The Future of Money

CONTENTS

The Big Question

Alipay’s Financial Revolution BUSINESS REPORT A Weekend in Bitcoin City

Q&A with Stripe’s Patrick Collison

Starbucks’s Mobile Bet The Future M-Pesa Tries to Branch Out of Money From Apple Pay to Bitcoin, payment technology is changing. Some of the big winners in this “revolution” may be the old guard. DANIEL ZENDER

mobile wallets Apple Pay and LoopPay, card terminal. Venture capitalists invested The Big Question run on top of the existing payment net- over $2 billion in payment technology works owned and operated by banks and firms between January 2013 and June credit card companies. The new technolo- 2014, according to the data tracking firm Technology gies are designed to make those estab- CB Insights. lished systems faster, more convenient, However, established players, espe- Repaints or more secure, and to convert transac- cially the banks and credit card companies tions now being done in cash. A diferent that handle most noncash payments today, the Payment group of technologies would replace the have, if anything, seen their positions established systems with new ones, fun- strengthened by recent developments. A Landscape damentally challenging the vast industry good example is the high-profile launch that executes, guarantees, and tracks pay- of Apple Pay. Unlike earlier technologies As technology-driven payment ideas ments. Among them: Venmo, a person-to- like Google Wallet and PayPal, Apple Pay give cash a run for its money, the big person payment app and social network makes no attempt to supplant the Visas winners could be established banks and that processes $3 billion of payments a and Bank of Americas of the world. Look credit card companies. year, and Dwolla, an upstart in Iowa look- at your digital wallet in Apple Pay and ing to cut the payment-processing rev- you see a version of exactly the same card ● In developed economies, money has enue enjoyed by Visa and other networks. that’s in the wallet in your pocket. The been digitizing for decades. Few Western- As technology drives a shift in how we ers touch a paycheck anymore. Through buy things, the revenue that the payments direct deposit, digital money is trans- industry extracts could grow to more ferred electronically from our employer than $2 trillion a year by 2023, double $2 billion VC investment in payment tech to our bank account every pay period. A the 2013 figure, the Boston Consulting similar process moves contributions into Group predicts. Much of that increase our 401(k) accounts or zaps money over will come from a reduction in cash pay- digital wallet LoopPay, which can be used to pay the rent, the utility bill, a student ments in developing countries. But across in many more terminals than Apple Pay loan, or any other expense. the globe, BCG predicts a time of “disrup- because it uses a simple, widely compat- Yet it remains a cash-based world, tion and opportunity” driven by digital ible copper loop technology to simulate with 85 percent of consumer trans- technologies that will require the existing the coding in your credit card’s magnetic actions worldwide done with bills and credit card system to prove that it’s better strip, similarly relies on the existing credit coins. While some countries, like Singa- than its new competition. card system. pore and the Netherlands, now use cash “The smartphone is the catalyst for a “Think about the infrastructure and in a minority of payments, consumers in lot of change in this industry,” says Dana how long it took to create that,” says such diverse economies as India, Mex- Stalder, a venture capitalist with Matrix LoopPay CEO Will Wang Graylin. “It’s ico, Italy, and Taiwan still execute more Partners and a former eBay and PayPal very difcult to change merchant behavior.” than 90 percent of transactions with cash, executive now on the board of Poynt, Innovation in payments might be according to research by MasterCard which recently introduced a smart credit especially likely to take hold in the devel- Advisors. Even in the United States, they find, cash accounts for 55 percent of payments. New technologies, including digi- The Surprising Persistence of Cash tal wallets, cryptocurrencies, and mobile Estimated percentage of consumer payment transactions done with noncash peer-to-peer payments, aim to tip that methods, including credit cards, checks, and electronic payments. balance. They’re accelerating the move SINGAPORE 61% away from cash in countries where alter- NETHERLANDS 60% natives to banks and credit cards are well established, and they’re doing the same in UNITED STATES 45% developing economies. GERMANY 33% Which technologies and companies JAPAN 14% are likely to lead this transformation is CHINA 10% the big question for this Business Report. ITALY 6% One way to look at these new tech- RUSSIA 4% nologies is through their relationship with the long-established payment ser- INDIA 2% SAUDI ARABIA 1% vices. Some technologies, including the ADVISORS MASTERCARD SOURCE:

2 THE FUTURE OF MONEY TECHNOLOGYREVIEW.COM MIT TECHNOLOGY REVIEW oping world, where cash is still king. with a stack of 100-yuan notes. To pay company, which unlike Amazon doesn’t Leapfrogging ATMs and checks the her utilities—water, electricity, and home actually stock and sell the merchandise same way they have skipped over land- Internet—she went to three separate on its sites, held its initial public ofer- lines and cable, whole chunks of popu- banks, where she handed cash to a teller. ing on the New York Stock Exchange in lation are moving straight from cash to The process was “very time-consuming September, raising $25 billion, the larg- mobile money. M-Pesa, which has become and irritating,” she remembers. Even as est debut ever. a force in Kenya and Tanzania, has turned money into a cellular currency that can be converted into airtime or used to pay for things. Today, some 60 percent of Kenyan “[Alibaba and Alipay] are integral to each other’s success. But I adults have used a mobile phone to receive wouldn’t be surprised if, in the long term, Alipay turns out to be the or send payments. more important business.” What could derail the boom in pay- —Ben Cavender, China Market Research Group ment technologies? Security concerns. The consulting firm Accenture recently surveyed 4,000 con- skyscrapers and gleaming shopping malls Alibaba and Alipay, which has been sumers in North America and found that cropped up around China’s capital, most incorporated as a separate company since while more people expect to use mobile middle-class residents had never seen or 2011, helped drive the very rapid expan- payments, 57 percent of respondents used a simple checkbook. sion of online sales in China—now the were concerned about the security of such Today she uses the Alipay app, Chi- world’s second-largest “e-tail” market. transactions. That’s up from 45 percent na’s most popular online payment ser- McKinsey Global Institute estimates that two years ago. vice, on her smartphone to transfer by 2020, Chinese e-tailing could generate New approaches could help. Apple money directly to her landlord’s account. as much as $650 billion in sales, and Chi- Pay, Google Wallet, and others utilize a She pays for her utilities and her mobile- na’s market “will equal that of the United system that creates a one-time digital phone account through Alipay as well. States, Japan, the United Kingdom, Ger- token for each transaction and sends that, Yang even keeps savings in her Alipay many, and France combined today.” rather than a customer’s credit card infor- Yu’ebao money market account, where As much as Alibaba has driven China’s mation, through the system. money accrues higher interest than it booming e-commerce market, it’s possible Innovations like this show that mobile does in a traditional bank account. Yang that Alipay will ultimately have the bigger payments—even if they don’t lead to a hadn’t set out to deliberately overhaul her impact on the Chinese economy. Alibaba radical shake-up—are improving a global financial habits, but new mobile technol- and Alipay “are integral to each other’s payment ecosystem that’s long been due ogy, she says, “made so it easy.” success,” says Ben Cavender, principal at for an upgrade. —Nanette Byrnes As of October 2014, Alipay had more China Market Research Group in Shang- than 300 million registered users in China hai. “But I wouldn’t be surprised if, in the (and 17 million overseas), according to long term, Alipay turns out to be the more Case Study the most recent figures the company has important business—it’s so flexible and made public. Many, like Yang, originally has so many potential uses.” set up accounts in order to shop at parent Alipay debuted as a simple e-payment Alipay Leads a company Alibaba’s wildly popular retail system, but it’s now a destination app sites Taobao.com and Tmall.com, where (and website) in its own right. In addition Digital Finance everything from designer clothes to pet to easing consumers into online shopping, food is for sale. The Alipay payment sys- Alipay, with its huge built-in user base, Revolution in tem works much like PayPal, except that has recently made a range of financial funds are held in escrow and are released services available to people who previ- China when the goods arrive in satisfactory fash- ously lacked easy access to money market ion. In a society where consumers have accounts, small business loans, and tools What started as a service to help learned to be wary of false advertising for making payments. customers buy goods from Alibaba and fake products, Alipay’s escrow sys- As the Chinese fast become accus- retailers has grown into a serious finance tem helped ease consumer fears—and tomed to banking on their phones, Alipay business all its own. gave Alibaba’s retail sites a crucial early faces new competition from alternatives advantage over rival eBay. like Tencent’s Weixin Wallet function, ● Not many years ago, Jane Yang, a Today Alibaba’s sites sell $300 bil- which enables mobile payments. 26-year-old civil servant in Beijing, paid lion worth of goods annually, dwarfing “In China today, it’s technology com- her landlord in three-month installments sales on eBay and Amazon combined. The panies that are driving innovation in

