Motley Fool Money - The War for Your Wallet

Episode Date: August 7, 2022

"We want a cashless society." That's what Bank of America CEO Brian Moynihan said in 2019. And while the war on cash may be a strong trend for investors, it's also important to understand the implications of a world that only takes cards (or Apple Pay). Jason Moser caught up with Brett Scott, author of the new book “Cloudmoney: Cash, Cards, Crypto, and the War for Our Wallets” to discuss: - Incentives in the war on cash - How money transforms when it moves from your wallet to a Venmo account - Why cash is like an emergency staircase - How COVID changed the way we use money Stocks mentioned: BAC, V, PYPL, SQ, MA Host: Jason Moser Guest: Brett Scott Producer: Ricky Mulvey Engineers: Dan Boyd, Rick Engdahl Learn more about your ad choices. Visit megaphone.fm/adchoices

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And you can get unlimited expert help at no extra cost, even on nights and weekends during tax season. Visit turbotax.com to get matched with an expert today, only available with TurboTax full service experts. You know, I might find it useful to use a elevator to get to the top of a skyscraper, but that doesn't mean I want the emergency stairs removed. And in many senses, the cash system is kind of like the emergency stairs of the payment system. It's extremely resilient, it doesn't go down when the power goes down, or when the hurricane hits. So actually, it's an extremely important system, and actually is more advanced in many situations than digital payments are. I'm Chris Hill, and that's Brett Scott.

He's the author of the new book, Cloud Money, Cash, Cards, Crypto, and the War for Our Wallets. For the past five years on this show, we've talked a lot about the War on Cash, but today, we're taking a closer look at the other side of the War on Cash. Jason Moser interviewed Scott about the implications of moving toward a cashless society, how money transforms when it goes from your wallet to a Venmo account, and why FinTech companies really don't want to become banks. Brett, your position on cash comes from not really politics, but rather a critique of financial capitalism, as you mentioned in the book. So let's get started. Tell us a little bit about your background in finance and what inspired you to write this book. Sure. I actually worked

in, I guess, high finance for a while, which is I was in the realm of over-the-counter derivative contracts, in particular swap contracts. This was during the financial crisis. And So these are considered exotic derivatives. People often think of these as very complicated instruments that are hard to understand. And I found when I was working in high finance, lots of people, you know, they had very high opinions of their sort of skills, their financial skills, but often actually wouldn't really understand much about the monetary system. You know, it turns out to be a high finance trader, you don't really need to understand

a huge amount about how the monetary system works. But yeah, so I was working that for a little while. I left and wrote a book called The Heretics Guide to Global Finance, which was a book basically for ordinary citizens who are concerned about the financial sector and who were interested in finding new ways to challenge its power or to build alternative types of finance. And so that book came out 2013. And then since then I moved into working in lots of different financial campaigns, sort of financial reform campaigns, but also working on potential alternatives, including alternative currencies. alternative banking, alternative fund management, all sorts of stuff like that. By alternative I mean sort of alternative to business as usual. So sort of thinking about new types of finance that might actually be better for society.

And this eventually took me into looking at this realm of where sort of technology intersects with finance. So the whole kind of world of fintech. And the fintech community often had this sort of self-image of being a kind of disruptor that was really going to sort of revolutionize finance and so on. And I really started to doubt this narrative. And it sort of became very apparent to me that actually what the fintech community was often doing was simply automating finance. And that might be experienced by some people as empowering in a certain sense. But really, when you sort of zoom out and you look at the sort of role of the fintech sector, it's basically being to try and extend the power of big finance often, more often than not, rather than actually

reforming the financial sector. So this is it led to my new book. cloud money, which is looking at how actually in a way the cash system, which is often reviled as this kind of out of date system, actually the cash system is much loved by people. And there's a lot of ideology and sort of attacks that go against the cash system. But many people actually value the cash system very, very deeply, but are constantly told that they should feel ashamed for using these non-automated, this non-automated form of money. And so I'm looking at the power dynamics of who's attacking the cash system, why, how big tech and big finance are involved. Well, okay, let's dig into that power dynamic because I think this really kind of all boils

