BY JAKE THOMAS
An ancient institution moves slowly into the digital age.
BY JAKE THOMAS
In the beginning, money as a medium of exchange revolved around grain, cattle and other necessities. Next came beads, cowry shells and shiny pieces of metal. Today government-issued paper and coins are the rule of thumb. Increasingly, the entire financial system is devolving into sequences of zeros and ones.
For centuries people have relied on an unspoken social contract that assigns a commonly understood value to a recognized set of objects. But if currency has always had a physical existence, its value is defined by the community and the marketplace and is therefore ephemeral. At some level, money has always been an abstraction.
In 2014 physical currency is less tangible than ever, with money’s bling increasingly likely to be found on computer screens. As cash turns into trash, technological innovations are streamlining banking practices and commerce for businesses and consumers.
But the changes under way go beyond transactional efficiencies. As the nation’s financial system comes under increasing scrutiny, currency innovations are being touted as a solution to social and economic problems, democratizing access to capital, helping nurture local businesses and giving a boost to those near the bottom of the economic totem pole.
Oregon Business explored some of the innovations taking place in various financial institutions, from banks cautiously exploring mobile payments to cutting edge digital-currency startups still searching for a market. One thing is clear; although the future of money may be fast, easy and literally immaterial, the goals of the evolving ecosystem remain decidedly old-fashioned: to facilitate exchange, to allow people to move goods and services and, ideally, to boost work, productivity and income.
Banks: stalwarts and upstarts
In 2014 digital currencies like Bitcoin may grab a disproportionate share of the news headlines. But brick-and-mortar banks are still the gatekeepers. Banks provide the lubrication that keeps the gears of the economy churning. They finance businesses and mortgages. They also have heaps of money. In Oregon alone, banks boast $16 trillion in assets.
Most banks and credit unions have a social media presence and offer customers a mobile app — Sprig is a popular one — allowing people to manage their accounts via smartphones. Still, bankers, traditionally a conservative lot, admit to taking a wait-and-see approach to the adoption of new technologies.
“Banks are always innovating and always working on new solutions with new technology, but underneath it all is still the same thing: It’s still a place for safekeeping and a source for safe credit in their community,” says Linda Navarro, president and CEO of the Oregon Bankers Association.
Financial institutions are reluctant to invest in a new technology unless demand warrants it, Navarro adds; smaller banks, she says, simply don’t have the resources for research and development.
Umpqua Bank, with more than 200 branches and $12 billion in assets, has adopted a mobile banking platform from Q2. But the Oregon bank, the largest community bank on the West Coast, has also invested in brick-and-mortar branches that have a hip and welcoming feel with free Wi-Fi and coffee. “To me, it’s really about bringing the physical and digital worlds together,” says Sonny Sonnenstein, executive vice president and chief information officer.
As banks take an incremental approach to new technology, several startups are going forth more boldly into the digital realm. A case in point is Simple, a tech-focused bank aimed at streamlining the consumer experience. The Portland-based company — now a division of Spanish banker BBVA — opened shop in 2012, offers no storefront branches, and has partnered with Allpoint to provide customers with a network of 55,000 surcharge-free ATMs. Beyond the ATMs, Simple has little to do with physical cash.
Like many startups, Simple poses itself as a solution to perceived shortcomings of regular banks. Traditional banks get a substantial amount of revenue from customer fees, says COO Adam Erlebacher. “When you have that kind of model, you’re benefiting when your customers make mistakes. It’s hard to design an experience where customers can avoid them.”
Simple, which has $64 million in account balances, doesn’t charge users overdraft fees. The company’s 85,000 users can access on their smartphone apps the “safe to spend” budgeting tool, which takes into account monthly bills and saving goals and tells the customer how much they have to spend. Users can also access detailed information on their spending habits.
Another Portland startup, Chirpify, leverages social media to streamline financial transactions. CEO and founder Chris Teso got the idea for the company after seeing relatives post items for sale on Etsy or Craigslist and then promote them on Facebook or Twitter. Teso wanted to seamlessly incorporate into social media a way to make purchases.
“Buying things is fun, but the worst part is the payment,” Teso says. Launched in 2011, Chirpify has worked with major brands like Adidas and Sprint and allows users of Facebook, Instagram and Twitter to purchase products, activate movie trailers or donate to a fund-raising campaign by posting specific hashtags, or “#actiontags.”
Hashtags, used to link to specific topics in social media, are also being widely adopted by advertisers, who might make one integral to a campaign and incorporate it in radio and television ads. This month, Chirpify will launch #Actiontags for TV, a new type of hashtag that enables consumers to request and buy products directly from a TV ad.
Despite the cutting-edge social media spin, Chirpify users’ accounts are still linked to bank accounts; meanwhile Simple uses Bancorp, a conventional bank, to hold consumers’ money. Simple is paying attention to the mobile wallet space, “but we haven’t seen anything that’s truly compelling for customers,” Erlebacher says.