3 MIT TECHNOLOGY REVIEW TECHNOLOGYREVIEW.COM THE FUTURE OF MONEY mobile payments,” says Zennon Kapron, a site, but with Alipay, customers can go This is a remarkable turnaround for a financial technology and digital currency directly to its app and website to make country that for years seemed to be stuck expert in Shanghai. Traditional banks and payments, check their investments, or buy in a far earlier, low-tech era of consumer the government are not the main actors. movie or plane tickets. The presentation, financial services. “The banks did noth- Between July 2013 and June 30, 2014, says Kapron, is suited “for people who ing to make customer service easy,” says Alipay handled $778 billion (4.8 trillion have quickly gotten used to using their Cavender, who notes that for many years yuan) in transactions, according to the mobile phones for everything.” paying a credit card bill required stand- company. It is able to process more than With these new mobile payment tech- ing in line at a bank. It could not be done 10 billion transactions per day. During nologies, China has leapfrogged both through the mail or online. Only those the popular “Singles’ Day” annual sale— checkbooks and desktop banking. Jane who had significant funds to invest and which is like Black Friday in the U.S. but Yang, for example, went straight from lived near large bank branches had easy on overdrive—Alipay handled up to 2.85 paying rent in cash to paying via Alipay. access to wealth management options. million transactions per minute, and 54 According to PricewaterhouseCoopers, 79 These changes coincide with ris- percent of its transactions are made via percent of Chinese consumers surveyed ing overall incomes in China, and with mobile device. said they were happy to receive coupons the government’s desire to build a more Alipay’s back-end technology is simi- via their mobile devices, versus just 53 consumer- based society, observes Tjun lar to that of PayPal, Kapron says, but on percent globally. And 55 percent of Chi- Tang, senior partner and managing direc- the front end the user’s experience is quite nese consumers said they expected their tor at Boston Consulting Group’s Hong diferent. PayPal is best known as a pay- phone to be the main way they made pur- Kong ofce. “In uptake of digital finance, ment option, a screen you may reach at chases in the future, versus 29 percent China is probably leading the world right the end of a transaction on a retail web- globally. now,” he says. —Christina Larson

Hacking Payments Impact Records, in millions, exposed in incidents involving stolen payment card Attacks that come in many forms data in retail and ﬁnance. Includes breaches publicly disclosed in English- are yielding more records and language media reports, government sources, and online forums. doing real damage.

300

250 302.5

Incidents 200 Some of the most notable large-scale 34.6 172.3 breaches of card information, by day of 69.9 150 announcement. 1.2

NUMBER OF INCIDENTS 100 2013 OCTOBER 3 2010 2011 2012 2013 2014 Adobe Systems

DECEMBER 19 Method Target Brands Types of major industry security incidents from 2011 to 2013. Remote attacks against stores’ 2014 Incidents may include theft of non-payment information. payment systems JANUARY 8 Attacks targeting Web applications to Korea Credit Bureau control servers JANUARY 23 Employees misusing company Neiman Marcus RETAIL FINANCE resources JANUARY 25 Physical theft or loss of important Michael’s Stores 6% documents, laptops, ﬂash drives, etc. 10% 27% Data exposed by human error JULY 14 31% Goodwill Industries 26% Malware, not including point-of-sale attacks or espionage AUGUST 4 33% P.F. Chang’s 7% Payment card skimmers physically altering card readers to steal numbers SEPTEMBER 8 10% Home Depot 22% 5% Denial-of-service attacks render- 6% 4% ing networks unusable OCTOBER 9 Dairy Queen Other types of attacks 2% 2% 2% 4% 3% ANALYTICS RISK CYBER / SECURITY - BASED RISK REPORT; INVESTIGATIONS BREACH DATA 2014 VERIZON SOURCES:

4 THE FUTURE OF MONEY TECHNOLOGYREVIEW.COM MIT TECHNOLOGY REVIEW

ger system called the blockchain. So has a any of the money. So eight days before I Technology hoped-for trip to space. set out for Arnhem, I opened an account A rising number of people report or with a Boston-based startup called Cir- anticipate transacting in Bitcoin, and advo- cle that would let me buy bitcoins with a A Weekend in cates see great potential in the currency for credit card. lowering the transaction cost of payments Next, I logged onto CheapAir.com, Bitcoin City: while increasing their security. But for Bit- one of a few companies that will let you coin to survive as a functional currency, it book flights using Bitcoin, and bought a Arnhem, the has to be widely accepted and useful in the ticket flying KLM to Amsterdam from way cash and credit cards are today. Retail- Munich. At the payment page I chose the Netherlands ers will need a reason to accept it—because option to display a Bitcoin address—a of the lower costs, perhaps—and consum- 25-to-34-character string of letters and Is it possible to live for 48 hours on ers will have to be convinced it’s no more numbers—to which I could send my pay- nothing but Bitcoin? of a hassle than paying by conventional ment. I then logged into Circle again to means. Can Bitcoin pass that test? buy enough bitcoins to cover the ticket, ● Propped up next to me on the red sofa To find out, I had come to Arnhem, but the transaction was immediately in my room at the boutique Hotel Modez a place with one of the highest concen- denied. After a call to my bank to explain in Arnhem, the Netherlands, my iPad tration of merchants accepting Bitcoin that the charge indeed was not fraudulent, has its screen on the Bitcoin exchange anywhere in the world. My experiment: I tried again. This time I bought $450 Bitstamp.net, and the value of the Could a journalist plan a weekend escape worth of bitcoins, safely within Circle’s cryptocurrency is dropping, moment by paid for entirely with Bitcoin? Further, $500-per-week credit card limit. The moment. At breakfast one bitcoin had could he not only survive but perhaps transaction went through instantly. been worth over $400, but the value has even enjoy himself? Proud of being a part of the future, I been sinking for the past 30 minutes and Arnhem’s friendliness to Bitcoin has went to Circle’s payments page, entered has now hit $383. I know I’m blowing it. much to do with Patrick van der Meijde, the Bitcoin address from CheapAir, and When the price of a bitcoin tumbles a 36-year-old resident of this city of keyed in the $450 listed as the cost of by another $10, I am unwilling to risk 150,000 located on the Rhine. Van der my ticket. Almost instantly CheapAir’s any further losses. My stomach sinking, Meijde heard about Bitcoin a few years website updated—to tell me I’d sent the I head to reception to pay my bill. My ago. Finding the concept intellectually wrong amount. What? exchange rate later turns out to have been interesting, and figuring that the tradi- Was this a scam? I had taken screen- near the day’s low, and I feel like a sucker. tional banking system could use com- shots at a few phases of paying, so I did a For the vast majority of Bitcoin hold- petition, he decided to buy some. As his quick post-mortem and realized I’d made ers—and the billions of people who have cache grew, he realized it wasn’t so use- a beginner’s mistake: CheapAir’s price never even heard of the digital currency— such fluctuations may not seem like a big problem. But for me, sitting in the Hotel Modez, it was very real: I’d committed to Bitcoin has become common currency for criminals, but the list of paying for a room, priced in euros, with legitimate companies accepting it for payment is growing. Bitcoin. As I waited, and the exchange worked against me, my bill had grown increasingly expensive. ful if he couldn’t use it to buy things. So, was listed in dollars with the equivalent Such is the state of afairs in the vol- with two partners, he set up a payment in Bitcoin, so I’d also entered my pay- atile world of cryptocurrencies—where system local vendors could run—on their ment via Circle in dollars. It felt like the regulation is a distant concept and large phones or any other connected device, intuitive thing to do—but it was wrong. market swings are commonplace. Because like a laptop or tablet—allowing the own- Whether because of the volatility of Bit- it’s hard to trace, Bitcoin has become ers to accept Bitcoin but be paid in euros. coin or the fact that there are multiple common currency for criminals, but the Van der Meijde has now convinced 45 exchanges to price it and they rarely list of legitimate companies accepting it businesses to accept Bitcoin, including a match up, the payment I had sent was as payment—or planning to—is grow- hotel and a major franchise grocery store. roughly $1.60 short. ing to include the retailers Overstock I started making calls. Charlie at and Newegg and the mainstream travel Step one: Buying the plane ticket Circle, stumped, suggested a do-over. site Expedia, among others. Homes have Though I was familiar with Bitcoin, its Gemma at CheapAir was sure we could been purchased with Bitcoin, which leans genesis, its technical underpinnings, and resolve the problem but insisted, “Only heavily on cryptography and a public led- its controversies, I didn’t actually own our CEO has access to the Bitcoin stuf.”