down to incentives, right? The parties that participate in this value chain and their incentives. And in the book, you talk about the four war on cash conspirators, which I just, I love how that sort of sets the table, right? So, I mean, let's just talk. Who are these conspirators in what are their incentives. Yeah, well, first of all, I'll quickly say that I use the term conspirator in a kind of tongue-in-cheek way because actually in a large scale, you know, in a big economic system, you don't really need to overtly be a conspirator to push your kind of power and message into society. So actually a lot of the big banks and stuff were involved in its attack against cash wouldn't think about themselves as being conspirators. But in reality, this is kind of like how

they're operating. So the big sort of parties who are attacking, the cash system. The first party is the banking sector. So bear mind that the banking sector runs the underlying account infrastructure that is used in mainstream digital payments. So when you're tapping your your card or when you're using a mobile app of some sort making payments, it's inevitably going through the banking sector. You know, the Bank of America CEO has openly said this, you know, is to say, we want a cashless society precisely because they run the underlying account infrastructure by which they can get data and

fees via digital payments. The second big body of players is the payments companies like Visa and MasterCard, which who basically specialize in telling the banks who's trying to move money from who to who. So they're basically intermediaries. And for Visa and MasterCard, it's very very straightforward. I mean, cash is something, every cash transaction is a transaction they're not making fees from. All right. So it's very straightforward for Visa and MasterCard. They openly attack the cash system all the time. The third player is actually the fintech sector. And, you know, FinTech companies are, you know, they do more than just payments.

They're often trying to automate loans. They're trying to automate insurance claims. They're doing all sorts of automation activities in finance. And for them, cash is an offline form of money that can't, it doesn't jell well with automated systems. All right. It's a kind of human to human form of payment. What the ideal form of payment for a fintech company, if you want to automate things, is to deal with the data centers of the banking sector, right?

To say, you know, get other, work with other big institutions rather than trying to directly deal with cash payments from people, right? So in terms of automation, all the big players, big tech players want to work together. Then the fourth sort of set of players is actually governments. You know, there's lots of governments who have attacked the cash system. And governments are slightly more complex because they have multiple different departments. who have different agendas. And so, for example, some people in central banks are very reticent about letting the

cash system go down, whereas some people in, for example, security circles might say, hey, we can watch payments more easily if they're digital. So let's attack the cash system. So among certain nation states, there is an anti-cash push too, depending on where you are. Yeah, so let's dig into the fintech side of things for a moment because I think that's, Our investor community can really relate, I think, to that word fintech. It's been bandied about a good bit here recently as really opportunity for investors. First and foremost, just kind of going back to exactly how money moves, physical cash versus

digital currency. Can you give us just a quick tour on the mechanics of how money changes, from cash to your bank to then a tertiary player in the space, like a PayPal, for example. Sure, yeah, yeah. How does that money move along that chain? That's a very big question that could take a long time to unpack. Let me try to give a simple version of it. Right, one of the metaphors that I sometimes use to try and quickly and quickly convey

the dynamics of this is to ask people to think about casinos. All right. So if I walk into a casino with, let's say, $100 in cash and I hand it over to the cashier, and they hand me $100 worth of casino chips. If you think about what's just happened there, the casino took ownership of my physical cash and gave me this physical chip, which I can now use within the confines of the casino.

Now, that's casino chip is actually a secondary form of money. It's a privately issued form of money that's tethered to the original form of money, the actual government cash. All right, but it's privately issued, and it's within this casino. Now, if you want to understand the banking sector, something related actually happens in the banking sector. If I hand over cash to, let's say, Bank of America, they take ownership of that cash and they issue me a chip,

the equivalent of a casino chip, but it's in digital form. So it's a digital chip issued by Bank of America. So if you have a Bank of America account and you see numbers in that account, you're basically seeing the digital chips they've issued to you. It's a privately issued form of money that can be moved around within the confines of the bank payment system. Now, the big power that banks have, unlike actual casinos, is banks can issue far more of these digital chips than they have in government money reserves.

