The Technology of Money

Read our article in the Cayman Financial Review Magazine, eversion 

 Nairobi – Some years ago, DFID – the UK Department for International Development – partnered with Vodafone to develop a secure software platform for performing a number of basic payment functions on mobile phones. These included transferring “E-Money” to anyone with a mobile phone, paying for airtime on yours or someone else’s mobile phone (few people in developing countries can afford monthly plans).

This and similar payment applications are dramatically changing life for the better in Africa, where very few people had access to banking services until very recently. Workers in Kenyan cities now send money home to their families in the villages via their mobile phone rather than carry cash by bus. The cost is 10 to 15 cents.

By the end of 2008 half of Kenya’s population had mobile phones and by the end of 2009 over one fifth of the population had mobile phone e-money accounts (over 9 million from zero three years ago). Surprisingly, banks have responded competitively by increasing branch offices and becoming mobile phone payment agents. “The number of deposits accounts increased from 2.6 million to 8.9 million at present1.”

As a result of these developments the use of cash has fallen rapidly. In less than three years the share of the central bank’s monetary liabilities (currency held by the non bank public and central bank money held by banks – cash in bank vaults and bank clearing deposits with the central bank) held as cash by the public fell from 64 per cent to 56 per cent, a 12.5 per cent drop. As the number of e-money account holders continues to grow (presumably at a slower rate) and as the uses of e-money expand to cover a wider range of payments (utility bills, petrol, groceries etc) the currency ratio will fall further. Mobile phone payments are cheap enough for the poor to use at great benefit, convenience and improved security.

But the development and spread of mobile phone payments could not have been possible without the proliferation of mobile phones and their transmitting towers and power sources across the African country side. And that would not have happened in our life times at the hands of the state monopoly phone companies that provided phone service in most countries for decades. The breakthrough came when most African and many other countries gave in to pressure from the World Bank and IMF to privatise their mobile services (and other state monopolies) and to open them to competition.

Money has come a long way from seashells and gold coins. But its basic features remain the same. Money is something of known or predictable value that is widely accepted in payment for whatever you want or owe (your debts, to pay for your purchases of toothpaste, cars, stocks and bonds, your wages), ie it is a means of payment. By its nature it is a store of value (you can save it) and invariably is used as a unit of account (the unit in which prices and contracts are stated).

Money’s ability to fulfil its central function as a “means of payment” has improved dramatically over the centuries as a result of the development and application of technology. The fundamental and unchanging feature of a payment is the change of ownership of “money” from the payer to the payee.

The simplest form of payment is when you personally deliver cash to the person you are paying. Technology as contributed to the ease of making payments – in fact dramatically transformed the whole process – in two fundamental ways. The first concerns getting money into your own hands and the second concerns how you can deliver it to the person being paid, especially if they are far away.

Standardisation is essential, of course. Without that payments would still involve elaborate systems of bartering goods and services, which is terribly inefficient. Aside from the printing of currency or minting of coins (paper, ink, engraving quality and other security features to thwart counterfeiting), the primary innovation in making payments was the creation of banks where money could be depositing for safekeeping.

The arrangements for transferring specific amounts of your deposits with your bank to someone else eliminate the need to have cash. The technical and legal options for transferring balances in your bank account to someone else include writing a check (an order to your bank to transfer the money), an ACH/payment order, keying in instructions using a debit card and now in some places by keying in simple transfer instructions in you cell phone. On top of these is the wide spread use of credit cards of one sort or another.

These modern means of payment all involve transferring bank balances by issuing instructions (via check, debit card, mobile phone etc) to your bank in one way or another. The benefits in cost saving and speed are enormous.

Large or small amounts of money can be transferred to the casher across the counter or to a relative, friend or business halfway around the world in seconds at low cost.

These alternative payment instruments (means of issuing payment instructions to your bank) each have laws that define the rights and obligations involved in order to protect the process and different technologies to communicate and secure the payment messages.

The growing use of modern means of payment has dramatically reduced the use of cash in preference for the use of bank balances. But as we marvel at the ease with which money moves around electronically it is easy to overlook the continuing need in many instances for an interface between cash and deposits.

That interface may be symbolised by a bank teller window. You might receive your weekly or monthly wage as a direct deposit to your bank account (an ACH transfer from your employer’s account to yours) and you might make many of your payments by transferring those balances to others, but the system would not work (at least not yet) without the ability to deposit and withdraw cash. For that you need the old-fashioned teller window through which cash is paid in or out.

