Treasury Today Country Profiles in association with Citi

Are we any closer to the death of cash?

Single dollar bill crumpled

As the payment world becomes increasingly electronic, many might think that the long-heralded death of cash is almost here. However, data shows that in many markets the opposite is true and notes and coins are in fact making a comeback. Should treasury teams be preparing for a cashless world, or is physical cash here to stay – and if so, what can treasury teams do to manage it effectively? Treasury Today finds out.

“Sorry, we don’t accept cash,” is an increasingly common phrase uttered in retail outlets around the world as businesses pivot customers away from notes and coins onto electronic forms of payment. In many markets, customers need no encouragement when it comes to using electronic forms of payment and are increasingly leveraging cards and mobile-based forms of payment as a matter of convenience.

The data clearly supports this. In the UK, for instance, cards are set to take over cash as the most popular form of payment this year, according to UK Finance. In Australia, 52% of consumer payments are made with cards – two-thirds of which are contactless – according to the latest Consumer Payments Survey. Meanwhile in Sweden, which is regarded as the most cashless country in the world, a 2017 study found that 36% of people never use cash or use it only once or twice a year.

The move away from cash is even more rapid in the developing world. Countries such as Kenya, China and India are very quickly becoming cashless economies as large unbanked populations leverage digital wallets as a means of financial inclusion. Indeed, according to the 2017 World Payments Report from Capgemini and BNP Paribas, cashless transactions in developing economies will grow at a rate of 19.6% until 2020.

Why cash should die

Why then are we saying goodbye to cash? For Rohit Talwar, world-renowned futurist and CEO at Fast Future, the answer is simple: eliminating cash has huge benefits. He notes that digitalised payments provide a safer and more convenient way for individuals to transact. Indeed, a study from Tufts University found that on average, Americans spend 5.6 hours a year withdrawing cash from ATMs at a cost of US$8bn a year on ATM fees. There is also the hygiene factor: an Oxford University study showed that the average European banknote contains 26,000 bacterial colonies.

Businesses are keen to see cash disappear because it is inefficient and costly to manage. Cash also exposes businesses to significant risks, notably theft and fraud. Indeed, the Tufts University study found that US businesses lose roughly US$40bn a year to cash theft and loss, about 1% of total revenues.

Finally, governments are also keen to drive cash out of the system. Talwar comments on how this helps “reduce corruption, crime, shadow economic activity, and tax avoidance”. Again, Tufts University estimates that the US government loses out on US$100bn-US$500bn in tax revenues each year, due to cash being used as a method of payment to avoid tax.

In India, the government took a radical step to combat tax avoidance when it suddenly ordered the demonetisation of all Mahatma Gandhi Series Rs500 and Rs1000 notes – which constituted 85% of the total currency under circulation – in 2016. At the time, Prime Minister Modi said that corrupt officials, executives and criminals would be stuck with “worthless pieces of paper” as they would be unwilling to transfer these for the new Rs500 and Rs2000 notes.

A year and a half on, the success of the move is up for debate as it caused a significant shock to the Indian economy and negatively impacted individuals and businesses. It also seemingly has not driven out black money. Recent stats from the Finance Ministry show that 99% of the old notes have been swapped, far more than had been expected. It has been suggested that those in possession of black money have used complex money-laundering networks to deposit undeclared currency without exposing themselves to the tax authorities. Apparently, the only way to stop cash being used for tax avoidance may be to remove it altogether.

Payment evolution: from barter to cashless

Bartering and trade

A direct trade of goods and services.

Coins and currency

The first minted coins were stamped with pictures of animals to represent their value.

Paper money

The use of paper IOUs led to paper currency being used.

Money travels

Banks started buying currencies from other nations and created the first currency market.

Mobile payments

Money rendered for a product or service through a portable electronic device.

Seamless payments

E-wallet payments are instant and seamless allowing for fast and safe P2P and C2B payments.

Biometrics payments

Payments that don’t require a card or a phone, just a fingerprint.

Virtual currency

Virtual currencies have no physical coinage. Bitcoin is the most famous.

Source: HSBC

Increase in cash in circulation

Demonetisation was also meant to kick-start Modi’s Cashless India initiative. And whilst digital payment volumes in India have increased since 2016, the number has fallen short of the government’s targets. At the same time, the amount of cash in circulation across India has surpassed the amount before demonetisation.