That's sometimes called fractional reserve banking, probably more accurately called credit creation of money. But the basic deal is banks have the ability to expand the money supply through issuing far more of these chips than they have in reserves. And they do that through a process of when they're issuing loans. But the basic deal is when we're using the digital payment system, and by that I mean, you know, when you're using your credit cards or debit cards, all these types of and apps and things like that, you're using these bank issued chips within a sort of a bank, a sort of elaborate series of data center operations that they've got going with the help of Visa and MasterCard. If you're looking at players like PayPal, they actually add a new layer onto it. They will take your bank issued chips, take control of them and issue you their own third. tier chips, as it were.

It's like taking your casino chip to a different casino, and then they take ownership of that and give you a new chip. It's really better. Yeah, yeah. So basically the monetary system is often made up of what we call the US dollar, is actually multiple different currencies with different issues that have the same name that are kind of tethered together with each other. And what's often called the cashless society is a society where you essentially lose the

ability to hold government money in the physical form, when you have to use this bank issued or corporate issued money like PayPal issues. So, we talk about big banks, and I think you really, you keyed in on something there, in the power that the big banks have, really, throughout all of this. Why don't fintechs ultimately want to be banks? And do you feel like this puts them in a longer term precarious position, at least competitively speaking? It feels like banks could really come in there in more, and more or less call the shots. If this fintech layer, I don't know if it necessarily needs to exist.

I mean, it feels like it's very convenient. But ultimately, it does feel like if they don't want to be banks, that's going to limit the power that they have. Absolutely. But I don't think many fintechs have ever wanted to be banks. You've got to understand the, I mean, bear in mind, if you're running a big bank, it's a big ship. It's a big ship and it's hard to turn it in different directions,

but it's extremely powerful. So if you're sitting in the boardroom meeting of one of the big banks, they're thinking about many, many things, right? For example, how exposed are we to the geopolitical risks of Russia or, you know, what about our risk portfolio? They're thinking about these very big issues. Things like, what does our new app look like is but one of many issues that they're thinking of, right?

Now, bear amount, these banks do want to automate. They do want to create these fintech systems to essentially automate their industry. interaction with their customers because that's how you optimize profit, but they're quite slow to do it. Whereas if you're running a 10-person startup that simply specializes in building apps, you're much faster. All right. So a lot of the fintech accelerators and so on basically specialize in these small teams, who if they were within a bank would be a very specialist little division, all right,

but they can operate as a startup initially, get venture capital financing, build these nice looking apps, which essentially are basically kind of like interfaces. that we would interact with, and which often will plug into the banking sector in the background, right? Now, a lot of these fintechs don't want a banking license. They don't want to have to deal with all the actual politics of being a bank, right? So what they often will do is enter into partnerships with the banking sector and find ways to interface with them, or else they just get bought up, all right?

Which is, I mean, I was just in London, and I remember, you know, about 10 years ago or so, maybe there was a new startup in London called Nutmeg, which was an inventive. investing startup. And they had this whole advertising campaign, which they were putting on the London underground system, the train system, saying, you know, don't trust the banks, all right? Now go back 10 years later, and I see NAPMeg now belongs to JPMorgan. So it has a JP Morgan company underneath it. So basically they did this. It was kind of an outsourced R&D effort in the end for JP Morgan. And they've now been incorporated in, which happens to a lot of fintechs. So many of the fintech sector is kind of grafting itself onto the banking sector. And in the process actually

enables big tech, so like Apple and so on, to interface more effectively with the financial sector. You certainly talk about that threat of consolidation, the risks that come with that. And it's, I don't know that anything can really stop that ball from rolling. I wanted to ask in regard to cash specifically. Now, I'm not a lawyer. I didn't go to law school. I don't think you're lawyer either. But there are, I talk to lawyer friends about this from time to time. And it's interesting, when you look at actual physical cash, right? The note says, and I quote, this note is legal tender for all debts, public and private, end quote. I mean, that's on the bill. And so given that, it feels like there has to be some sort of legal ramification for a

store or for a merchant saying, no, we don't accept cash. I mean, in the book, you called out the example on the flight, right? Where you're trying to buy the drink, you offer cash? And they say, I'm sorry, we don't accept cash. Now, you had someone a stranger that jumped in there and bought you the drink with a card, but he ruined your point, right? He stole your thunder, so to speak. I mean, are there legal ramifications for saying, listen, we just don't accept cash? Because I feel like I've read, at least, of some litigation out there coming to the surface where people are challenging this. Sure, legal tender laws are actually a lot more subtle than people think often.

