Physical cash has existed in Asia Pacific for a very long time. Records show some of the first coins were created in India and China around 600-700BC. Today, cash is still an integral part of the economies in APAC: in emerging markets (EMs) – such as India, Malaysia and Indonesia – cash accounts for between 95% and 100% of all consumer transaction volume. More surprisingly perhaps, is that even in some of the region’s more developed economies, cash remains the most used method of payment, with cash accounting for around 70% of all consumer transaction volumes in Australia and Korea. In Japan this number rises to roughly 85%.
It is worth noting however, that the value of these cash payments is lower than that in the EMs. In Australia for example, cash accounts for just above 10% of the value of all consumer payments, whilst in India this number is just below 70%.
The trouble with cash
Although cash is still widely used across the region, progress is being made towards cashless solutions in both developed markets and EMs. For instance, data from MasterCard highlights that in 2014 the number of unique contactless card users grew by 49% year-on-year compared to 2013 across APAC. This was led by the developed markets of Singapore and Australia primarily, but, in some EMs such as China, the number is also increasing.
A key reason behind this increase is the cost of cash for governments and businesses. In India for instance, the Reserve Bank of India and commercial banks spend roughly $3.5bn per year issuing, collecting, and handling cash. For corporates, there is also a cost, as Indrajeet Maitra, Head of Cash Management – APAC at BNP Paribas explains: “Using cash to make a transaction can cost up to 3% to 5% of its value. It has to be collected, managed, guarded and deposited into a bank, who will then charge to handle it. In addition to this, it can take between three to five days to be converted and reach the ultimate beneficiary – not including any notes that are lost in transit – again creating working capital inefficiencies and thus cost.” The payment will also need to be reconciled, which as many treasurers will confess, is tricky with cash, due to its anonymous nature.
Removing cash can bring a raft of other benefits for the economy, businesses and society more broadly too. These include, but are not limited to: ensuring that all money in the economy is counted towards GDP, making taxes easier to collect, providing more control to regulators with regard to monitoring movements of money, and enabling cash to reach the right beneficiaries, something of tremendous value to non-governmental organisations (NGOs) providing aid, for example.
Driving the agenda
With these apparent benefits, some may ask why cash isn’t already a thing of the past. Unfortunately, the removal of physical cash from the economy comes at a cost and needs to be driven by governments. As BNP’s Maitra explains: “To be able to create a cashless ecosystem you first need to develop the physical infrastructure to accommodate this.” This includes building best-in-class domestic payment and clearing systems and having an advanced technological infrastructure utilising new technology such as the cloud. Many countries in APAC have strived to do this, for example, Singapore recently launched its faster payments platform. Countries like India have also now developed such an infrastructure that enables payments to be made readily by electronic means.
Just because you build it, doesn’t mean they will come, though – at least not right away. Take Japan for example, a market with advanced payment technology but one that remains extremely cash-intensive, as a report by the Aite Group highlights. A lack of incentives and a low crime rate are offered as the reasons Japanese society hasn’t moved away from cash.
Governments therefore must encourage the move towards removing cash by making it an unfavourable instrument to use compared to digital solutions. In Lagos, Nigeria this is exactly what is happening with the Central Bank of Nigeria (CBN) introducing a cash-handling charge on daily cash withdrawals or deposits. In doing so it is hoped that consumers and business will switch to digital payment solutions and thereby reducing the cost of banking services, including the cost of credit, and to drive financial inclusion by providing more efficient transaction options and greater reach.
There is a similar project occurring in Malaysia. As part of the government’s ambition to be considered a developed nation by 2020, the government is looking to increase the number of electronic payments per capita from 56 in 2012, to 200 by 2020. To do this, it will be increasing the cost of using cash and cheques and reducing the cost of digital transactions through the introduction of a lowered merchant discount rate (MDR), whilst also introducing more digital payment terminals.
Today, there are many alternatives to cash, in particular given the rise of digital specialist payment services such as PayPal and Alipay. But, in most instances these are similar solutions with nuanced differences to suit particular demographics. For that reason, the alternatives to cash can be largely grouped into three different buckets: cards, digital (and increasingly mobile) solutions and alternative currencies (though the lines between these are now becoming blurred).
Having existed for over 50 years, payment cards are a widely used alternative to cash, allowing the user to make cashless transactions by swiping or using chip-and-pin functionality at a point of sale (POS) terminal, by entering their card details online, or giving them over the phone. These come in many guises including: store cards, rail cards, loyalty cards and prepaid cards, but the most popular are credit and debit cards. According to the World Payments Report 2014, growth in non-cash transactions were driven by debit and credit cards, accounting for $140.7bn and $62.7bn respectively. Although over half of these transactions were made in Europe and North America, there was growth in emerging Asia as consumers became more affluent and electronic payment systems became more readily available.
Despite this, cards are far from ubiquitous. For instance, in the US, 20% of the population have no form of payment card. Across APAC, and in particular in emerging Asia, low card penetration has been a feature of the market (Indonesia and Thailand have credit card penetrations of 6% and 5% respectively). Although in the developed markets, such as Singapore and South Korea, it is estimated that credit card ownership to be as high as 3.3 and 5 cards per person.
So why have cards not proved a successful medium to remove cash? Cost has a significant part in this, especially in regard to credit cards. For instance, when offering card services a merchant usually has to pay 100/200bps depending on the market to make the transaction. Moreover, for a merchant to accept cards, they have purchase the correct POS equipment and maintain this. Although this is not usually a problem for large retailers it may be for a small ‘mom and pop shop’ in the Philippines.