5 MIT TECHNOLOGY REVIEW TECHNOLOGYREVIEW.COM THE FUTURE OF MONEY

A Bitcoin Weekend Highlights of 48 hours living on cryptocurrency

Four Digits Hotel Modez Café Stout Dinner at a Web startup and co- First to pay for a Beers with local Bit- working space coin evangelist Pat- room with Bitcoin rick van der Meijde

Mimint Netherlands Natural-foods bodegaMimint for choco- CycleNation Amsterdam Arnhem late and toothpaste Shop memorializes Mo Lón purchase with a Belgium Germany photo on Twitter Pulled-pork sand- France Luxembourg wich for lunch

She told me to wait for CEO Jef Klee to in town: he is variously referred to as “this Step three: Full Dutch crypto (mostly) get in for the day—and he’d take care of guy who is really into Bitcoin” or, more Over the next two days, guided by a map it for me. simply, “that Bitcoin guy.” hosted on van der Meijde’s website, I did About an hour later, I received an Payment itself was seamless: the bar- indeed spend nothing but Bitcoin—with e-mail confirmation for my flight. “Do I tender pulled up a QR code on his phone, fewer mishaps than early users of Apple owe you five bucks or something?” I asked van der Meijde scanned it using a Bitcoin Pay were reporting in the press at about Gemma when I called her back. “Don’t wallet app called Mycelium on his phone, the same time. At dinner I ate a massive worry about it,” she said. “It was easier to and the payment registered instantly. pile of ribs and learned that tips in Bitcoin just issue the ticket.” Later we repeated the process as I trans- are handled much like tips using a credit Using Bitcoin for everyday purchases ferred Bitcoin directly to van der Meijde card, with waiters paid out from the reg- was proving more difcult than paying to cover my drinks. ister. Another day, at a restaurant called with a credit card. A befuddled kid at the bar, of around Mo Lón, I ordered a heaping pulled-pork university age, wanted to know what we sandwich and scanned a QR code that the Step two: Bitshock were doing. “You mean I can buy drinks owner, a Bitcoin enthusiast, loaded on a A part of me expected Arnhem, about an hour from Amsterdam by train, to feel like a high-tech hub. But instead it resembled any typical European city. At Hotel Modez I was the first customer to pay in Bitcoin. At the It had a few churches, a central pedes- CycleNation bike shop a bemused employee took a photo of me at trian area filled with shops, and a hand- the register and posted it to Twitter. ful of antique Dutch windmills. After checking into Hotel Modez, where the bubbly owner said I would be the first with this?” the kid asked. “Yes, of course,” large LCD TV on the wall. At Mimint, a customer to pay in Bitcoin (something said van der Meijde. Ever the evange- natural-foods bodega, I bought chocolate I’d hear a few times over the weekend; list, he helped the kid download a Bitcoin and toothpaste. at the CycleNation bike shop a bemused wallet—and then transferred five euros’ In only a few places did I encounter employee took a photo of me at the reg- worth of bitcoins to him. The kid’s friend obstacles. At a souvenir shop I had to wait ister and posted it to Twitter), I met up watched all this with a stunned look on a few minutes for the owner to arrive, with van der Meijde at a bar named Stout his face. “Does Café ’T Huys take this?” since he was the only one who knew how to chat over a beer. the kid asked. When van der Meijde told to accept Bitcoin. And at another shop I “With Bitcoin?” said the gray-haired him that the bar did, the kid bolted for had some momentary Wi-Fi problems. bartender when it came time to pay. He the door with his phone, now a few mil- I was turned away only once, at a small knew van der Meijde’s face, as did others libits richer, clutched in his hand. restaurant where the young woman work-

6 THE FUTURE OF MONEY TECHNOLOGYREVIEW.COM MIT TECHNOLOGY REVIEW ing that day hadn’t heard of Bitcoin. The And there was one exceedingly impor- Today, Stripe’s products have cook, who was sitting at a table waiting tant thing I could not do: get out of town. expanded to include subscription billing for customers, said, “I’ve heard of Bit- The only way to travel between Arnhem services and an online checkout system. coin, but I don’t think we take it. Maybe and the airport using Bitcoin was to rent Customers include Walmart, Twitter, and the previous owners did?” (They were a car or hire a taxi—a multi-hundred-euro the ride-sharing app Lyft. The company both surprised when I showed them the expense. By contrast, the train ticket to the has received $190 million from venture Bitcoin sticker afxed next to ones from same place, which was not payable by Bit- funders including PayPal cofounders MasterCard and Visa on the restaurant’s coin, cost only 17.10 euros. Even the very Peter Thiel, Elon Musk, and Max Levchin. window.) staunchest Bitcoin enthusiast would be In an interview with MIT Technology One night, at van der Meijde’s sugges- unlikely to pay that kind of premium. Review’s San Francisco bureau chief, Tom tion, I stopped by unannounced at a Web Knowing this, I had come to town Simonite, at his company’s headquarters with 18 euros in my pocket. I felt like I was in San Francisco, CEO and cofounder Pat- betraying something or someone—per- rick Collison explains how he is trying to haps Bitcoin’s mysterious inventor, Satoshi increase the small fraction of spending 45 Nakamoto—as I inserted coin after real- that takes place through e-commerce. Number of businesses in Arnhem euro coin in the yellow ticket machine that take bitcoins of the government-owned Dutch Rail- Payments processing seems like a ways. When the railroad accepts Bitcoin, I fairly simple function. What makes it startup and co-working space called Four thought, we’ll know that cryptocurrencies important? Digits, where once a week around a dozen have truly arrived. —Russ Juskalian Today the most exciting technology com- tech-minded folks in Arnhem get together panies are the mobile marketplaces, com- informally to eat, drink, and geek out. A panies like Airbnb and Lyft. Software is few of the people there were equal parts Q&A sufusing every industry and sector and skeptical and excited by the idea of cryp- market. As technology companies expand tocurrencies. Two of them discussed theo- into more markets that have been tradi- retical—but exceedingly unlikely—exploits Increasing the tionally ofine, it’s natural that business that would let them rip of the point-of- models are more about payments. Stripe sale application van der Meijde had helped GDP of the is providing the infrastructure for the next design. The Indian delivery order they were wave of these companies. eating had been paid for with Bitcoin, and Internet as they split the bill, some were paying the Only 2 percent of commerce worldwide purchaser back in Bitcoin, too. Improving payment technology is vital is e-commerce today. Why is that share “How much did dinner cost?” I asked. if Internet companies are to make so small? “About half a bitcoin,” someone said. an impact, says Stripe CEO Patrick There are major infrastructural Collison. deficiencies. If you’re in Latin America Step four: Ex post crypto or China and go to a website, it’s almost Though I mostly enjoyed the weekend, the ● When Apple launched its new payment guaranteed that you can’t buy from it. getaway to Arnhem at times felt like a service last October, it boasted of sup- By only accepting credit cards, which is chore. I’d had to skip some cultural sites port from major partners such as Amer- what the majority of websites do, they’re recommended by a friend from Amster- ican Express, Chase, and Macy’s. But essentially restricting themselves to dam. The Hoge Veluwe National Park and Apple had also spent months ahead of selling to North American and Western its museum with works by van Gogh, the launch working with a relative min- European buyers. Rodin, and Dubufet don’t accept Bitcoin, now in the world of financial technol- sadly. ogy: a four-year-old San Francisco startup Even in the U.S., e-commerce only Having exhausted most of the possible called Stripe. accounts for just over 6 percent of all Bitcoin-ready diversions in town, I spent Stripe got started in 2010 selling tools retail. Is that a business problem or a the last few hours of my visit, on a rainy that make it easy for businesses to add technology problem? Sunday, walking along the waterfront and credit card payment functionality to a It’s absolutely a technology problem. through a park. I pined for a museum, or a website or mobile app. It quickly earned Think of the places where you’re likely bowling alley, or a film in a warm theater. a reputation for being friendlier to coders to discover something that you want to Spending bitcoins had been easy, and ulti- than more traditional payment proces- purchase. You no longer stumble across it mately—despite the snafu paying for the sors, making it popular with app makers when you’re walking down the high street; hotel—not that expensive. But the options and a natural choice for Apple when it you find it in your Facebook or Twitter had run out quickly. began designing Apple Pay. feed, on your phone.