Indeed, anecdotal evidence suggests mobile payment technology is still very much in the early adopter phase. The Joinery, a Portland-based furniture maker, signed up for MasterCard’s PayPass system, which allows customers to make payments with their smartphones. However, Cassandra Jackson, the company’s director of sales and marketing, says customers have yet to take advantage of it.
In other industry sectors, mobile payments might prove more practical. Mass transit appears to be among the most promising. Portland-based GlobeSherpa launched a mobile app last fall allowing TriMet and streetcar riders to pay for tickets with their smartphones; so far the app has been downloaded by 50,000 users who have purchased more than 300,000 tickets. Last year City Center Parking began offering customers the option to pay for parking in some of its downtown Portland lots with a cell phone. “Normally, you run around town putting cash in a meter, and if you’re a business user, you have no record or a bunch of receipts,” says Julian Jones, senior vice president for corporate development at parent company Impark, of the convenience of paying for parking with a phone.
Democratization of money
Online and mobile banking platforms do more than create efficiencies; such innovations are also helping small businesses access capital. In the wake of the recession, banks tightened their lending practices, prompting some entrepreneurs to seek out “crowd funding”: an Internet appeal asking potential investors to pool money to help finance a project.
Although Brooklyn-based Kickstarter is the largest crowd-funding platform, Crowd Supply, a Portland startup, offers a more comprehensive approach, says CEO and director of projects Josh Lifton. He says his company offers more than Kickstarter by working with entrepreneurs on preorders and sales, and connecting them with manufacturers and other services to get their products to market. This gives supporters a better sense of the project’s feasibility.
“Why make the same mistakes that literally everyone before you has made as a first-time product developer?” Lifton asks.
So far Crowd Supply has launched more than 50 projects, including a French press coffee maker, a set of laptop cases and a mini synthesizer. Lifton says successful campaigns have raised half a million dollars through its website since going live last year.
In 2012 President Barack Obama signed the JOBS Act, which contained a provision intended to make crowd funding more mainstream. Although that has yet to happen, crowd funding does allow businesses to raise funds when banks are tightfisted, and a previously successful campaign could help an entrepreneur convince a reluctant lender.
The next stage may be leveraging mobile and online technology to benefit people on the economic margin. “What we need to do with tech is not just come up with new, sexy ways for rich people to buy lattes,” says David Wolman, the Portland-based author of The End of Money, a book that argues physical money will go the way of the pay phone. Cash hurts the poor because it’s more difficult to save, it makes them vulnerable to theft and fraud, Wolman says. It also costs money to cash checks.
Aiming to correct these problems, the Seattle based Bill & Melinda Gates Foundation has made it a goal to make financial services more accessible in the developing world. One project involves M-Pesa, a service used by millions of people in Africa and Asia who lack money and access to banks. M-Pesa allows users to transfer, receive and deposit money using mobile phones for relatively small transaction costs.
The system been praised for helping the world’s poor better manage money — and for making people more productive. One study found that rural Kenyan households that adopted M-Pesa increased their income by 5% to 30%.
Conceivably, that kind of technology could also benefit the poor in the U.S. According to a 2011 FDIC study, one in 12 U.S. households do not have a bank account. Why? The most common reason is they don’t have enough money.
A sea change in currency
The 2009 economic collapse rattled the image of large banks and the governments that monitor them. Add to that digital tech innovations and you have the perfect storm: alternative currencies poised to disrupt the existing financial system — even if those currencies are still but a blip on the radar screen.
First, a brief history of existing currency and its institutional ties: Throughout the 1800s, the gold standard, which linked currency to reserves of gold, dominated the world’s monetary system. Following the Great Depression, the U.S. dollar began its breakup with gold. In 1971 President Richard Nixon took the U.S. dollar off the gold standard, forever untying the currency’s value from any physical commodity.
In 2008 the financial services firm Lehman Brothers filed for bankruptcy. With over $600 billion in debt, it was the largest bankruptcy in U.S. history and set off the great recession. “All that value with Lehman Brothers just went poof, and when it did, it caused people to ask: ‘So where does that money go and what was it in the first place?’ You break the spell,” Wolman says.
Europe has faced a similar crisis over the euro. Last year a central bank-bailout deal in Cyprus required depositors to forfeit part of their savings accounts. In Argentina the peso has been hypernflated. Collectively, these events have set the stage for alternatives to government-backed currencies.
Enter “cryptocurrencies” such as Bitcoin, a nonpolitical digital money proponents say is immune to mismanagement or manipulation while also giving a boost to local economies and entrepreneurs. “Bitcoin wasn’t born of a philosophy, but it fits a lot of philosophies,” says Jinyoung Lee Englund, spokesperson for the Washington DC based Bitcoin Foundation.
One basic idea is that digital money can be sustained through a worldwide, decentralized, Internet-based architecture, eliminating the need for overlords of finance.
In recent months, Bitcoin has received a tremendous amount of (breathless) press; nevertheless, at this point, it’s hard to tell whether the cryptocurrency is real or imaginary, a passing fad or a bona fide disruptor. A smattering of small businesses do accept Bitcoin, including Portland’s Whiffies Fried Pies. Virgin Galactic will accept Bitcoin for trips to space. In January online retailer Overstock.com announced that it would begin accepting the currency, with 840 orders worth $130,000 in sales on the first day. Some large investors have also taken an interest.
