On 8 November 2016, India’s Prime Minister, Narendra Modi, made a surprise announcement – he was pulling Rs1,000 and Rs500 notes out of circulation. It was an attempt to stamp out corruption, crime and tax evasion. Cashless payments leave an electronic audit trail; cash payments are hard to trace, monitor and tax. Modi wants to push India towards becoming a cashless society but many are reluctant to give notes and coins up.
The persistence of cash
Cash still accounts for 85% of all transactions, according to MasterCard. “The persistence of cash is surprising given its inconveniences and the risks of carrying it around,” says a MasterCard spokesperson. “Electronic payments, in contrast, are proven to boost economic growth while advancing financial inclusion.”
Globally, the volume of non-cash payments is estimated to have grown by more than 10% in 2015, according to the World payments report
produced by BNP Paribas and CapGemini, with growth in emerging Asian markets taking place at a particularly rapid 31.9%. In some developed markets, cash is no longer king; Swedish economists like to boast that Sweden will be a cash-free economy by 2030. In the UK, statistics from Payments UK show that the share of purchases made in cash fell from 64% in 2005 to 45% in 2015.
Omar Haque, chief transformation officer of Worldpay, cites four key factors which are driving the move away from cash: governments are keen on the traceability that online transactions give them; the fintech companies that are driving innovation want their technology to be used; financial services companies can reduce processing costs; while consumers can use technology to budget and track payments.
The need to go cashless
“Many countries are adopting measures to discourage the use of cash and some banks are supporting such moves,” according to the World payments report
. It estimates that the cost of using cash, which includes security, transport and fees associated with banking, increased by 30% in the decade to 2012 and now accounts for roughly half the costs associated with carrying out any retail transaction.
“The increase in online transactions and adoption of e-commerce, changing consumer preferences, the high cost associated with cash and the need to curb the shadow economy are driving the need to go cashless.”
Technology is the key factor enabling the shift away from cash. Contactless cards, which use Near Field Communication (NFC) technology, allow users to make their underground journey to work and pick up a coffee with just a tap of their card.
The success of these contactless cards could be hindering the adoption of mobile payments via technologies such as Google Wallet or Apple Pay, which are usually linked to your credit or debit card. Worldpay says in its Global payments report
that contactless cards, a lack of merchants with the technology to accept mobile payments, and the fact that only the newest smartphones support them, has hindered growth.
Youngsters prefer contactless
The younger generation is a particularly enthusiastic adopter of contactless technology. A July 2016 YouGov poll finds that 63% of millennials, aged 18–34, are likely to use a mobile payment method in the future compared to 51% of Generation Xers (aged 35–54) and 33% of baby boomers (aged 55 plus).
“Mobile wallets will increasingly come with value-adding services, including additional transaction information within the payment app, budgeting features and integrated loyalty schemes, which will make them more attractive to consumers,” says the Worldpay report.
Mobile technologies are having a dramatic impact on emerging and less developed economies where access to banks and their services is limited but mobile phones are widely used. In China, Alipay, which was launched in 2004 by Alibaba – the country’s dominant internet site – has become so popular that it now accounts for 44% of global eWallet spend, and is on course to rise to 60%, according to Worldpay’s survey.
In Africa, a much-cited example is M-Pesa, which was established in 2007 by Vodafone and Safaricom in Kenya to allow users to carry out basic banking activities, such as deposits and withdrawals, and to make payments by mobile phone. It has signed up 17 million subscribers in its first five years. Similar systems have been used in other markets but, as Bernardo Batiz-Lazo, professor of business history and bank management at Bangor University, says, these have not been all been successful.
Financial services firms must adapt quickly so they are not bypassed in the shift from cash
“The challenges for mobile money and e-wallets are not fancy technology but convincing consumers of their adoption”, Bernardo writes in The book of payments
, which looks at the history of cash. “These innovations sit at the intersection of finance and telecommunications and so face regulations from both. On top of that, India and other countries in Asia and Latin America have a significant number of transactions that take place outside the formal financial sector and typically, an overregulated telecommunications sector.” Non-formal transactions, such as cash payments or payments in kind, still dominate in large parts of these communities. As Bernardo says: “Those at the ‘bottom of the pyramid’ distrust established financial institutions as well as government attempts to increase the tax base.”
No cure for all ills
That distrust means going cashless is not necessarily the cure to the ills of the shadow economy. In its report Cash, freedom and crime
Deutsche Bank says: “A high share of cash in total payments does not always indicate a large shadow sector: Germany and Austria are cash-intensive countries with relatively small shadow economies. In Sweden, cash payments have become rare but the country still has a mid-sized shadow economy. Other parameters such as the tax level and the quality of public institutions, the tax morale and the level of per capita income drive the size of the shadow economy.”
Nor does going cashless reduce crime: it simply shifts it elsewhere. While burglaries and bank robberies have fallen in Sweden, electronic fraud has increased, according to Deutsche Bank. Omar does not think that contactless payments are necessarily riskier than other forms of payment. “The risk has to be appropriate to the transaction,” he explains.
The risks are, however, likely to grow as mobile and online payments rise in popularity and criminals become more sophisticated. Regulators are demanding greater attention to security. Last June, the Bank for International Settlements released its first set of internationally agreed guidelines for the financial industry.
Banks and other financial services firms are having to adapt quickly to ensure that they are not bypassed in the shift away from cash and traditional payment technologies. The advent of blockchain technologies, such as the virtual currency bitcoin, means that they can be leapfrogged as businesses and consumers transact directly with each other. Already, several leading investment banks are developing their own payment systems based on blockchain. And many of the new wave of mobile payment systems used by consumers do not pass through the banking system, relying instead on telecoms or other infrastructure providers.
In a presentation on the future of financial services, issued two years ago, the World Economic Forum said that this is likely to mean financial institutions suffer a reduction in their control over their customer relationships; to deal with this, they will need to adopt more sophisticated techniques of targeting and servicing their customers, and to be more proactive in their relationships with merchants and other users of their services.
But Bernardo cautions that the dream of a cashless society is unlikely to materialise any time soon. “There is more innovative technology looking for a market than consumers looking for alternative ways to pay. And there is nothing wrong with existing forms of payment – they, and cash in particular, work well in most countries, for most consumers, 99% of the time.” As Omar suggests, advocates of an entirely cashless world may need to wait for a slow overnight success.
The full version of this article was originally published in the Q2 2017 print edition of The Review. The print edition is available to all members who opt in to receive it, except student members. All eligible members who would like to receive future editions in the post should log in to MyCISI, click on My Account/Communications and set their preference to 'Yes'.