In the not so distant future, checkbooks will take their rightful place in museums alongside answering machines, VCRs and folding paper maps. Online bill-paying and Apple/Google Pay have narrowed the times when it’s necessary to resort to the clunky paper-and-pen based payment method, and many growing up today have never touched one at all. It’s clear the way we handle our finances is changing. So why not bring the concept of money itself into the 21st century?
Cashless payment systems were a good first step, but the financial industry can go the extra mile by making money smarter.
As we currently know it, cash is dumb as a rock — literally, in some cases. A piece of paper bearing finely printed images of long-gone politicians is deemed by convention to hold value. And so it does.
Making payments with a smartphone might seem smarter, but it really isn’t. When using physical money, the piece of paper bearing the portrait of a bygone leader is handed from the buyer to the seller in exchange for goods or services. All online or phone payments do is transfer that money digitally. Digital bits merely act as stand-ins for the paper that would otherwise have been transferred from the buyer to the seller. Whether it’s a rock, a coin, a piece of paper or a digital bit, cash thus conceived remains a static concept. You only have two choices: You can hold on to that money, or you can spend it.
Bitcoin and other cryptocurrencies introduced the first new idea in money in centuries. Blockchain, a distributed ledger system, is a phenomenally useful tool that will play a part in making money smarter. But the cryptocurrencies themselves are also static symbols of value. To the extent the holder of a bitcoin acts as if it has value, it can be traded for goods and services according to that value, which fluctuates with market conditions. The holder of a bitcoin can use it, or save it. In this respect, it’s also just like cash.
Bitcoin may be the best-known of a range of digital cryptocurrencies that use tokenized blockchain technology. (Shutterstock)
A smart system would be more dynamic. It would use automation to help the money work for you. That’s the iMoney concept.
Only the most conservative among us would ever settle for a static retirement account investment in which the amount you contribute when you start your career is equal to the amount you withdraw at its end. You might as well put the money in a mattress. Roughly half of workers have access to a 401(k) plan that allows them to do a bit better than that. They set aside a defined amount from their paycheck, and a selected company will manage investments based on the employee’s choices and needs, balancing risks against the potential for higher return. By taking advantage of compound interest, the end result ought to be a substantial nest egg for the golden years, rather than a lumpy mattress.
While the 401(k) is a great way to save for the future, the system is subject to several constraints. Contributions are limited to $19,500 per year, and that money can’t be touched without penalty until the age of 59-and-a-half at the earliest, under normal circumstances.
The idea behind iMoney is to create a smart card that’s able to invest cash from the time it’s earned to the time it’s spent. This would take place automatically according to pre-established tolerances for risk. The funds wouldn’t be locked away from the user — unless the user explicitly wants the money to be saved.
Now, some might object that it’s too risky to allow any investment options at all, saying everyone’s cash would vanish with the next stock market crash. With 401(k) plans, those risks are minimized because the ups-and-downs of the market even out in the long-term. Over 20 years, the most common investments provide a positive return despite the turmoil of recession and market crashes.
Since iMoney would deal with very short-term investments, the system would need advisors responsible for ensuring the risks are appropriately balanced and avoid all of the volatile options. But money can be smart even if it’s not invested at all. A monetary concierge could be empowered by its owner to enforce a budget, denying those spur-of-the-moment purchases, thereby boosting the likelihood that the user’s long-term financial goals will be met.
So picture browsing the web one morning and noticing a tantalizing advertisement for an expensive new gadget, or a jacket that “looks cool” but really isn’t needed. The iMoney system could block the transaction to enforce the budget that the user set up in advance so that the long-term goal of a nice vacation, a new car or a new house could be met.
Imbued with smarts from artificial intelligence algorithms, the card would also stretch each dollar by searching automatically for deals and apply coupons to ensure the consumer is getting the best deal possible. Cash itself becomes a tool for meeting financial goals.
Of course, if the user really wants that jacket, the block on the transaction could be lifted. But for corporate accounts, iMoney would have hard limits automatically imposed by an intelligent system that recognizes the difference between valid business transactions and expenses that shouldn’t be charged to the company.
Time will tell if we see money becoming more dynamic in the decades ahead, but it’s clear AI will become an increasingly important tool in helping consumers meet their financial needs.
Joseph Byrum is chief data scientist at Principal. Connect with him on Twitter @ByrumJoseph
Please note that all references to individual companies and services provide contained within this article are based on publicly available information and or summaries of their businesses and should not be taken as investment advice nor should it be construed as a recommendation to buy, hold or sell the underlying securities of those firms. Additionally, the risk ratings contained within this article are for illustration purposes only and were compiled through discussions with a number of industry professionals and colleagues. Results and assumptions can be different based upon relevant, specific industry or business related understanding of those potential risks.