7 MIT TECHNOLOGY REVIEW TECHNOLOGYREVIEW.COM THE FUTURE OF MONEY

But think about what you’re supposed There’s the difculty of obtaining bitcoins. Something from Visa, MasterCard, or to do on a mobile device: click on the link, With Stellar you can use real, normal cur- one of the big banks, perhaps? get bounced to some random e-commerce rencies in addition to digital ones. Trans- No doubt you’ve guessed it’s none of website, click “add to cart,” zoom in, peck actions clear instantly. We backed this the above. Starbucks has emerged as the in your address and credit card number, because we’re in favor of anything that runaway leader in mobile payments at and click on checkout. It’s a 10-step pro- seems it might help us build a more ubiq- retail stores. Twelve million active users cess, and it might not even work at the uitous, useful commerce infrastructure for now pay for their Frappuccino with a wave end of it all. I can hand a dollar to some- the Internet. of a phone. Of the $1.6 billion spent via body really easily in the store; it’s really smartphone in U.S. stores in 2013, the difcult for me to digitally hand them a Can you really make as much money as company claims, a full 90 percent went dollar. other high-margin software startups by to Starbucks, and most payments experts taking a small slice of transactions you don’t doubt it. Apple Pay, which you worked on, seems handle? Starbucks’s mobile wallet is actually to work well, and there are a lot of part- The economics of the business generally a digital stored-value card more akin to ners. But it’s not very radical, is it? work better than people think. Look at its popular gift card. Its success—the app I think Apple was quite aggressive on a PayPal’s income statement and margins— now accounts for 16 percent of Starbucks’s number of points. Giving merchants a they’re really good. We’re a technology 47 million weekly transactions (up 50 per- “token” versus your credit card number provider and happen to bill for that as a cent from a year ago)—makes it both a is a very important shift. If that business function of the transaction volume, but model and a target for payment apps from is compromised, you’re not liable to any- that’s an implementation detail of the other retailers and tech companies alike. Starbucks CEO Howard Schultz has even bigger plans for mobile payments. In comments to investors in late 2014, “A new, successful, behavior-altering payments product is a big Schultz made it clear that he views the deal and represents a crack in that frozen ice of the industry and mobile app as a linchpin of plans to keep the way things are done.” growth perking. For one thing, the com- —Patrick Collison, CEO of Stripe pany says, it speeds payment and reduces waits in line. It also makes it easier to track rewards points, giving customers one in the world stealing from you. The pricing. Do you price it as a percentage incentive to buy more at Starbucks so they privacy changes are not insigniﬁcant. It of the transaction or as a monthly fee or can get perks such as a free drink after would have been very natural for Apple an annual fee? There’s no reason why the buying 12. to try to aggregate all this data and use it margins should be that diferent. But the real attraction is in the data for ad targeting, but they haven’t. that the company can collect. Whoever There’s no point proposing some uto- last touches the customer at the point of pian vision that doesn’t come to pass. A Case Study sale owns a wealth of information about new, successful, behavior-altering pay- purchases and preferences that can be ments product is a big deal and represents fed back into the business. Starbucks has a crack in that frozen ice of the industry Starbucks Bets started using purchase data to send per- and the way things are done. sonalized offers the way merchants do the Store on online—say, for food to complement a Stripe is invested in some more radical drink. It’s beginning to result in additional ideas. You support payments made via Mobile purchases. “It’s going to be the Amazon Bitcoin, and you’ve invested $3 million in experience, inside the store,” says Ken a Bitcoin alternative called Stellar. The iconic cofee merchant built a Morris, a principal with Boston Retail Bitcoin is kind of a ﬁnancial Rorschach payment app that quickly became Partners, which helps retailers create sys- test; everyone projects their desired mon- the envy of retail. Can it recharge tems like Starbucks’s. etary future onto it. What we care about Starbucks’s growth despite new To get more people to use the app is making digital transactions and com- competition? and join the rewards program, the commerce more universal. There is the ele- pany plans to add major new features in ment to Bitcoin of just being a universal ● If pressed to name the leading smart- 2015. One is the ability to order and pay means to transport value. phone app for paying for a purchase in a in advance, which launched in Portland, Bitcoin has some user experience store, would you say Apple Pay? PayPal? Oregon, in December and will expand to issues. Transactions take minutes to clear. Google Wallet? other cities later. And in a few markets

8 THE FUTURE OF MONEY TECHNOLOGYREVIEW.COM MIT TECHNOLOGY REVIEW

starting in mid-2015, the app will enable monthly M-Pesa transactions are valued customers to schedule regular delivery of Case Study at $820 million. individual drinks and food to ofces—fur- But despite this remarkable record, ther expanding Starbucks’s brand beyond M-Pesa has found that moving the tech- its own stores. Can Mobile nology into a different market can be Schultz wants to push deeper into the a challenge. Though the service is now digital realm. He’s talking to tech firms Money Conquer available in 10 countries, more than and other retailers about licensing its pay- 100,000 of M-Pesa’s 186,000 authorized ment and rewards software, much the way New Markets? agents worldwide are still in Kenya. Seattle neighbor Amazon sells its cloud For clues to how M-Pesa can find computing services to other companies. After great success in East Africa, broader acceptance, many are watching Starbucks even aims to turn its stored- mobile-phone wallet M-Pesa hit some its 2014 relaunch in South Africa, where value cards, app, and rewards points into bumps in South Africa. an initial introduction in 2010 fell far a broader currency usable at other retail- below expectations, signing up 100,000 ers, creating a potential alternative to ● Since its launch in 2007 by mobile- users instead of the 10 million anticipated. credit and debit cards. phone giant Vodafone and local partners, The 2010 version was a “carbon clone” Launched widely in January 2011, the M-Pesa has taken East Africa by storm. of its Kenyan counterpart, not well suited app generates a bar code on the smart- Today more than 18 million users, most to South African customers, says Herman phone that can be scanned at checkout in Kenya and Tanzania, use the mobile- Singh, the managing executive for mobile readers already installed in most stores. phone wallet to transfer billions of dollars commerce at Vodacom, who is responsible At the time, bar codes were pooh-poohed a month. The technology has brought new for the South Africa relaunch. (Vodacom by tech firms already looking to a radio- financial options to places where banks is 65 percent owned by Vodafone.) The based technology called near-field com- and credit cards are scarce and cash rollout also sufered because there weren’t munication that Apple Pay now uses to has long been king, promising a faster, enough agents to help customers upload send payment information. But Starbucks cheaper, more secure way to pay for things and download. was looking for ease of use above all, says and send money. Now M-Pesa has simplified the regis- Chuck Davidson, who then worked for the The service enables cell-phone owners tration process for agents and increased company’s prepaid-card business (worth to essentially use their mobile device like a their numbers in South Africa from 800 $1.5 billion at the time) and is now head bank card. After registering as a user with to 8,000. Users can use their mobile of customer engagement at the mobile- commerce firm CardFree. The strategy worked. Just two months later, some three million people had paid Vodacom is betting on M-Pesa’s low cost. Users aren’t charged with the app. Of course, Starbucks ben- the monthly account fees they would have to pay a bank, and most efited from its brand name, customers services, like cash deposits and electronic transfers from bank who can aford smartphones, and a daily- accounts, are free. habit product. But Davidson and other payment experts say other features were the real key to its success. Allowing easy an M-Pesa agent, a customer can upload wallet at all retailers. And there is now tracking of card balances and rewards money onto the phone. Those funds can a voucher system similar to the prepaid points encouraged customers to use the then be used for many transactions, from mobile-phone credit system most South app more often. grocery purchases to paying utility bills. Africans use to pay for cell time. New alternatives like Apple Pay and Vodacom is betting that M-Pesa’s low rival retailers’ apps present challenges for cost will win over consumers. There are no Starbucks. Dunkin’ Donuts, for instance, monthly account fees, and most services, less than a year after relaunching its 186,000 like cash deposits and electronic transfers Number of M-Pesa agents worldwide mobile app with a new rewards program from bank accounts, are free of charge. in January 2014, said it reached two mil- Early results are encouraging. In the lion rewards members and 10 million app According to the Central Bank of first four months following the relaunch, downloads. Kenya, the value of M-Pesa transactions the number of users grew from 100,000 Starbucks created the iconic mobile in Kenya jumped 30 percent, to $12 bil- to 650,000, and more transactions have payment app. Now its customers know lion, in the first six months of 2014 com- been processed than in M-Pesa’s first four how to use their phone to pay everywhere pared with the same period in 2013. In years in the country combined, Singh says. else, too. —Robert D. Hof Tanzania, a country half as populous, —Miriam Mannak