India is not unique in this. Given the clear move towards digital payments around the world, it would be rational to assume that the death of physical cash is nigh. However, while the use of cash as a method of payment falls, the demand for cash and cash in circulation around the world is increasing at a steady rate.

Take the UK, for example: in 2017 there was £73,198m worth of notes in circulation, up from £67,819m in 2016. Yet apparently the UK is set to move beyond “peak cash” this year, with cards poised to be used for purchases more frequently than cards and coins. The story is similar across many eurozone countries, the United States, Australia, Hong Kong and Japan.

There is no single reason that this is the case. However, Talwar speculates that in developing countries “the cashless movement could lead to exclusion of poor and more vulnerable segments of the population that do not have bank accounts or cell phones”. He also notes that opposition to digital payments may be coming “from those who see this as a further incursion of ‘big brother’ into our lives, and yet another erosion of individual privacy”.

Treasury headaches

The continued use of cash is not good news for treasury teams that must put in place products and strategies to manage its collection. The treasury team at British American Tobacco (BAT) is fully aware of these issues. Indeed, Philip Stewart, Global Head of Cash & Banking at BAT says that the company collects a “significant” amount of cash around the world, including in key markets like Indonesia, Brazil and South Africa where it sells directly to retailers.

In those markets where cash is a reality, Stewart explains that BAT has strived to put in place processes that make cash collection and management as efficient as possible. For example, in some of the large depots in Colombia and South Africa, the company has tellers from its relationship banks count and deposit the cash on site. “This enables us to quickly transfer the risk to the bank,” says Stewart. “It also allows us to achieve same day value and same day reconciliation.” In the company’s smaller depots, BAT utilises cash counting machines, which provide similar benefits to the onsite tellers.

Stewart explains that employing these solutions and making cash collection as efficient as possible is not just about mitigating risks and reducing costs: it is about enabling the company’s representatives to focus on selling its products. “When they are working we want them to be out there selling, not coming back to the depo to count cash,” he says. “So, making this process efficient and standardised is adding value to the business.”

Of course, the ultimate aim for the BAT treasury is to drive cash out of the business by incentivising its customers to use digital forms of payment. “There is a lot of work being done across the company to encourage our customers to pay without using cash and we have had some success with customers beginning to pay us using cards or through mobile wallet solutions,” says Stewart. “However, we cannot force this because we are not going to risk losing business by forcing our customers to pay in a way that they don’t want to.”

Ultimately, Stewart believes it is just a matter of waiting for the markets that still rely on cash to reach that tipping point where digital payments become the norm. “We have worked hard to make sure we have the tools to facilitate digital payments in all our markets once the market is ready and we will continue to do our part driving the change.”

Case study

Sweden: the most cashless country on earth

Cash is dying in Sweden. Statistics from the Central Bank show that between 2010 and 2016 the use of cash payments in the retail sector declined around 40%. And with businesses across the country increasingly no longer accepting cash, it is unlikely to be long before the Swedish krona only exists in bits and bytes.

The reason for this, explains Gabriela Guibourg, Head of Division for Analysis and Policy at Riksbank, is two-fold. Firstly, demographically Sweden has a homogeneous, well educated, technology savvy population that responds positively to innovation. This has seen the consumption behaviour of Swedes rapidly change with more and more preferring to shop online which requires digital forms of payment, which they then want to use in the high street. “In this respect, the shift to digital payments is following the natural evolution of societal behaviour,” says Guibourg.

Another driving factor is the highly cooperative and innovative financial sector in Sweden, which has responded to market demand for digital payments by creating the infrastructure to make this happen at scale. Guibourg cites the success of the Swish mobile payment system as being a prime example. Launched in 2012 by seven large Swedish banks in partnership with the Central Bank, Swish is now used by over 50% of the population.

“Swish was initially created as a platform for real-time, low-value P2P payments,” says Guibourg. “It then began to be used as a collection method by businesses and most recently as an online payment method. The solution has therefore played a big role in removing cash from many different types of transactions.”

In Guibourg’s view, the disappearance of physical cash in Sweden is largely a positive phenomenon. However, it also creates some issues. “Firstly, there are individuals in Sweden that are not ready to live in a cashless county,” says Guibourg. “Also, the disappearance of physical cash means that individuals will no longer have access to Central Bank money – historically the only asset that is completely risk-free and liquid.”

The rise of digital payments also means that there is the possibility that the payment market will become dominated by a few private participants, says Guibourg. “This creates vulnerability and may stifle innovation if these new entrants are barred from accessing these payment rails.”

These are the main reasons behind the bank’s exploration into issuing a state-backed digital currency, the e-krona. “This would act as a complement to cash and ensure that individuals still have access to central bank-backed money,” says Guibourg. “The idea is also to build a new payment infrastructure to underpin the e-krona that would be competition neutral. This would allow the market to build innovative solutions and ensure that Sweden continues to lead the world when it comes to digital payments.”

Ultimately, it is important that in a cashless world there is still the ability to access central bank-backed money, says Guibourg. “A strong and sound monetary system needs to have a trusted issuer – the whole system of fiat money relies on the fact that people trust that money will be accepted by others and have a stable value.”

The best alternative?

It is clear then that one of the chief tasks for any treasury team working in a cash-heavy business is to wean customers off cash. The good news is that in many traditional cash-heavy countries, like China and many African and South East Asian markets, there are now solutions that enable businesses to do this. Namita Lal, Managing Director, Global Head Payments, Collections, Mobile Money, eCommerce at Standard Chartered, cites the mobile phone and the emergence of mobile money as being a game changer in these markets, “bringing financial solutions to a traditionally large unbanked population”.

While mobile money may have been developed to facilitate P2P payments, businesses have quickly recognised the opportunity to collect and pay using these solutions. Doing so has helped many companies reduce the amount of cash they must manage, bringing efficiency gains and cost savings. However, Lal explains that beyond that, the proliferation of mobile money has enabled businesses to access a much bigger market of consumers and even evolve their business models. She cites insurance companies as an example, many of which are now able to offer micro-insurance products due to the reduced cost of the payment process.

However, whilst the growing acceptance of mobile wallets has certainly benefited businesses, it has also created some challenges for treasury. Most notably, treasury teams are now having to facilitate and manage a multitude of payment types, as businesses must offer customers their preferred method of payment to be competitive. This is a challenge for treasury because onboarding these wallet providers takes time and resources. At the same time, treasurers have no desire to manage tens, if not hundreds, of individual payment portals.

Standard Chartered thinks it has the solution. “We’ve built a single gateway that enables our clients to seamlessly connect with multiple payment options in the countries they operate in,” says Lal. “This removes the need for treasury to create bespoke arrangements with these wallet providers. It also ensures that they receive a consistent experience, no matter how they are being paid, and all the reconciliation efficiencies this brings.”

Value adding

Moving from cash to digital payments is not just about efficiency: it is about data. Data that if harnessed correctly can see treasury deliver increased value to the wider organisation and ultimately boost the top line.

Andrew Wray, Vice President at Yoyo Wallet, explains that currently retailers only receive basic transactional data at the point of sale (POS). “However, by tapping into the point of sale through a simple transaction API, retailers can gain full stock keeping unit level basket data, which reveals who each customer is, what they’re buying and when.”

Wray explains that with basket data insight comes the ability to segment customers, connecting basket data to preferences and behaviours on an individual level. “The next step is to use this insight to engage each individual by personalising their experience, which will increase the effectiveness of campaigns,” Wray says. “It’sabout the consumer receiving offers and rewards that are most relevant to them. And the more relevant the offers and rewards are, the more engaged a customer will be with a brand.”

With this information, businesses can then engage individuals by personalising their experience, which will in turn increase the effectiveness of campaigns. “Once customer segments are developed, retailers can target them with a campaign that either rewards, thanks, or encourages them to carry out a certain behaviour,” Wray adds.

The end of cash is coming

For treasurers in certain businesses, it is clear that the move away from cash presents a tremendous opportunity to add value to the organisation by creating efficiencies and harnessing the power of data. The challenge, however, will be to find ways of accepting this plethora of payment types without creating a spaghetti-bowl of complexity.

And cash will have to remain a consideration. Indeed, whilst it is widely believed that cash will soon disappear, it is clinging on for dear life. Fast Futures Talwar anticipates that it might take 20 to 30 years for cash to become extinct.

“While there are clearly many potential benefits to shift to an entirely digital medium of exchange, there are also significant hurdles and concerns to be addressed,” he says. “The pace of transition could therefore vary quite dramatically between nations and the process may require a fundamental reshaping of economies.”