Legal tender doesn't mean a person has to accept cash for anything. It doesn't have to accept the legal tender for any transaction. What it means is they have to accept it if the person giving it to them is in debt to them. Gotcha. So notice actually on that bill, you use, the, you, you, this. the quote was for all debts, public and private, for all debts. All right. So if I, if I enter a shop and I'm not in debt to the shop, they can actually refuse

legal tender, right? But for example, imagine I went into a restaurant, ate the food, which would actually technically put me in debt to them, because I've taken something from them without paying, now actually the legal tender laws start to kick in, right? because now if they try to refuse my legal tender, they're trying to prevent me from exiting debt, which historically is a kind of debt bondage, right? So these legal tender laws are trying to stop forms of debt bondage to say, if a person is trying to exit their debt and you're stopping them, you're in breach of legal tender laws.

All right. So that's what the legal tender thing is. But in terms of, so that's an interesting legal cases to test out when it comes to people refusing cash, and which situations are truly in breach of legal tender laws. But in terms of, for example, when banks are doing things like shutting down ATMs or trying to make it out as though the provision of cash is like some kind of burden upon them, that is a very dubious legal situation. Because think about that casino metaphor I gave to you earlier. If I have a casino chip, that's actually a legal claim upon cash held with the cashier. Right.

If I go back to the cashier and they say, oh, sorry, we don't actually redeem this anymore. they are now in breach of their legal agreements. So that's a kind of more, this is not in the realm of legal tender, but this is a different legal issue. So when banks say, we're going to penalize you for using cash, or we're going to stop you from exiting our system by through the ATM, they are now in breach of some other types of laws. Does that make sense?

Oh, yeah. Yeah, absolutely. In line with this use of cash, do you feel like going cashless marginalizes certain parts of society? And if so, how? I mean, absolutely. There's a huge class dynamic to this. I mean, it's very easy to see. I mean, you don't need to have a sociology PhD to notice which places, quote, unquote, go cashless first. All right. It's always boozy kind of upper income places, right? Largely because not only do banks historically have targeted those people before they target poorer people, but actually those people and those type of establishment, have much higher trust in institutions more generally, all right? Whereas people who are more marginalized not only get less service from institutions, but they often don't trust those

institutions either. So there's a very strong correlation between socioeconomic status and cash usage. There's many studies which will show this. And so when there's this public messaging coming out that there's something wrong with the cash system or somehow it's a sort of inferior form of payment, there's a very strong class dynamic to that. There's a very strong value judgment being made upon people who actually often prefer the cash system. And if you think about that messaging, you're basically been told if you don't want to be absorbed by large-scale banking institutions, there's something wrong with you. That is a very loaded message that comes out of many mainstream circles. But we live under an ideology which says, you know, where we always have to go to is

ever more scale, speed, complexity, automation. And that's really a corporate message. That's not something that ordinary people resonate with necessarily. It feels like when we talk about the war on cash, steering away from cash, the risks of systems of digital money, I mean, look at what's been going on recently in regard to the war in Ukraine, right? I mean, you see networks cutting off Russian nationals. And while, you know, I think a lot of the world is probably on board with that, I mean, you see folks resorting to alternate forms of currency, whether it's cash or whether it's crypto, right, in order to be able to move money around. And that really goes to one of the greater risks here of a cashless society in that what happens, right? Maybe a lot of folks right now

or on board with what's going on in shutting off Russian nationals because of what's going on in Ukraine. But what happens when they're shutting you off when it's something that you agree with, right? I mean, what happens when the shoe is on the other foot? Because it feels like that's just a matter of time. Yeah, absolutely. I mean, if you're a citizen of a authoritarian country, you very, very quickly understand the implications of what a cash society means. because basically it means you all your transactions can go through institutions that can be watched