9 MIT TECHNOLOGY REVIEW TECHNOLOGYREVIEW.COM THE FUTURE OF MONEY

per week, the transfers become more com- Would I use it again? Review plicated, requiring personal information Yes. I probably would not use the Snapcash like your birth date or the last four digits version again, though. of your Social Security number. After you Modern Money enter that information, the weekly spend- App: Venmo ing limit is $2,500. You can also receive Payment methods: Major debit and credit Compared up to $1,000 per month simply by signing cards up for the app, but if you want to receive Fees and limits: Free to send money Payment apps are all the rage. But how more than that, you must give more per- from your Venmo balance, made up of the well do they work? sonal details. money people send you through the app. Currencies accepted: U.S. dollars There’s a fee of 3 percent for payment from ● Picture this: You’re at a restaurant table Strong suit: Getting paid quickly with a credit card or lesser-known debit card. surrounded by friends and acquaintances, minimal hassle Receiving money is always free. The send- and the end of the night approaches. The ing limit is $2,999.99 per week, but iden- waiter picks up his check holder to find I found Square Cash to be the easiest tifying information like your zip code, or three different credit cards, accompanied app for sending money to the bank account Facebook account details, is required after by detailed instructions about which ones of someone who needs it right away. It has $300. should be charged how much. He informs a sparse, utilitarian design. After typing in Currencies accepted: U.S. dollars you that the restaurant does not accept my debit card details, I could immediately Strong suit: Fun cards. Since you are the one person who send money to, or receive money from, any- always has cash, you reluctantly pay the one whose phone had the app installed. Since launching more than two years entire bill. You doubt anyone will pay you The screen looks like a calculator. There’s ago, Venmo has become popular with back in a timely fashion, if at all. a big field that flashes “$0” at the top until young people as a social network that tells This is the type of scenario mobile pay- you punch in the amount you want to send. the world when people pay each other and ment apps, which allow you to send money After that, you have two options. You can hit why. One friend accurately divulged that digitally to a friend’s account, were made “Request,” which scours your phone’s con- she sent me a dollar for “using technol- for. Apps from Venmo, PayPal, and Square tact list for the person you want to tell that ogy,” but the public feed shows memos have spread quickly through word of you need that amount. Or you can press running from the tame—“Kanye West fan mouth to become a staple in many Amer- “Send,” which sends that amount almost club enrollment fee”—to the unprintable. icans’ lives. Venmo, a free peer-to-peer immediately to the desired recipient’s bank Venmo defaults to making these updates payment app attached to a social-media account. You can add a memo, and the app completely public, but one can adjust the stream, is now processing $700 million in notifies you when the money is deposited settings to make transactions private or transactions per quarter. into your bank account or your friend’s visible only to friends. Like Square, Venmo But are these apps any more useful than account. Unlike other apps tested, Square has a function that allows you to discover cash, checks, and the old-fashioned IOU? Cash does not require you to add your bank other people using the app nearby. The short answer is yes. account number to receive money, some- The thought of telling other peo- Though some of apps offer a variety thing that can be a hassle when you’re on ple what I was spending money on was of services, I focused on the central tasks the go. You can find other users in the area uncomfortable for me at first. It seemed of sending and receiving money. I down- via Bluetooth, making it easier to pay back crass. I put this judgment on hold for a loaded and tested the apps in November people who are not yet on your contact list. while, however, to see how the app worked. and December 2014, linking each one to a There’s also Snapcash, a version con- I found it slightly slower to set up than debit card and, when necessary, my bank nected to the popular photo-sharing app Square Cash but relatively easy to use after account and routing number. I tested each Snapchat. The interface is diferent, and I that initial housekeeping. app by exchanging funds with people I found it harder to use. You can send and receive payments already knew. All seemed secure, either Many of Square Cash’s security features about as quickly with Venmo as you can requiring you to unlock the app with a PIN are behind the scenes, which allows for an with Square. However, the money is imme- or giving you the option to add that layer easy payment experience. An optional fea- diately available only as a balance on your of security. ture requires users to enter their card’s CVV app: you can use that to pay other Venmo number each time they send money, which users, but not for much else. App: Square Cash can prevent unauthorized use by a thief With Square, by contrast, that money Payment methods: U.S.-based MasterCard who gets hold of a user’s phone. Informa- shows up in your bank account. To get and Visa debit cards. No credit cards. tion is encrypted and stored on Square money into my bank account with Venmo, Fees and limits: Free. The first time you servers using tokenization, adding to the I had to dig up and enter the account and surpass the initial spending limit of $250 system’s security. routing information, and then wait a day

10 THE FUTURE OF MONEY TECHNOLOGYREVIEW.COM MIT TECHNOLOGY REVIEW

example, I moved from Madrid, Spain, to Mobile Payment Apps Oaxaca, Mexico, and in November I made The lowdown on three of the most popular options quick trips to both California and Nicara- gua. Confused by my unpredictable spend- NAME Venmo Square Cash PayPal ing patterns, my credit card companies often block my legitimate transactions. WHAT Social-media net- Send and receive Peer-to-peer pay- In this mobile, data-driven era, there IT DOES work built on peer- money from phone ments, digital wallet, must be some better way. After all, Califor- to-peer payments contacts with just a mobile payments nia friends may have heard about my trip debit card at some stores ahead of time via Facebook, and my U.S. mobile operator might have noticed my MILESTONE Processed $700 U.S. users send Processed $27 new location when I plugged its SIM card million in payments millions in billion in mobile into my phone at the border. But still, “your during payments daily payments during Q3 2014 2013 bank is the last to know,” says Loc Nguyen, chief marketing ofcer of Feedzai, a mobile payments firm in San Mateo, California. BEST In-app commenting Simple interface Sends money Sure enough, when I tried to buy a bunch FEATURE feature in 26 currencies of hiking gear on arrival in California, my card froze and I had to call the issuer to for Venmo to post two small sums to my And the rest verify my identity. debit card. Google Wallet and PayPal also have mobile Banks and merchants want to know I didn’t realize at first that you could apps, but I didn’t find them as useful. who is wielding a given credit card because leave a balance on Venmo to pay other peo- Though PayPal has strong security and they, not the cardholder, are on the hook ple without linking your bank account. I was the only app that could move money for fraudulent transactions. And such fraud found that process inconvenient because I between 26 diferent currencies (for a fee is rising, according to the 2014 Lexis Nexis was set on getting money into my account. of 0.5 percent to 2 percent with a U.S. bank annual fraud study. Worldwide, fraudulent People who use Venmo often may not see account or PayPal balance), others were bet- card transactions have reached around $11 this as an issue. Customers of Chase, Wells ter at domestic transfers. Unlike Venmo or billion a year, and the U.S. may account for Fargo, Bank of America, and Citibank can Square, PayPal ofers no way to use a debit about half of that. Europe’s share was 1.33 link their accounts more simply. card to send people money without incur- billion euros ($1.7 billion), according to a Venmo gives users the option of ring a fee. European Central Bank report. requiring authentication, such as a PIN, to Balances on Google Wallet can be used New technologies try to address this open the app on their phone. Other than at some stores, a plus, but overall I found problem by merging a broader range of that, the main security feature I encoun- the app less useful. To claim even a small financial data, mobile-phone data, and tered when testing the app was the pro- transfer, you must enter extensive personal even social-networking data to better cess to verify my bank account. Behind the verifying information. —Kristin Majcher establish the likelihood it’s actually you scenes, Venmo encrypts and stores users’ behind the transactions racking up on your information on secure servers, which are cards or mobile device. Nguyen says that protected by a firewall and not directly Technology Feedzai’s system can improve fraud detec- connected to the Internet. tion rates from 47 percent to almost 80 percent. Chirag Bakshi, founder and CEO of Would I use it again? Who Zumigo, a company in San Jose, California, Probably. You can easily comment on that provides location-based mobile ser- transactions to thank a person for the Are You? vices, says his company’s data algorithms money sent or share an inside joke about reduce fraud losses by at least 50 percent. the event where the transfer took place. Banks are using mobile technology “When fraudsters steal your identity, With Square, I found myself texting people to build better profiles of credit card what they can’t do is steal your behavior,” separately to thank them for sending me customers that will be harder to fake— Nguyen says. That, in fact, has long been money. Honestly, though, I am less likely or shake of. the principle behind credit card fraud to keep using Venmo. While the app works alerts. But a conventional credit card com- great for sending a few bucks quickly, the ● I often travel to different countries chas- pany is relying on information from your time one could waste digesting the status ing stories. It’s hard for me, let alone my past to guess whether each attempted updates could easily eat up the time saved credit card issuers, to predict where I’ll transaction is genuine. Today’s new tech- not going to the ATM. be at any given time. This summer, for nologies tap into your mobile phone and its