The ubiquitous ATM machines are a modern version of the teller window and testify to the continued use of cash and thus for the need for means to deposit it in or withdraw it from a bank. Conceptually the system could become cashless with all payments may by transferring bank balances from one account to another, but that will not happen in our lifetimes.

Mobile phones are the most dramatic and interesting recent innovation in payment technology. They provide an extremely low cost technology for issuing and executing payment messages. One of the most interesting innovations is the extension of the teller window – the cash in cash out point – from your bank or an ATM machine to an authorised agent of the provider of the mobile phone payment service.

In Kenya, for example, the dominant provider of mobile phone services is the largest mobile phone company, Safaricom. Their mobile phone payment service is called M-Pesa. M-Pesa provides subscribers with texting software on their mobile phones with easy steps for crediting cash to an account, for transferring it to other M-Pesa account holders and for receiving transfers from other account holders (eg your wife or your employer). There are more M-Pesa accounts in Kenya than bank accounts.

The cash in cash out (teller window) function is performed by authorised M-Pesa agents. Initially these agents were generally mobile phone airtime vendors (phone cards) that can be found on many street corners or in small kiosks around Kenyan cities and towns. Now many merchants and even banks function as agents. Cash can be collected from or deposited into the system through these agents.

If you work in the city and your family lives in a distant village, your transmission of your wages to your family via your mobile phone does not, obviously, actually send cash electronically. Like a check, a mobile phone payment is simply an instruction – a text message – that authorises the recipient to receive cash from a nearby office/agent.

The need to manage the stock of cash (availability, safekeeping, note quality etc) has shifted in part from individuals (city workers used to take the bus home on weekends to deliver cash to their families) and banks to mobile phone payment agents.

The agents are responsible for keeping enough cash on hand for payouts and for safekeeping cash received for deposits. A large part of the cash paid out by a bank or agent in a region stays and circulates within the region.

Thus to some extent cash paid in or paid out by agents balance. Any net flow of cash to or from the village must be organised by the agents and physically transported. If a bank office is available cash shipments are most likely to be organised via the bank.

This new payment technology is having a material, positive impact on life in Kenya, especially for the low income population. It has implications for monetary policy as well. The use of cash has fallen rapidly. In less than three years the share of central bank money (currency held by the non bank public and central bank money held by banks – cash in bank vaults and bank clearing deposits with the central bank) held as cash by the public fell from 64 per cent to 56 per cent, a 12.5 per cent drop.

This shift of cash to bank deposits allows the banking system to create more deposits (also a part of the country’s money supply) from the same amount of central bank money (so called reserve or base money). Thus to prevent this very positive development in payment technology from being inflationary, the central bank must slow the rate at which it creates central bank money.

The history of money has been a long series of innovations that lower the cost of making payments. The history of the behaviour of money’s value has been more uneven. Technological innovations in making payments pose challenges to central banks’ effort to preserve the value of the money they issue, but they can meet if they pay proper attention.

The Central Bank of Kenya has adopted an enlightened supervisory attitude of putting primary responsibility for the development of services and their safeguards with the service providers, but have insistent that new uses be tested step by step in a gradual careful but market driven process. Kenya has become a leader in an exciting new technology primarily of benefit to the poor and middle class.

Governor N’Dungu in a presentation to bank CEO’s March 30 in Nairobi.


Village in rural kenya

Village in rural kenya
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Warren Coats
Warren Coats retired from the International Monetary Fund in 2003 where he led technical assistance missions to more than twenty countries (including Afghanistan, Bosnia, Egypt, Iraq, Kenya, Serbia, Turkey, and Zimbabwe). He was a member of the Board of the Cayman Islands Monetary Authority from 2003-10. He is currently Visiting Scholar in the Institute for Capacity Development Department of the International Monetary Fund (February 20, 2018 through April 30, 2019) and a fellow of Johns Hopkins Krieger School of Arts and Sciences, Institute for Applied Economics, Global Health, and the Study of Business Enterprise. He has a BA in Economics from the UC Berkeley and a PhD in Economics from the University of Chicago. In March 2019 Central Banking Journal awarded him for his “Outstanding Contribution for Capacity Building.” Warren CoatsT.  +1 (301) 365 0647E. [email protected]W: