Despite all the marketing money spent on promoting electronic payments over many decades, cash still accounts for around 80 percent of consumer payments worldwide. So, is a cashless society a realistic aspiration, or is less cash the best we can hope for?
The modern-day contradiction of cash is that, while there are ever more digital ways to pay, the demand for physical cash has never been higher. So, how far from a cashless society are we? What are some of the challenges of going cashless? And to what extent will technology change how we pay?
SHOW ME THE MONEY
The statistics on electronic payments and cash present a confusing picture. Payment card numbers, and mobile and contactless usage are increasing. Yet so is cash in circulation. Around 18 billion payment cards had been issued at the end of last year, up from 12 billion in 2010, according to the Nilson Report. Europeans regularly using a mobile device to pay has tripled year on year, according to a recent study by Visa. Meanwhile Mastercard reported processing more than one billion contactless payments in 2015, a 150 percent increase on 2014 figures. At the same time, the ratio of cash in circulation to GDP is increasing across major markets. In Europe and the US, the cash-to-GDP ratio grew 4.4 and 3.9 percent respectively during 2013-14, according to the 2016 World Payments Report.
“If you look globally, 80 percent of consumer transactions are made in cash. But like any statistic, this hides dramatic differences across the world,” explains Andy Brown, marketing director, payments, NCR. “Globally I think we are a long way from a cashless society, however Scandinavian countries are moving towards a cashless environment.”
“It’s very important to recognise the specific requirements of consumers in different countries. Some expect a stage payment for buying consumer goods or cash-on-delivery, so finding an electronic mechanism that allows that is important.” Andy Brown, marketing director, payments, NCR
There will always be extremes in relation to cash usage, and variations in between, depending on individual geographies. According to Brown, the outlook for the next five years is that some countries will become very low cash users. This depends on various factors, including population demographics, the willingness of consumers to use electronic payments, and the access and enablement of technology. Maybe it really is a case of the cashless future being here but unevenly distributed; hence the need to look behind the statistics.
LICENCE TO PRINT MONEY
The challenge of going cashless starts at source. As long as central banks print and mint cash, it will be used. Central banks are creating cash in ever-greater quantities. Around $1.3 trillion worth of US dollar notes were in circulation at the end of 2015 or $4,200 for every person in the US, according to the US Federal Reserve. It is a similar story in other developed economies. Australia, Canada, the Eurozone and the UK have all seen an increase in notes in circulation over the last ten years. So, is there is a different way for central banks to organise and manage the supply of cash? What if cash were digitised at source and issued as electronic money? This would decrease costs and increase efficiencies across the ecosystem, as well as influence how cash was accessed and used.
Dr David Everett has been the technical architect on three electronic cash schemes, including Mondex, Tibado, and MintChip for the Royal Canadian Mint. He is an advocate for digital cash.
“If you take the bricks and mortar world, then I would argue that payments isn’t particularly broken. You can still use lumps of metal and bits of paper and plastic,” says Everett, CEO, Microexpert. “I don’t see that going away. It may reduce but I don’t think it’s going to totally disappear. In addition, we will have a digital format — electronic money. It’s the same concept of cash but in a different form factor.”
MintChip was an attempt to anticipate the future of money and for the Mint to issue collateralised electronic coins in addition to metal ones. MintChip was conceived as an evolution of cash with the benefits of being digital. It was instant, anonymous and worked without intermediaries. It would also have allowed the Mint to benefit from close to 100 percent seigniorage, the total profit from creating money. Seigniorage is perhaps one of the biggest counterarguments to moving towards a more cashless society. Governments enjoy considerable profits on their monopoly to print and mint currency. However, creating fiat currency in digital format may help to address this.
Central bank figures show how much money is printed, distributed to banks and withdrawn. Thereafter the money trail goes cold. Why is cash in circulation rising, particularly in developed countries with electronic alternatives? People may be hoarding cash as a store of value, particularly as interest rates head towards zero. They may be holding it outside the country or using it in the underground economy.
Criminals love cash. It provides no information about its origin and is valid no matter who holds it. A 2015 Europol report entitled Why is cash still king? found: “In spite of the changing face of criminality, with significant threats now stemming from new technologies, money laundering schemes detected by law enforcement are still largely characterised by traditional techniques, in particular the use of cash.”
High denomination notes are particularly popular with criminals as they are easy to transport. €1 million in €500 notes equates to just 2,000 notes weighing 2.2 kg, which easily fits inside a small laptop bag. Meanwhile, the same amount in €50 notes equates to 20,000 notes, weighing over 22 kg and taking up the space of a small suitcase. In 2010, 90 percent of all €500 notes in the UK were in the hands of criminals, the UK National Crime Agency found.