11 MIT TECHNOLOGY REVIEW TECHNOLOGYREVIEW.COM THE FUTURE OF MONEY more up-to-date information to see if your my home mobile operator. It required no card, a system in which the transaction current behavior matches your purchase. registration forms, and I hopped on the is guaranteed by a third party. But that is “[We can use] a SIM card as a proxy bus to read the news and handle e-mail. a very expensive way to make payments. for a person,” says Rodger Desai, CEO of Without trying, I might have outpaced the It is run by a cartel with a lot of pricing Payfone, which works with banks, mobile futuristic systems designed by Feedzai, power. The difference between what it operators, and fraud detection companies Zumigo, and Payfone. Could I have then really costs to make a payment and what to assess the legitimacy of a given payment. booked a hotel for the night on my phone you are being charged for that is a large Payfone builds a profile of a user and tracks with the new SIM card while riding the amount of money. It’s a huge target for more than 400 types of data to create what bus? Probably not. —Lucas Laursen new payment technologies. And some set it calls a persistent identity. Change phone of technologies is going to find a way to company? Noted. Someone steal your reduce that diference. phone or clone it? The company will catch Q&A There is a payment revolution under that, too. Even if you’ve canceled your cel- way—though maybe we’re not fully aware lular data plan, it has ways of flagging the of it—and the incumbents [such as Visa activity of someone who then tries to use New and MasterCard] are not without some the phone’s Wi-Fi connection. power or ability to respond. It’s difcult Zumigo adds location information Technologies because they make so much money on gleaned from partnerships with mobile the existing system; why would they cut network operators. It checks the name and Can Change their prices by too much? But there’s a big address attached to the mobile device in a opportunity here. given transaction against Equifax’s credit Payments and records to confirm the buyer’s identity. If new technologies and other changes Feedzai’s software combines that kind of the Economy make paying for things less expensive, information with current and historical could that encourage more transactions location data to draw inferences such as Economist Simon Johnson examines and boost the economy? whether it would be possible to travel from how a “revolution in payments” could I think the biggest issue is for lower- the site of an already approved purchase afect companies and communities. income people and lower-income coun- at, say, the airport to a shop in town in the tries. These are countries that typically amount of time between the transactions. ● Formerly the chief economist at the have less well-developed banking sys- The use of this method, Nguyen says, is International Monetary Fund and now a tems, where credit cards are typically not what allows Feedzai to detect 80 percent professor at MIT’s Sloan School of Man- as available. Now they can bypass [credit of fraudulent transactions, rather than agement, Simon Johnson has studied and cards]. The financial services ofered to the 47 percent achieved by conventional written widely about payments, credit, relatively poor people in the U.S. are very methods, without adding more of the banking, and monetary policy. He is now expensive—including cashing your pay- sort of false alarms to which I am grow- watching a variety of “big ideas” that could check, or getting a payday loan, or even ing accustomed. influence the future of payments and have cashing a government check, which is Some companies are trying to build broad implications for the economy. New crazy. I think change can help people deeper identity profiles for mobile pay- methods of transferring money quickly across a range of activities and help less- ments based on social-network data. It’s and at low cost could especially benefit well-of people more. a tempting target. If I ask my friends for the “unbanked” in emerging economies advice on rain jackets and I’m a member and poor people in the developed world. But the most discussed new technology of a mountaineering club, it would lower Johnson spoke to Business Reports edi- in payments, Apple Pay, is not a threat the odds I might trigger a fraud alert at a tor Nanette Byrnes in his campus office to the existing payment business model. shop selling outdoor gear. But that kind in Cambridge, Massachusetts. In fact, it runs on the rails of the existing of information requires permission from system. Will it help overall costs drop? users, and experts say it can be a source of Is the system we use to pay for things I suspect not. They’re divvying up the pie. false signals as well as reliable information. today working? Mobile-data-based identity systems The clearing of a check is very efcient, Others are too. Starbucks reports that have their limits. After my November trip is done on a massive scale, and has very 16 percent of its sales are made through to Southern California, I flew to Nicaragua. low costs. That part of making a payment its phone payment app. At the airport, I called my card providers to works well. The other part obviously is the What Starbucks cares about is selling cof- alert them to my travel. But in Managua, question “Is this check going to bounce?” fee. This money thing is just a side issue I paid cash for a local SIM card at the bus We have become persuaded since the for them. They’re not going to screw me station, to avoid the roaming charges from 1950s that it was better to use a credit on that because then I’m not going to go

12 THE FUTURE OF MONEY TECHNOLOGYREVIEW.COM MIT TECHNOLOGY REVIEW buy cups of cofee from them. Someone to take mobile payments mainstream. who has that kind of consumer trust I Case Study Standing in front of a photo of an over- think can do well at this. stuffed billfold, Apple CEO Tim Cook Consumers need to trust someone unveiled the mobile wallet at an event who is this kind of payments interme- Can Apple Pay where he also debuted new iPhones and diary. You are giving them money. And the Apple Watch. With iPhone 6 models, maybe letting them draw more money Do for Money all it takes to buy a sandwich at Subway or from your account when necessary. They chicken at Whole Foods Market is to hold have a lot of data on you. We have to What iTunes Did your iPhone near a wireless reader and believe they can’t be hacked into, to steal press your thumb on the Home button. that data or money. So it does suggest you for Music? The iPhone’s Touch ID fingerprint should think about a technology company sensor, already used to unlock the phone, or a company for whom data security is With added security, better design, confirms it’s really you. Behind the scenes, really key. and improved convenience, Apple Pay a payment processor such as Visa recog- I’m surprised the technology compa- hopes to finally make mobile payments nizes an encrypted version of your credit nies haven’t made more inroads [in pay- commonplace at the register. card such as the one in an iTunes account, ments] yet. There are some regulatory along with a one-time security code for restrictions in the United States, which ● The terminal at this CVS drugstore that particular transaction, and approves I think are going to come under some in Palo Alto, California, can accept pay- the sale—all in less than 10 seconds. scrutiny. Regulators like to restrict who ment through a quick tap from a smart- That is indeed easier than using can run a bank. They like to keep it to phone. The clerk isn’t sure how it works, most other digital wallets, which require this group of people who’ve run banks though he knows it does because “a few unlocking the phone, opening an app, before. It’s a very, very old-fashioned idea kids” have used it. But one shopper tries checking into a store, typing in a code, to think that bankers are somehow more it by taking out his Android phone and or other steps that can take much longer honest or trusted. Who would you trust clicking on Google’s Wallet app, which is than swiping a credit card. Apple’s ability more? A big brand-name bank, or Google intended to allow instant payment, and to create elegant, user-friendly products or Apple? taps the terminal. Nothing happens. Then helped it popularize and seize command- he tries PayPal’s payment app. Nothing. ing positions in music players and smart- What role will cryptocurrencies play in Out comes the wallet. phones. If Apple Pay works as promised, it the future of payments? Over the past decade, tech companies could do something similar for payments: There is clearly something about the including Google, PayPal, and upstart make mobile wallets appeal to the masses, backbone of those systems that should Square, along with mobile carriers, credit starting with its influential army of iPhone work, but whether the consumer inter- card companies, and various retailers, users. “Mobile payment is finally hitting face with bitcoins and wallets, whether have all proclaimed the “death of the that pivotal moment when all the pieces that wins, I’m not sure. People want to wallet.” The promise: their digital wallet are coming together,” says Matthew de steal your stuf all the time—that’s just equivalents would make paying for things Ganon, senior vice president of product a common theme of human history. in physical stores much easier. Instead, and commerce for Softcard, a joint ven- How much anonymity do you want to they ran into technical glitches, consumer ture of T-Mobile, AT&T, and Verizon that’s have, given that you want some protec- indifference, and resistance from mer- working on a rival mobile wallet. tion against theft? The other issue is, chants, banks, and phone carriers. In the United States there are only do I want to work through this separate Though mobile payments at U.S. retail about 220,000 merchant point-of-sale currency that has the fluctuating value stores will nearly double in 2014, to $3.5 terminals featuring the wireless payment of Bitcoin, or would I rather just have a billion, according to market researcher communications system known as near- lower-cost way of making payments in eMarketer, they remain a rounding error field communication (NFC). That repre- dollars? Ultimately money’s going from on the more than $4 trillion worth of in- sents a small fraction of the more than six my bank account to your bank account. store credit card and cash transactions. million U.S. retail outlets. They are used I’m not sure I need it to go through an Cash and cards are simply good enough, so rarely that, wags joke, “NFC” might alternative currency. There are people says payments expert Bill Maurer, dean of as well stand for “not for commerce” or who want to take Bitcoin [valuation] risk, the School of Social Sciences at the Uni- “nobody freaking cares.” but you’re selling me a cup of cofee. Why versity of California, Irvine. “All of these But Apple’s often adroit timing may do you want to take Bitcoin risk? You mobile wallets are looking for a problem prove spot-on once again, because a new don’t. You just want to be paid, and it’s in to solve,” he says. development could bring NFC to many both our interests to make that payment But in September 2014, Apple jumped more stores. In a bid to force adoption of at very low cost. into the market with Apple Pay in a bid more secure credit cards that use a chip

