was not able to design, manufacture, and sell the new PCs. For example, their sales-people were paid in the form of a percentage of the contract. This would give them a good bonus when the contracts were in the millions of dollars, but not when a customer bought a PC for less than a thousand dollars. Furthermore, while the mainframe and mini-computer manufacturers made the complete product, PC components and software are manufactured by many different companies. Therefore, a PC manufacturer requires high volumes to make money, which is quite different from the earlier technology.
These technology shifts have been so disruptive that one could argue that the incumbents would not have had a chance, even if they had decided to go for the new technology. It may be that Kodak’s only choice was to continue making photographic film and analog cameras as long as it was profitable, and then close down its entire operation. The new digital age required different technologies, different competence, a different way of making and selling cameras, and different media for storing the images, and maybe Kodak would not have had a chance in this business? When smartphones became the standard ways of taking photographs, the consequence is straightforward—Kodak would be lost!3 Of course, shareholders in Kodak would have had the option to sell the shares and invest in companies that utilized the digital technology. But moving an investment is simpler than reorganizing a company from one technology platform to another disruptive platform.
Before the Internet, the major airlines had built a system where tickets were sold through travel agencies or airline offices. A customer would call in, describe his or her needs, and an operator would enter the booking in the system, then send the tickets by mail. With skilled operators, one could have a complex discount system, such as a discount on round trips or a discount for couples whereby if one paid the full price the other would pay half price.
With the advent of the Internet, all airlines, both the incumbents and the new low-cost airlines, established online booking systems, thereby allowing customers direct access to their systems. In this respect the technology was not disruptive; it was sustainable, for both the customer and the airline, but perhaps not for the intermediaries—the travel agencies. However, while many of the incumbents retained their complex discount structure, budget airlines such as Ryanair and Norwegian developed a much simpler discount system. The main idea was to separate tickets. Round-trip discounts and discounts for couples required two tickets to be connected. This could cause problems. For example, what would happen if only the full-price ticket for a couple was cancelled? Would this be possible or would the discount system demand that both are cancelled in this situation? As we can see, the idea of connecting two tickets increases the complexity, possibly beyond what normal users can handle.
The new airlines came in with many other ideas—low fares being the most important—but a major part of their success in establishing their new business was by simplifying their price structures. The enabler for these business models was the Internet and the simpler price structures made it possible for the customers to book tickets on their own. Still, it is not a disruptive technology for the airlines, as seen by the fact that both the traditional airlines (most of them anyway) and the low-cost airlines coexist. However, the Internet offered an opening for the new airlines. Another example of a sustainable technology in the airline business is the move from propeller airplanes to jets. Again, in this case, the technology shift does not disrupt the business model.
In this book I shall discuss digital currency and digital payments. The technological basis is inexpensive point-of-sale terminals, mobile technology, and encompassing computer networks. Interestingly, here we also have “pirates,” manifested as a set of new cryptocurrencies that provide an alternative to the traditional currencies. These are maintained by smart algorithms instead of a central bank. They are still just in an experimental phase, perhaps also with an uncertain future. I shall return to cryptocurrencies later, but shall first concentrate on technology that enables us to make digital payments within the traditional currencies.
An important advantage of digital payments is that they can be embedded naturally in the buying process. Customers are there to purchase something and paying is a required part of most transactions. By using cash, the actual payment is a separate part of the transaction, most often performed manually. In a store, the cashier must tell the customer what to pay, take the cash, count it, and offer change in return. When paying with a card, the amount can be captured electronically. The advantage of a physical store may be that the payment goes faster when it is digital, especially with tap-to-pay solutions where the card or the smartphone only has to touch the terminal. On the Internet there will be no good alternative to paying digitally. The integration of payments in the whole process is also very much apparent when buying tickets, for theaters or concerts. The process may involve selecting shows, dates, and seating. Similarly, we use apps to buy tickets for buses and trains. These apps will help us find routes, schedules, and may even tell us when the bus will actually arrive. We see that payments are just a part of these processes, a part that cannot be separated out as a cash transaction.
Digital technology is disruptive for traditional payments such as cash or checks, but here the fight is not between companies. In practice, payment systems have to be general if they are to work. The customer clearly does not want one system for each store; neither does the merchant want one system for each type of credit card. That is, if many customers or companies accept one form of payment, soon all the others will have to follow. There will be no competitive advantage if any form of digital payment can be used in any store, but digital payment systems allow for lower cost and better service. In many ways this is like electricity; it is clearly an advantageous technology with many benefits, but since it is available to all stakeholders there is no competitive advantage between businesses within a country.
Network effects are important here. The advantage of a new technology increases with the number of users. The owner of the first telephone had no one to call; today we can call people all over the world. As more and more customers use digital payments as a default, merchants will have to provide the necessary equipment. Many stores used to have a sign on the door saying, “We accept credit cards”; today we may see warnings such as “Cash only—we do not take cards.” In many countries such a sign will turn away most customers.
These network effects are very apparent with mobile pay systems that can handle person-to-person transactions, and in this respect can take over from cash. To aid the introduction of the new technology, and to get the network effects, the providers let you also send money to people that are not connected to the system. The receiver will then have a few days to register in the system; if it does not, the money is returned to the sender. For most customers this is an opportunity to install the new systems.