In May 2016, the European Central Bank announced that it would stop producing the €500 note around the end of 2018 amid fears that it could facilitate illegal activity. Whilst this may be a step in the cashless direction, for some it does not go far enough. In his book The Curse of Cash, the former chief economist at the International Monetary Fund, Kenneth Rogoff, calls for the phasing out of all paper currency. As well as “a major impediment to the smooth functioning of the global financial system”, he claims paper currency is feeding tax evasion, corruption and criminality.
“I believe that there is a market for cash in a different form factor. The properties of cash are still required. The reasons are different for each part of the value cycle.” Dr David Everett, CEO, Microexpert
“The effect of curtailing paper currency on tax evasion alone would likely cover the lost profits from printing paper currency, even if tax evasion fell by only 10-15 percent,” argues Rogoff. The effect on illegal activities is probably even more important. In addition, there is the huge volume of cash payments within the informal or shadow economy. The long-tail of small, cash-in-hand payments to babysitters, builders, plumbers and so on adds up.
The shadow economy of undeclared work and under-reported sales is worth around €1.2 trillion in Europe alone. This is equivalent to 18.5 percent of Europe’s economic activity, according to a 2013 report commissioned by Visa Europe. The shadow economy is strongly correlated to economic cycles. During an economic downturn, more people tend to drift into shadow activities to compensate for missing income streams and improve their finances. In 2009, the first full year after the 2008 economic crisis, the shadow economy grew 0.5 percent relative to GDP, breaking a long-term downward trend.
Arguably the underground economy would still exist without cash, merely operate in a different way. The move towards a more cashless society would likely make it harder for criminals and tax evaders, which would benefit the Exchequer, rather than eliminate criminality altogether. Authorities can combat the underground economy through direct law enforcement measures. They can cut red tape, boost financial inclusion and reduce the material advantage of participating in the shadow economy. Another way to tackle the problem is cash displacement. Increasing electronic payments by an average of ten percent a year for at least four consecutive years could shrink the size of the shadow economy by up to five percent, the Visa Europe report found.
Cash continues to be attractive because many of its properties are still required. This is as true in the legitimate economy as it is in the underground economy. Cash is a two-party transaction with no-one else involved. There are no witnesses, transaction fees or concepts of a chargeback. Cash is familiar, tangible, simple and irrevocable. It meets people’s needs and fits their beliefs. One of the major challenges to the cashless society is overturning decades of habit and deeply ingrained behaviour around how people access and spend cash.
Cash is easily accessible from an increasing number of ATMs. Worldwide ATM numbers grew by seven percent in 2014 to reach three million, according to RBR figures. Four million ATMs are forecast to be installed by 2020, with China and India leading deployments. “Cash withdrawal volumes and values are rising year on year. The $14 trillion withdrawn from ATMs around the world every year is equivalent to 18 percent of global GDP, or around $450,000 every second,” says Colin Gordon, marketing manager, self-service re-invention, NCR. “Due to the sheer scale of this, it’s hard to comprehend that cash is going away anytime soon,” he continues.
Bank branches also provide cash deposit and withdrawal services, and many retailers offer cash back with card purchases. A change in these distribution channels could deter people from using cash. A reduction in ATMs or increase in charges for withdrawals could steer consumers toward electronic payment methods. Similarly moving towards cashless bank branches could make it harder for businesses to deposit cash, steering them towards electronic payment acceptance.
The obvious counterarguments to this are choice and financial inclusion, even in countries with a high banked population. In Sweden, only 20 percent of payments made in shops last year were made in cash. The society is moving rapidly towards less cash. However, the move is too rapid for the central bank, which fears that the pace of change may create problems for certain groups and exclude others. It has called on parliament to make banks’ cash service a legal requirement.
“To really drive [cashless], there needs to be a collective push across all organisations with a real determination to reduce the amount of cash being used.” Andy Brown, marketing director, payments, NCR
A move towards a cashless society requires a holistic ecosystem to be in place. This includes everything from how state welfare payments and salaries are paid, to how recipients spend that money. It is a two-sided market. Infrastructure needs to be in place on both the issuing and acceptance side. This includes access to basic banking and electronic payment instruments and a network of places accepting such payments.