13 MIT TECHNOLOGY REVIEW TECHNOLOGYREVIEW.COM THE FUTURE OF MONEY and a PIN instead of a magnetic strip for tomer Exchange consortium pushing its industry back in 2009, when he launched payment authentication, Visa and other own wallet app, say they won’t accept his company, Dwolla. At the time, he had payment networks will, starting in October Apple Pay. The Softcard mobile wallet of been running a successful business sell- 2015, make merchants liable for fraudu- T-Mobile, AT&T, and Verizon is touting its ing audio speakers, but he was annoyed lent charges unless they use readers com- support of more than 80 Android phones at spending tens of thousands of dol- patible with the new cards. That’s expected and the ability to pay at retailers includ- lars a year to process payments. So he to speed installation of new readers, most ing McDonald’s, Subway, and Walgreens. started looking for, and then building, of which will include NFC capability. PayPal (soon to split of from eBay) and an alternative. Although credit cards are used in Google are pushing their wallet apps too. “I didn’t know we were taking on a Apple Pay, it’s more secure because card Individual retailers that have per- system as big as we were when we started,” numbers aren’t stored directly on the suaded customers to use their own apps he says, shrugging. “I was trying to solve phone or on Apple’s servers. Instead, have no intention of replacing them with my own problem.” digital tokens, encrypted numbers that Apple Pay. Starbucks, for instance, lets The solution Dwolla came up with look like card numbers, are assigned by customers pay by launching an app and uses the Internet to move funds digitally a payment network such as Visa to each holding up the phone screen with a QR and nearly instantaneously. But while the card and stored on a secure chip in the code to a reader on its cash registers. resulting system saves money and time, phone. During a purchase, that token Apple will have to offer a lot more Dwolla is becoming something of a case and a one-time code are sent to process to merchants than it currently does if it study in how hard it is to do anything new the payment, so even if hackers intercept hopes to gain support from more of them. in payments. the numbers, they can’t do anything with In particular, Apple Pay will need to incor- Dwolla’s system bypasses decades- them. Though Google Wallet and others porate loyalty programs and discount old payment arrangements. One of those have used tokens, Apple Pay will be the ofers. Payments experts think the com- arrangements relies on credit cards and ﬁrst to deploy them more widely. pany will allow outside software devel- carries 2 to 3 percent fees to execute a pay- “It is probably the most secure opers to create apps that can add such ment instantly; the other is far less expen- mobile payment solution to date,” says features to Apple Pay. sive but processes payments in batches, David Brudnicki, chief technology of- By all accounts, it’s going to take years meaning it can take two or three days for cer for Sequent Software, which provides for mobile payment to catch on widely. money to reach the recipient. mobile wallet services to banks, retailers, Apple Pay’s success will ultimately come The new technology primarily serves and mobile operators. down to persuading consumers they as an alternative to the slower system, Improved security is even more should depart from payment methods commonly called ACH, for “automated important to banks and retailers than it that, after all, work pretty well. clearing house.” A network run by banks is to consumers, who have limited liabil- —Robert D. Hof and credit card consortiums, ACH pro- ity for fraudulent charges on stolen cards. cesses bank-to-bank transactions like Apple Pay has already signed up the three direct deposits or bill payments from an big payment networks—Visa, MasterCard, Case Study online checking account. and American Express—as well as banks Any consumer who has an account handling 90 percent of credit card trans- with a bank using Dwolla’s payment actions in the United States, including A Payment platform can directly pay a merchant in Bank of America, Capital One, Chase, and real time. It’s also possible to store value Citibank. Better security seems to have Upstart Still on a Dwolla account, just as you might made up for any reservations that banks with PayPal or Venmo, and pay a mer- may have about Apple’s role as a powerful Trying to chant from that balance. Dwolla charges new middleman on transactions, or the 25 cents per transaction of $10 or more. small cut of transaction revenues they’ll Catch On Transactions under $10 are free. be paying the company. Another poten- Milne still doesn’t look much like a tial bonus: Apple Pay could help the card Five years in, Dwolla’s trying to make banker. In Las Vegas for a payment indus- networks capture transactions currently a dent in the payment processing try trade show last November, he wore a completed with cash. business dominated by big names like sports jacket and tie for a panel discus- For all that, Apple’s impact will be Visa and MasterCard. sion with executives from Bank of Amer- small at first. For one, only iPhone 6 ica, the Federal Reserve Bank of Chicago, and eventually iPhone 5 owners with an ● “You could call it stupidity. Or naïveté.” and other industry heavyweights. But his Apple Watch can use Apple Pay. Large Ben Milne is looking for the word to large-rimmed glasses and long beard set retail chains including Walmart and Best describe what made him think he could him apart from his fellow panelists, as did Buy, which are part of the Merchant Cus- take on the multi-trillion-dollar payment his frank message: Not every transaction

14 THE FUTURE OF MONEY TECHNOLOGYREVIEW.COM MIT TECHNOLOGY REVIEW requires real-time execution, but the big- alternative to traditional networks, Milne extremely safe and secure, thanks to layers gest winners in the expanding payment needs to rack up bigger partners and cus- of protections including PINs, fingerprint business will be the companies meeting tomers. His home state of Iowa—the com- identification, cryptography, and the log- customers’ increasing expectation of rapid pany is based in Des Moines—now allows ging of transaction data. execution. citizens to pay taxes using Dwolla. And in Mobile payment systems use near- Dwolla has had the benefit of building early 2015, Dwolla will launch a real-time field communication, or NFC, to trans- its network in the modern era. Its open payment system with BBVA Compass, a fer payment information from the phone to a store terminal within a few centi- meters. Whereas information stored on magnetic-stripe credit cards can be read Its system saves money and time, but Dwolla is becoming by anyone with access to the card, mobile something of a case study in how hard it is to do anything new in payment systems generally store the data payments. in encrypted form on a special NFC chip and require the user to enter a PIN or even a fingerprint. system is accessible to developers for free. bank with nearly 700 branches across the While newer credit cards also include The company supports the network and southern United States. That’s an impor- a chip and require users to enter a PIN, its connections to financial institutions, tant expansion because customers can’t do mobile phones could still hold an advan- but it does not hold customer deposits, real-time transactions unless their bank tage because they can log location and allowing it to sidestep a host of regula- or credit union accepts Dwolla’s network. other data that could be used later to help tory requirements. Milne describes build- Dwolla has raised $32 million from prove whether a transaction was fraudu- ing the network as “reverse-engineering a investors such as Bain Capital Ventures, lent or not. mountain of payment spaghetti” bank by Andreessen Horowitz, and Union Square bank, trying to work with bank stafs that Ventures. But a recent investor, CME were not always anxious to help Dwolla Group, could also become the kind of decode each unique system. landmark customer Dwolla needs. CME 57% Proportion of respondents who worry The problem is that banks have not Group operates derivatives markets where about mobile payment security been quick to sign up, in part because millions of trades are executed each day. revamping their existing systems is an It operates on a scale that could really expensive proposition. And one or two benefit from—and demonstrate the value To avoid major damage if retailers’ days to process a payment is in many cases of—Dwolla’s speed and low cost. databases are hacked, Apple Pay and fast enough, explains Kuba Zielinski, a —Nanette Byrnes some others also give stores “tokens,” or partner at Boston Consulting Group who encrypted strings of data about the pur- specializes in the payments industry. Also, chase, without passing along the actual most banks issue credit cards, a lucrative Technology credit card numbers. business they’d undercut if they embraced For now, attackers have easier tar- Dwolla’s approach and moved away from gets than mobile payments, including the networks of Visa, MasterCard, and Your Mobile magnetic- swipe systems and depart- others. ment store servers housing millions of New digital payment systems have Phone Is More card numbers. However, as credit cards taken off in some countries, including become harder to hack and more pay- the United Kingdom and Switzerland, Secure Than ments are made on smartphone, mobile but only after regulatory mandate. In the payments will increasingly attract thieves. U.S., Dwolla’s home market, there has not Your Visa Card One route in might be malicious soft- yet been such a requirement. ware that steals your phone’s payment As of late 2013, the last time the com- As mobile payments become more credentials by getting beyond barriers pany disclosed numbers, Dwolla had common, thieves will be more likely to imposed by Android and Apple’s IOS. An 500,000 customers. But the list of mer- target them. essential defense: partitioning off pay- chants accepting the firm’s virtual payment functions with software or, bet- ment app remains dominated by niche ● Is waving your smartphone over a store- ter yet, more secure chips. Chipmakers firms selling things like small-batch per- counter gadget really a secure way to buy are already broadening their products to fume and heritage-bred pork. something? emphasize “walling-of” functions, with To establish his rapid and inexpen- Right now, such mobile payments— one example being ARM’s TrustZone. sive way of moving funds as a legitimate via Apple Pay and similar systems—are —David Talbot