Between countries we see another picture. Some, such as the Nordic countries, have embraced digital payments. Checks are no longer used, cash transactions have been reduced, credit card transactions are digital, Internet banking is the norm, and invoices are sent electronically. New technology, not least smartphones, is handling more and more transactions. The advantage is an effective economy. Fewer and fewer resources are used for performing payments; at the same time, the customer, the business, and the authorities will get improved service and better overview. With digital payments, all operations can be connected to a given customer, which means a company will get valuable data about their customers and what they buy.
Other countries, such as the United States, are maintaining inefficient payment systems where paper is still the important ingredient—in the form of paper checks and paper money. Thus, the actual payment will in itself be more expensive. Another downside is less overview, for customers, businesses, and the authorities.
One could argue that cash has functioned very well for hundreds of years, so why change to another system? I shall return to this discussion later on, but going digital has many advantages, for customers, merchants, and for societies. Therefore, all countries will see an increase in digital payments. Furthermore, cash is becoming increasingly obsolete in a world where everything from invoices to salaries is paid digitally. Cash is losing momentum; it cannot be used for online shopping, and even if used in a physical store it creates a problem for the merchant, who must transfer the cash to the bank. The merchant also faces the problem that there may be few banks that handle cash. This is already the situation in several countries today.
Cheap, fast, and reliable computers are taking over many jobs and many tasks. Some experts estimate that, within a few years, 90 percent of today’s jobs will be performed by a machine, a robot, or a computer algorithm. This shows a lack of understanding of computer technology. Independent of application, the computer needs a formalization of the task at hand. As the end result, data and the operations will be broken into zeros and ones inside the computer—that is, as a predetermined formula. This program or “formula” will then be executed as a deterministic operation. While smart software can automate some jobs, it cannot handle all.
Some tasks have already been formalized. This is especially the case for operations regarding money. From the very first banks, these processes—establishing an account, inserting money into the account, withdrawal, interest calculations, and so on—have followed strict procedures. Nobody would want a sloppy bank to take care of their money. In the 1950s and 1960s, when the first computers emerged, the job of the programmers was to convert these procedures from natural language into a computer language. In principle, this was an easy task as both descriptions were formalized, and many of the operations regarding accounts and payments have the advantage of being simple.
Other tasks are more difficult to formalize. Today, leading technological companies are working on autonomous vehicles—cars that can drive themselves on ordinary roads. If this is to be achievable, they will need to formalize the act of driving, the traffic situation and the roads. In practice, they need to devise systems that can allow the car to follow the road, stop at a red light, turn to the left or right, avoid pedestrians and other cars, and more. As human drivers, we often have to use our understanding of a traffic situation in order to do the right thing. It is very difficult to program this understanding into a computer—that is, to formalize the task. One may be able to do this for some types of situations, but in practice there will be an unlimited number of exceptions to handle.
A lot of hype is concentrated on many of these unformalized and difficult tasks, from autonomous cars and decision-making robots to natural language speech translation. It seems that the media discussion has largely overlooked the digitalization of payments, even if this is so much easier to achieve. For payments, there is no need for the new technology to “understand” the customers’ intentions. Also, the technology that is needed to perform all types of payments—that is, to implement the cash-free society—is already here.
One reason for this paradox may be that there are some very dedicated supporters of cash. There are arguments that the poor, very young, or elderly will fall outside a digital system. While we may expect that privacy issues that emerge when we replace anonymous cash with traceable digital payments are up for discussion, we must also recognize that many stakeholders feel that their “business model” is threatened in a cash-free society. Anonymity is the all-important feature for criminals, tax evaders, and terrorists. From a technical perspective, however, or from a cost-benefit viewpoint, digitalizing payments are a clear win, but the aggressiveness in the discussion may have scared politicians, financial institutions, and many others from being involved.
There are several advantages to digital payments. They can be performed quickly and efficiently, there is no need to be physically present to perform the payment, and they can be performed everywhere using the customer’s own computer or smart-phone. While there are clear advantages for using digital payments for customers, merchants, and banks, the greatest benefit may come to the society as a whole. Cash handling is expensive, and it is not very environmentally friendly, as large amounts of cash have to be transported in armored trucks. As we have seen, it also supports black market transactions. I shall explore these issues and also study how citizens in many countries have made the transition from using cash to become real digital citizens.
While there may be law-abiding ordinary citizens who want to operate anonymously, doing so is not very practical in a modern society. One would not have the opportunity to perform online shopping or to get the discounts that are offered to app users, for example regarding public transportation, concert tickets, and grocery stores. In fact, a person wishing to retain full anonymity cannot use social networks or have a mobile phone and must be very careful using any service on the Internet. Still, many activities, such as crossing a border, renting a car, or checking in at a hotel, cannot be performed anonymously. In some countries, toll-booths are digital, meaning that anonymity is also lost. Data on these activities will be registered in computer systems. One can question whether it really is possible to operate anonymously in a modern society. So, instead of trying to avoid being traced, a better option may be to support laws and regulations that stop the misuse of the data that are collected.
The world will become cash-free, whether we like it or not. Some countries are nearly there, and others will follow.
Notes
1 John J. Larish (2012) Out of Focus: The Story of How Kodak Lost Its Direction, Createspace Independent Publishing Platform.
2 See Clayton Christensen (1997) The Innovator’s Dilemma, Harvard Business Review Press.
3 Scott Anthony (2016) “Kodak’s Downfall Wasn’t About Technology,” Harvard Business Review, July 15. https://hbr.org/2016/07/kodaks-downfall-wasnt-about-technology