but they can also perform a vector via which power can be exercised so you can be stopped from doing certain things and so on now obviously there's an interesting balance here when we're talking about okay potentially you know and this this is a debate that goes throughout society more generally about you know when is it okay to exert power and when is it a form of overreach now actually in the case of Russia right now, while you say, you know, many people agree with the idea of imposing these sanctions, bear in mind that within Russia, there are many, many people who hate Putin, you know, and who disagree with these policies and are now finding themselves essentially shafted, right, because they are now bearing the brunt. And often these are people who don't have

the ability or the buffers to actually deal with that. You know, the actual Russian elite are not going to be heavily affected necessarily, or they, you know, they have ways of surviving. But many poorer people don't. Things like the cash system in this context become super useful. But even outside of the Russian context, this applies. You know, a good example, which is in Hong Kong, right, during the Hong Kong protests, Hong Kong is a highly digitized society in many ways. But people were queuing up at the train stations to try and buy paper tickets with cash

precisely because they were aware of this potential that if they, if authorities could watch where they were traveling to via digital payments systems, they would be identified as potential protesters. Now, the cash system in that situation enables that alternative, but imagine if you don't have that alternative. Not only could you be watched, but hypothetically, you could be stopped from exiting a particular station, for example. So there's a huge, potential problem in getting rid of cash. Nobody's really thinking about it right now, because cash still remains an option, but in some future where it doesn't, then you're really going to know about it.

Yeah. Yeah. I have a hard time imagining a world with that. I mean, I know a lot of listeners probably know. I mean, I love the investing opportunity in regard to digital payments, payment networks and whatnot, right? I mean, I own shares in companies like Visa, MasterCard, and PayPal and Square. But I also, I mean, I'm a big proponent of cash. I feel like if you're a merchant and you don't accept cash, you're explicitly telling people you don't want their business, which I just find to be the opposite of what you should be doing. Well, you know, one of the good great metaphors that people actually, to convey this is cash is like the public bicycle system of payments, right? Whereas things like your, you know, Venmo and so on,

you can think about them as being at the private Uber system of payments. All right. Now, you might like Uber. it doesn't mean you want them controlling the entire transport system. That just gives too much power, right? You want a balanced transport system with multiple different options. So with payments, it's very similar. You want a balanced payment system with multiple options. You don't have to be anti-digital to be pro-cash. They're not mutually exclusive.

You can have both of these. And actually, it's extremely important for the resilience of economies to have both of these. And unfortunately, the only players who benefit from the removal of the the option to use cash are the companies. But for most ordinary people, they want options to remain open. You know, you don't, nobody wants a reduction in payments options. They always, everyone wants an increase. All right. So it's only the industry that has an incentive to destroy the ability to use cash. And one, one final metaphor, which is quite useful to sort of, to grow the dynamics of this is, you know, I might find it useful to use a elevator to get to the top

of a skyscraper, but that doesn't mean I want the emergency stairs removed, all right? And in many senses, the cash system is kind of like the emergency stairs of the payment system. It's extremely resilient, doesn't go down when the power goes down or when the hurricane hits. So actually, it's an extremely important system. It actually is more advanced in many situations than digital payments are. Yeah, I like that. I like that analogy there. You, Speaking of cash and having sort of that emergency use case, early on, COVID really accelerated this movement away from cash, right? The general idea was cash is dirty, it transmits germs, therefore stores more and more,

you know, really, really tried to steer away from the use of cash, right? And then I think you actually said in the book, as time has gone on, we've seen there's great a risk in actually using things like the pin pad on the actual hardware. than transacting in cash. So it feels like we're kind of moving back away. Maybe we're seeing that that risk isn't necessarily as great as once thought. But it also feels like this is something we could probably expect to see more and more of down the road. And I don't mean COVID specifically, but it does feel like the industry itself will find every

opportunity for reasons why we shouldn't be using cash and should be focusing more. digital payments, right? I mean, one of the big things I'm talking about in the book is the sort of war on cash, as it were, which is, you know, a sort of way of talking about the top-down pushes against the cash system because historically the narrative that comes out, the standard narrative is that it's a bottom-up process. You'll find this idea that, oh, the reason why we've seen the decline of cash is because ordinary people are just making this choice. But this completely ignores half of the picture, which is that these very big players, it's been a very long time undermining the cash system, which makes it ever more likely.

that you will quote unquote choose to use digital payment, right? And actually during the pandemic, we saw this. Big players were always against the cash system. They were pushing against cash system far prior to the pandemic. But as soon as the pandemic came, they were very quickly weaponized it, being extremely aware that people were scared temporarily of physical contact. They really weaponized this and push that narrative forward. The cash is dirty and transmits disease.

