Money for Nothing?

Money isn't free - and never will be - but as the cost  of moving it around decreases and the speed at which it can be done accelerates, the more likely it will be used by more people in more places for more purposes. Which could create opportunities for innovators as larger enterprises shrink from risk. JL

Christopher Mims reports in the Wall Street Journal:

Something that has never happened in the history of money: Exchange it at any distance, nearly instantaneously and for near-zero transaction fees. The easier it is to exchange money, the more of it will be exchanged
One day last year, at the height of the Ukrainian revolution, Mark Howard spotted something interesting on television. In the background, a protester was holding up a poster with an instantly recognizable logo: A “B” with two vertical bars, the symbol for the digital currency bitcoin.
Mr. Howard is an American IT specialist and a self-described bitcoin enthusiast. He surmised that the poster’s QR code, which is a kind of square bar code, must contain the address of a bitcoin wallet belonging to the protesters. On a whim, he froze the frame, scanned the code with an app on his phone, and sent $10 worth of bitcoin to a country whose banks were paralyzed but whose protesters needed money to continue their fight.
It happened instantly, and the total cost of the transaction was $0.02.
If using
unregulated cryptocurrency to crowd-fund foreign revolutions sounds like a quintessentially 21st-century edge case, here’s a thing you need to know: The same fundamental technologies that enabled Mr. Howard’s impromptu act of foreign aid are being used by hundreds of other companies, in many countries, to do something that has never happened in the history of money: Exchange it at any distance, nearly instantaneously and for near-zero transaction fees.
We are just at the start of understanding what this will mean. The safe bet is that the easier it is to exchange money, the more of it will be exchanged, with obvious implications for economies that successfully integrate these technologies.

Take Venmo, for example. Venmo is the Snapchat of money in that it’s wildly popular with 20-somethings and on college campuses, and yet it is so unlikely to be used by people older than 30 that internally, the company calls that age the “Venmo line.” Venmo’s mobile app makes it easy to pay friends for just about anything, usually things like rent or your portion of last night’s bender. In 2014, the company handled $2.4 billion in transactions, and it is growing so quickly that it did half that amount of business in the first quarter of 2015 alone.
The cost of using Venmo is zero. Early in the company’s history, this business plan, or lack of it, nearly killed the startup, but an acquisition by payments company Braintree (which was later purchased by behemoth PayPal) saved it. Like countless other newfangled payment services, including competitors Square Cash, Google Pay and even payments in Facebook Messenger, the reason Venmo can charge nothing is that payments within its network are just data bits moving around in a database somewhere, rather than dollars being moved between bank accounts.
All of these companies have to make money somehow, of course, and for companies like Venmo that means integrating with merchant services that do charge a small fee. Others, like Facebook Inc.’s offering, are simply features of larger enterprises interested in keeping us on their sites and in their apps, the same way Google can afford to give away productivity software services free.
Aside from convenience, the way Venmo and these other services are better than cash is that it costs money to transact in cash. This isn’t often appreciated unless you run a small business, but simply handling cash means losing a small percentage of each transaction in costs arising from the time required to procure and manage it. And there’s also a cost for consumers. One study found that on top of ATM fees, Americans spend on average 28 minutes out of every month simply traveling to get cash.
Existing electronic-payment networks aren’t much better. The duopoly of Visa Inc. V 0.40 % and MasterCard Inc. has extracted enough in fees from America’s merchants that Wal-Mart Stores Inc. WMT -0.19 % is suing Visa for more than $5 billion, alleging the fees it charges when customers use plastic are unreasonably high.
I asked Visa about this, and it pointed out that many of these new services use Visa’s network to get money in or out of them, from bank accounts. That’s true, but it’s also the case that for the most part they use the least expensive part of Visa’s network, the debit card, which is itself enabled by Federal Reserve banks.
Things get even more expensive when you want to send money overseas. As of 2012, Americans were sending $123 billion overseas, mostly to relatives for whom the money is a lifeline, according to the Pew Research Center. Traditional services like Western Union Co. and MoneyGram International Inc. MGI 1.21 % can charge fees that run as high as 8%, not including the less-than-favorable exchange rates they offer, but they’re being disrupted by startups that employ novel methods to reduce costs.
TransferWise, for example, matches pools of people in two different countries who want to send money to the opposite country, thus eliminating the need to actually transfer money at all. (Imagine paying someone else’s mortgage in the U.S. while they pay your tax bill in France.)
A Filipino startup called Rebit takes a different approach, exchanging dollars for bitcoin, which can then be transmitted and cashed out for Philippine pesos so quickly that the service avoids losing money on the volatility usually associated with bitcoin, says Chief Executive John Bailon. Total cost, depending on the country, can be as little as 1%, he says.
These trends have forced traditional banks to take notice, says Dwolla CEO Ben Milne. Dwolla has built a federally approved payment network, called FiSync, that allows any connected institution to instantaneously send any amount of money. As of last week, it does it all free. Payment networks like Dwolla raise the possibility that we will see even more free payment services, including some that aren’t part of a larger company that can afford to eat the current transaction costs.
It’s important to note that disruption in this industry isn’t going to progress in the same way that, say, Netflix killed Blockbuster. Alex Holmes, chief financial officer of MoneyGram, points out that 90% of the remittances his company handles are cash to cash, and they are between people who don’t even have bank accounts. These “unbanked” masses aren’t about to start transferring money via bitcoin anytime soon. And Visa has been particularly savvy about investing in its own disruption, taking a stake in Square, whose Square Cash product runs on Visa’s debit-card network.
We’ve never lived in a time when it was so easy to pay a person or a business, and that’s what’s really exciting about these developments: We are at that transition point in which most of us own checkbooks and wallets as well as smartphones. Now imagine a time when all we have is our mobile device, or a pin-and-chip card and our thumbprint, and every time we want to support our friends, a local business or even foreign revolutionaries, all it costs us is a moment’s consideration.