THE CASHLESS TIPPING POINT
One of the areas where cashless payments has been particularly successful is closed-loop environments, such as campuses, stadia and mass transit networks. These environments typically have high volumes of low or lower-value, everyday payments. The advancements of NFC contactless card technology, the compelling use case around speed and convenience for all parties, and the ability to build critical mass quickly have created an almost perfect storm for
Contactless payment on London’s transport network is held up as an exemplar project. More than 31 million journeys are made across the network every day. Long-term partners Transport for London (TfL) and Cubic Transportation Systems introduced the proprietary Oyster contactless payment system in 2003. Contactless bank cards on London’s buses followed in December 2012 and across the rest of the underground and train network in September 2014. In the three months to June 2016, TfL collected around £216 million on contactless bank cards and £480 million on pay-as-you-go Oyster contactless cards, according to official figures.
“The transit sector is more advanced than many others with regard to cash displacement. Close to 20 percent of TfL’s revenue comes via contactless payment cards alone. About 40 percent of the remaining revenue is collected via cards, either topping up Oyster cards or buying magnetic tickets from machines using a payment card. The remaining 40 percent is cash,” says John Hill, managing director, Cubic Transportation Systems.
There are generally few objections to cashless payment and paperless ticketing among transport agencies, according to Hill. “Our customers are asking for it. They see the benefits of doing it. Virtually every tender issued today will include a requirement for contactless payment as well as payments with card,” he says. A mindset change is required though. Similar to retailers, transport agencies need to move from buying equipment to buying a system to collect revenue and enhance the service. After all, transport agencies are not in the business of selling travel, but delivering it. Payment acceptance is not their core business, merely a means to an end.
“Many of our customers don’t really understand what it costs them today to sell a ticket,” says Hill. While third-party commissions to ticket vendors or acquirer fees are visible, others costs in the ticketing and cash management value chain remain hidden. “The implementation of contactless payment has really highlighted that. By going directly to the media already in the person’s hand [contactless bank card or mobile phone]and collecting the revenue via the acquirer, you realise how many costs you are not incurring.”
“Mobile is a potential game-changer, acting as a method of payment or secure identification to allow subsequent payment. It is a two-way device, so the transit agency can communicate with the user as they going through their journey.” John Hill, managing director, Cubic Transportation Systems
Long-held to be the so-called ‘killer app’ for contactless, transit can act as a trigger to contactless payment in other sectors. “We’ve seen this in other countries. As the transit networks move to contactless, then you start to see the acceptance of contactless cards, which migrates into shops as well,” says Brown from NCR.
A degree of cash pragmatism is necessary. For as long as cash co-exists with other payment methods, public transport agencies — and indeed other businesses — will have to accept it. “The challenge for the transport agency is making the collection of cash as efficient as possible for the agency, and as convenient as possible for the traveller. It’s really about optimising those two things rather than fixating about how to remove cash altogether,” concludes Hill.
It is difficult to say how far from a cashless society we are. The statistics on electronic payment adoption and cash in circulation present a confusing picture. It really depends on context and country: the context of any payment and the payments culture of the particular country.
There are many challenges of moving to a less cash society. Cash is deeply embedded in the culture and infrastructure of many countries, and various parties have strong vested interests in this continuing. This ranges from governments and central banks who earn money by printing money, to those who count, transport and insure physical cash. Any move towards less cash requires a concerted and coordinated effort across many stakeholders with this clear goal in mind.
Another challenge of moving towards less cash is that many of the properties of cash are still required: portability, convenience, privacy, speed and widespread acceptance. The characteristics of cash which make it so well-liked cannot always be replicated by digital alternatives. Often there is no need for them to be replicated: cash works. There is no particular problem that needs to be solved. Other times there is no compelling business case to move to electronic payments.
Nevertheless cash is not convenient in every situation. It is not always convenient for person-to-person payments when the persons are not face-to-face, or for other remote payments (e.g. e-commerce, mail order, telephone order), high-value or cross-border payments. Then there are specific use cases (e.g. remittances) where cash is not the best fit.
The payments industry could move away from the idea of universal usage and coverage — the so-called ‘Martini’ proposition of any time, any place, anywhere — towards specific cashless use cases and good-enough acceptance. Perhaps the success of non-cash payments in closed-loop environments (e.g. mass transit) illustrates the value of specialising in niche propositions, and achieving scale through fully exploiting these niches.
Changes in technology notwithstanding, the payments industry could do a better job of articulating the value of cash displacement rather than replacement. Cash is not free, especially to businesses, which must count, transport, insure and store cash, plus bear the costs of counterfeit and shrinkage. Besides which, cash will always need to be interoperable and co-exist with other payment types.
Sometimes and for some customer and merchant segments, cash will always be the preferred means of payment. Cash has existed as a medium of exchange, store of value and unit of account in some form for nearly 3,000 years. It is unrealistic to imagine that it will ever disappear entirely. Less cash, rather than cashless, is the workable aspiration.