And this narrative is unscientific. I mean, I'm based in Germany here, and the Robert Koch Institute, which is one of the world's preeminent health institutes, based in Germany, came out and said there's no evidence that cash transmits COVID. And in fact, subsequent research has shown, as you mentioned, that actually, you know, the digital screens and self-checkout counters and pin pads of the card terminals pose a greater risk of transmitting COVID. it. But in places like London, for example, all these big retailers used it as an excuse to push forward this automation drives they were already interested in. And now in London, people, for example, don't wear masks anymore. So all these COVID measures have been reversed, but these players have stayed with their anti-cash position. So they've used it to kind of ratchet up the use of digital payments and to not go back. All right. So that's been happening. And this is a very big problem.

And one final example I can give you there is actually the NFL, entered into deal with Visa in 2019, a sponsorship deal with Visa said, we want you to do cashless Super Bowls, right? And the first one of these cashless Super Bowls came out in 2020, and the narrative that surrounded that was all about COVID. But that deal was signed in 2019, right? This was prior to it. And they just happened to find that a convenient narrative. So there's a lot of top-down players that are working to not only overtly shut down the cash infrastructure, but also have a kind of ideological war against it, to make people feel ashamed for using this, and essentially make people feel ashamed for not wanting to use large institutions

all the time. Brett, I want to be respectful of your time here. So maybe if we could just wrap up with one more question. Because ultimately, this goes back to, I think, one of the themes in the book, these contradictions of corporate capitalism, right? We as consumers, we weigh the convenience versus things like monitoring, censorship, manipulation, whatever that may be. And it feels like it's going to be difficult to go back. But, you know, like I said, as much as I like the idea of the war on cash from an investor's perspective, I mean, I personally have a hard time believing we'll ever actually live in a fully cashless world, at least in my lifetime.

So that being said, what is the path forward with this? Sure. I mean, the first thing I'll say is the de facto narrative, mainstream narrative, is that cash will die. All right. Now, the reason why that that narrative exists is that for, if you just push play on standard capitalism, as it were, you know, companies try to scale, they try to automate and so on. So, so on the cash system stands against that. All right. But as we know, companies often don't actually act in their own best interests collectively.

Sometimes they can really mess themselves up, right? and this is a kind of contradiction in market systems. So in reality, in terms of what's in the best interests of a market economy, it's actually to maintain the cash system because the cash system creates resilience for the monetary system. It actually helps to keep the whole monetary system together. So if you're thinking about what's actually in the long-term interest of an economy, it's super important to maintain the cash system, not only for personal privacy and all these

things we've mentioned, but just for this basic stability of markets. So a kind of financial stability perspective. So I think what's going to start to happen is actually many policymakers will start to realize this, and they already have started to realize this, especially in a realm, in an era of increased geopolitical instability, where there's massive potential for cyber attacks, also in an era of climate change, where there's ever-increasing natural disasters, it's actually not obvious that you want to get rid of the cash system, where you want to be totally dependent upon these digital infrastructures. So I think in the next few years, we're going to see a lot more discussions of quite serious discussions about how to protect the cash system and how to actually counter.

And in a way, going back to that metaphor of cash being the public bicycle of payments to really promote that and say, actually, this is a very viable and important system to keep. But bear in mind, it's, you know, I'm going against the ideological grain by saying this because, you know, they factor the sort of standard story is that we have to get ever more automation, ever more connection, more convenience and so on and so on. All right. So I'm not going to bet against cash by any means. His new book is Cloud Money, Cash, Cards, Crypto, and the War for our wallets. Mr. Brett Scott, thanks so much for joining us today. Thanks for having me. As always, people on the program may have interest in the stocks they talk about, and the Motley Fool may have formal recommendations for or against, so don't buy ourselves

stocks based solely on what you hear. I'm Chris Hill. Thanks for listening. We'll see you tomorrow.