15 MIT TECHNOLOGY REVIEW TECHNOLOGYREVIEW.COM THE FUTURE OF MONEY

Industry Guide Outside Reading

The End of Money: Counterfeiters, A Closer Look at the Preachers, Techies, Dreamers— and the Coming Cashless Society Future of Money by David Wolman A Bitcoin update, worthwhile further reading, and a list of upcoming events focused Da Capo Press, 2012 on payments, commerce, and banking Wired contributing editor David Wolman Free and open, the blockchain is exposes the unsavory side of cash as he Bitcoin 2.0 maintained by computers around the seeks to measure its place in the modern world and shares some of the design world, talking to counterfeiters, coin col- Cryptocurrencies are still in their early features that laid the foundation for lectors, and everyone in between. Even days. Though a growing number of online the success of the World Wide Web so, the book’s takeaway that cash may be and real-world businesses accept bitcoins, and Linux, among other technolo- on its way out has proved controversial, writer Russ Juskalian found while report- gies. Increasingly, investors believe that explained the author in a 2012 interview ing “A Weekend in Bitcoin City” that they the future of Bitcoin lies in the idea of with MIT Technology Review’s senior edi- are not yet accepted widely enough to be extending or building on the block- tor Antonio Regalado (“The Slow Death a reliable substitute for cash. chain to create something called side- of Cash,” March 2012). Neither are bitcoins reliably function- chains. Sidechains would build on top ing as a store of value, a second key func- of the blockchain code—which currently tion of any currency. Bitcoin has proved records every Bitcoin transaction as an Breaking Banks: The Innovators, volatile recently, dropping from a value open, public ledger—to create systems Rogues, and Strategists Rebooting of over $1,200 in November 2013 to that secure other kinds of assets beyond Banking $310 in December 2014. payments, such as contracts or owner- by Brett King That fall-of, along with the fact ship of stock. Wiley, 2014 that Bitcoin is still being used to move Gavin Andresen, the driving force only about as much cash as it was a year behind Bitcoin, foresees a future in which In his latest book, best-selling author Brett King compiles interviews with executives at Google, Citibank, Zopa, Simple, and Despite a steep drop in the bitcoin’s value in 2014, advocates other firms that are disrupting banking continue to see merit in a peer-to-peer digital currency that’s with peer-to-peer lending, cryptocurren- independent of middlemen and governments. cies, and social media. The financial industry, he argues, will change more in the next decade than it has in the past 100 years. ago, prompted senior editor Antonio the currency might come to cheaply Regalado to nominate the currency power a diverse collection of services as one of the “top technology failures focused on trust and security. Bitcoin and the Future of Money of 2014.” “The idea of Bitcoin remains To use Bitcoin today, you must install by Jose Pagliery intriguing,” he writes. “But in practice, it a special wallet, like Coinbase, on your Triumph Books, 2014 is more like a Ponzi scheme that attracts computer or mobile phone. You can trade speculators, and it’s become the pay- U.S. dollars or other currency for bitcoins CNNMoney reporter Jose Pagliery details ment form of choice among professional at exchanges like Bitstamp. Both of these how Bitcoin came into the public eye and cybercriminals.” In November, the U.S. sites explain how their systems work, and why it is prone to unique risks, as seen in Marshals Service auctioned of 50,000 the nonprofit Bitcoin Foundation has February 2014 when nearly $400 million bitcoins seized from drug dealers, worth published an explanation of the technol- vanished with the sudden shutdown of about $19 million. ogy behind the payment system. the online exchange Mt. Gox. The author Still, advocates continue to see real For insight into how Bitcoin solves talks to advocates like Ron Paul about value in a peer-to-peer digital currency some of the special challenges of digital how the digital currency could shape the that’s independent of middlemen and currencies, a good starting place is world’s economy and learns about the government afliation—and, lately, in the “Explain Bitcoin Like I’m Five,” an essay illicit side of Bitcoin through interviews core computer code that makes Bitcoin published on Medium by financial with FBI ofcials and a Bitcoin entrepre- what it is: the blockchain. consultant Nik Custodio. neur behind bars.

16 THE FUTURE OF MONEY TECHNOLOGYREVIEW.COM MIT TECHNOLOGY REVIEW

The Age of Cryptocurrency Calendar by Paul Vigna and Michael J. Casey Financial Cryptography and Payments 2015 St. Martin’s Press, 2015 Data Security 2015 April 19–22, 2015 19th International Conference New Orleans A pair of Wall Street Journal writers team January 26–30, 2015 payments.nacha.org/2015CFP up to produce a sympathetic overview San Juan, Puerto Rico of cryptocurrencies. The book ends with fc15.ifca.ai Open Mobile Media’s Mobile Commerce and Banking 2015 the prediction that encryption-based, First International Workshop on P2P April 20–21, 2015 decentralized digital currencies “do have Financial Systems London a future,” even though it’s a major task to January 29–30, 2015 www.openmobilemedia.com/mobile- convince people of their beneﬁts. Those Frankfurt, Germany payments-europe benefits include potentially making the www.ecurex.com/p2pﬁsy Virtual Currency Today Summit financial system far more efficient and 8th Annual Smart Card Alliance April 29, 2015 offering an affordable alternative to the Payments Summit Boston many people without access to banks today. February 3–5, 2015 summit.virtualcurrencytoday.com Salt Lake City www.scapayments.com Cards and Payments Middle East May 12–13, 2015 Money, Real Quick: Kenya’s Apex All Payments Expo Dubai Disruptive Mobile Money February 23–25, 2015 www.terrapinn.com/exhibition/cards-and- Innovation Las Vegas payments-middle-east/index.stm by Nicholas P. Sullivan www.iirusa.com/allpaymentsexpo/home.xml Connect Mobile Innovation Summit and Tonny K. Omwansa BAI Payments Connect 2015 August 18–20, 2015 Balloon View, 2012 March 2–4, 2015 Chicago Phoenix mobileinnovationsummit.com Tools to send money via mobile phone are www.bai.org/paymentsconnect gaining popularity in the United States, Money20/20 but this book reveals that 70 percent of GSMA Mobile World Congress October 25–29, 2015 March 2–5, 2015 Las Vegas Kenyans were already sending money Barcelona, Spain money2020.com that way when it was published more www.mobileworldcongress.com than two years ago. The book’s authors CARTES Secure Connexions explain how M-Pesa, the country’s most Transact 15 November 17–29, 2015 widely used mobile money service, rap- March 31–April 2, 2015 Paris San Francisco www.cartes.com idly rose to popularity when not even electran.org/events/transact15/ 20 percent of Kenyans used traditional banks a year before its launch.

Mobile Banking: Financial Services Meet the Electronic Mobile Inﬂuence: Designing Mobile Payment Wallet The New Power of the Consumer Experiences: Principles and Best Ernst & Young, Knowledge@Whar- by Chuck Martin Practices for Mobile Commerce ton (the online business journal of the Palgrave Macmillan Trade, 2013 by Skip Allums University of Pennsylvania’s Wharton O’Reilly Media, 2014 School), 2013 It’s no secret that people use their mobile phones to buy goods online, but this book The inner workings of mobile payment This e-book provides an overview of the explains how brick-and-mortar stores can frameworks are the subject of this guide firms battling it out to provide mobile adopt new mobile payment technologies for app developers, designers, and proj- payment and banking services. In a series to better reach their smartphone-toting ect managers. The book gives a history of of accompanying videos, scholars from customers. The author describes difer- payment technologies and compares apps the University of Pennsylvania’s Wharton ent payment systems within the context like Google Wallet, LevelUp, Square, and School discuss business opportunities, of a bigger strategy for inﬂuencing con- PayPal. It also explains how to integrate data security, and mobile wallet technolo- sumers’ shopping habits through their security features like PINs and passwords gies with Ernst & Young analysts. mobile phones. into payment apps.