“The real test is when larger companies make that big leap to allow it to become mainstream,” says Brian Bolton, assistant professor of finance at Portland State University.
The virtual currency is also tainted from its association with the drug trade and is rife with security flaws and price volatility. According to figures on Blockchain.info, at its peak Bitcoin was trading for $1,203 late last year, before losing half its value a few weeks later after a regulatory crackdown in China.
Of course, most new innovations have rocky starts. Englund, for one, argues more infrastructure will bring stability to digital currencies. In Portland one company is trying to help build that infrastructure. Gliph is an application that allows users to conduct Bitcoin transactions with their smartphones. Launched in 2011, Gliph was originally a secure messaging app, with the Bitcoin function added in 2012, according to Rob Banagale, the company’s founder. Banagale says the app has 30,000 users, although Apple doesn’t allow the Bitcoin function of the app.
“Using Bitcoin today, it’s like dialing up to the Internet in 1995,” says Banagale, who hopes that his app will enhance the currency. Although Banagale says that the volatility of Bitcoin is an issue, he says the idea of digital currencies has caught on so strongly that no government could regulate it out of existence.
There are other cryptocurrencies, such as Ripple, Litecoin and, recently, Dogecoin, a currency based on an Internet meme that was created with the help of Portland developer Billy Markus. Indeed, Bitcoin itself may become obsolete with a “rainbow of currency options” emerging, says Wolman. For instance, one digital currency might be good for airline tickets, another for the farmers market.
Marcus Koch, the owner and principal of Portland-based Koch Architecture, took his first payment in Bitcoin for a remodel job last year. He says it is easier to use than checks and has a significantly lower transaction cost than credit cards, which can be as high as 3%. Koch says he wouldn’t invest his life savings in Bitcoin, but he thinks it could benefit small businesses.
Bolton also expects several viable cryptocurrencies to emerge, but he also thinks they are unlikely to challenge the dollar or euro, which are tied to such large economies.
Looking backward while looking forward
An intangible, money is becoming even less concrete as it manifests as pixels on a computer screen — although the technological changes under way in the digital-money sector are moving at a far slower pace than technology at large. Perhaps that’s to be expected, as much of this technology is geared toward enhancing money’s age-old functions.
Today digital money innovations revolve as much around rectifying flaws in the current financial system as boosting efficiencies. Consumers and businesses want to trust the people and institutions managing their money. They want a stable currency. They want to send and receive cash. They want access to loans. They want to feel a connection to local businesses. These goals haven’t changed much over generations, but new technologies, unthinkable decades ago, may make such objectives easier to achieve.
Banks bounce back
Banks may not be hotbeds of mobile finance innovation, but in 2013, many Oregon financial institutions reported record earnings, a sign the region’s economy is on the upswing and that local banks are regaining their footing in the wake of the 2008 economic collapse. Bank executives credit strong performance to the power of niche banking, personal relationships and a decline in problem loans.
Capital Pacific Bank
Headquarters: Portland
In 2013 Capital Pacific’s loan portfolio clocked in at $187.98 million, up 18% from 2012. Deposits rose 19% to $207 million. “We know exactly why we have been successful,” says CEO Mark Stevenson. “It’s the power of niche banking.” More than half the bank’s deposits come from nonprofits and schools. Capital Pacific also markets itself aggressively as an eco-friendly bank, and 12% of deposits now come from organizations with a sustainability focus or a commitment to green practices. A business-focused institution, Capital Pacific isn’t subject to the increased regulatory costs connected to consumer banking. And in an era when banks are announcing branch closures, Capital Pacific’s lone branch status creates financial and operational benefits. Says Stevenson: “With only one location, we can be more efficient.”
Willamette Community Bank
Headquarters: Albany
Net income for the year increased by 61% over 2012, marking the most profitable year in the bank’s 10-year history. Loan growth and a new management team helped drive profitability, says Stewart Williams, senior vice president of marketing. “We saw loan growth in the Willamette Valley, where we have a number of small-business and medium- business customers looking to expand.” The new management team, led by CEO Dan McDowell, also implemented operational efficiencies. “What you’re seeing is the effect of new leadership coming in,” Williams says.
Pacific Continental Bank
Headquarters: Eugene
In 2013, Pacific Continental reported a record profit of $13.8 million, up about 9% from 2012. Expansion of the bank’s dental lending program helped drive growth, says CFO Mick Reynolds. In 2012 the bank expanded this program nationally, and Pacific Continental now has active dental loans in 30 states, representing about $300 million of its $1 billion loan portfolio. Like most banks, Pacific Continental continues to see a decline in problem loans; the bank’s successful acquisition of Century Bank in Eugene and the “high retention level of that client base” also helped grow business, Reynolds says. But the biggest factor may be the corporate culture and employees. Hoopla over mobile and online banking notwithstanding, “banking is a people-to-people business, especially on the business side,” says Reynolds. “Our people have been critical to our success.”
