At a time when all economic activity is being digitized, it is interesting to ask to what extent banking and financial services will change in line with this transformation. Over the last decade or so, there has been a profound change in the way people consume music and video, share photos and rent cars or apartments. We no longer buy CDs and DVDs, but instead consume music and films. Usage is replacing ownership, for goods of all kinds. This phenomenon not only concerns products and services of relatively little value, but extends to assets such as cars and property for which ownership has long been a factor in the display of social success or in building up wealth to insure against life’s uncertainties or to pass on to future generations. If services and goods of all kinds seem to be caught up by this phenomenon, how is it affecting money – a very distinctive good –, and the closely related activity of payment?

Currency management has long been regarded as a fundamental “financial service”. Currency has needed to be a real good that is wanted, with a known cost of production. The slow disappearance of physical money could only have taken place in parallel with people’s growing reliance on banks. Trust in physical cash has been transferred to trust in the institution. It is now clear that the physical component of money is disappearing, due in particular to the widespread use of electronic payment and of smartphones as a tool for economic exchange and payment, along with the emergence of new non-banking actors authorized by fast-changing regulation.

People’s behaviour in response to the digitization of money can be best understood on the basis of the approach adopted by Kahneman (2012), which breaks down the cognitive mechanism into two systems, the first suited to quick and simple decision-making, the second for dealing better with complex problems with longer-term consequences. Kahneman’s approach to behaviour in relation to money has become all the more relevant with the emergence of smartphones in everyday life, especially in economic and financial transactions. This changing behaviour also entails taking account of generational and geographic differences between individuals.

A growing proportion of economic transactions now take place within the purview of a larger community. Financial exchanges are thus shared with other members of the community. Using money in this way further distances it from a more personal usage and requires both technical skill and discretion. We see here a new illustration of the dichotomy between immediate money linked to use and physical money for which other cognitive processes are involved.

 

Hervé Alexandre
Professor of Finance at Paris-Dauphine University

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