In addition to this, there is a security aspect. A recent Nilson Report highlighted that fraud losses incurred by banks and merchants on all credit, debit, and prepaid general purpose and private label payment cards issued worldwide reached $16.31bn last year.
Debit and credit cards also require the user to have a bank account. This is a problem for the millions of unbanked that live in the region (across developing Asia only 27% of people are banked). Pre-paid cards which don’t require a bank account, however, may be a better solution for the region. These also have potential in more developed economies, as highlighted by the popularity if the Octopus card in Hong Kong. Since its launch in 1997 the card has gained near ubiquitous status with around 95% of people between the ages of 16-65 using the card for transactions amounting to $18m every day. As a result of the medium’s convenience, over 60% of Hong Kong consumers prefer to use cards over cash for everyday spending.
Although cards have not yet been able to drive cash out of the system, new solutions are now attempting to do this. For instance, in recent years there has been an emergence of new providers and channels, such as mobile commerce and near field communication (NFC) payment methods have presented a challenge to the banks in the person-to-person (P2P) market.
Companies such as PayPal, Bill Me Later and Travelex are examples of these challengers that have a certain advantage over the banks, in that they are focused purely on payments, and can also be more flexible. This enables them to drive innovation and respond to consumer demands to bring new products to the market more quickly, especially in the world of e-commerce.
The second stage of this digital development has been the rise of mobile payment solutions. These again vary in their nature, for example, Apple Pay allows credit cards to have a digital wallet on their iPhone 6 or Apple Watch-compatible device, which is scanned at the POS, completing the transaction. Meanwhile, other solutions, such as Kenya’s M-Pesa, bypass traditional banking services altogether by storing money in e-wallets and then connecting with beneficiaries directly over mobile networks supported by Safaricom and Vodafone. The success of M-Pesa in Kenya has made countries around the world aware of the benefits offered by mobile solutions, including: driving financial inclusion and removing the need for companies and organisations to ship large quantities of physical cash to remote rural locations – greatly reducing the risks associated with this. In Asia’s emerging markets in particular, where more people own a mobile phone than a bank account, the opportunities are abundant.
Change is beginning to occur across the region in this regard and a number of projects are starting to gain traction. In Pakistan, for example, traditional card solutions were not heavily adopted because of the cost associated with the terminals, transaction fees as high as 3.5%, and slow internet connections. Yet mobile is beginning to take off thanks to a collaboration between Habib Bank and card issuer Monet, which has launched the first mobile point-of-sale (mPOS) system in the country, allowing retailers of all sizes to take payments using a mobile phone. What’s more, the system can run on a slow GPRS connection. In Myanmar, there is talk of adopting a solution similar to M-Pesa, which is already available in India. Also, in the Philippines, a joint venture between the government and the US is looking to create a single electronic payments platform for all transactions in the country – dubbed the e-peso.
In addition to changes in the means of payment, the currencies themselves are also changing. Much has been made of the rise of Bitcoin, a digital currency where encryption techniques are used to regulate the generation of units of currency and verify the transfer of funds. Bitcoin, operating independently of a central bank, is not bound by borders, leaving some observers to believe it has the power to replace fiat currencies.
Although these predictions may seem far-fetched, when correctly harnessed the transformational power of the technology is very interesting. Take, for example, Coins.ph, a Filipino financial services provider. The company was launched in 2014, having seen the need to deliver financial services to the unbanked population in the Philippines. As Scott Si, Product Marketing at Coins.ph explains: “We want to be a bridge between the financial institutions and the people that banks cannot reach. To do this, we’ve launched a mobile wallet – similar to Paypal – running on Blockchain technology. It only takes 30 seconds to create an account on your mobile phone, after which you could pay bills, top up your phone, and send funds to anyone, anywhere.” When a user sends a payment to a beneficiary, the money goes through the Blockchain – the decentralised public ledger that supports Bitcoin – to the recipient’s wallet. “This is a much more efficient means of transporting money. You can send and receive money with just an email address or phone number,” he adds.
Although the mention of Bitcoin may make some feel uneasy, given its negative press, Si is keen to point out how the Coins.ph solution is different. “What we really want to encourage is Blockchain and Bitcoin as a medium of transfer – it is the financial rails for people to transfer money quickly. We are not suggesting that this should replace fiat currency.” In addition, the service also strictly observes KYC and AML regulations.
However, cash still can’t be escaped – at least for now. In looking to meet the needs of Filipinos and to be a bridge between the unbanked and the traditional financial sector, Coins.ph allows its users to deposit or cash out across 10,000 locations, covering banks, cash pick-up outlets, ATMs, and even door-to-door delivery. But, there is opportunity for cash to be weaned away through partnerships with retailers in the Philippines allowing users to pay for goods with their phones. “We’re currently focused on delivering financial services in a more efficient and accessible way, but we also see a big opportunity in online payments since credit card penetration here is low and there is no dominant payment solution yet,” adds Si.
Impact on treasury
So what does all this mean for treasurers? “Today, physical cash is not something you can do without in the world of cash management,” says BNP Paribas’ Maitra. “Even if a corporate does most of their business electronically, there will still be 10% to 20% of their wallet which is still cash based.” That being said, treasurers are always looking at ways to optimise their payments and collections processes and mobile technology is becoming more established – and useful – in this regard.
“More broadly mobile technology has allowed us to live our lives differently but it hasn’t yet played a significant role in how corporates manage their cash,” says Di Challenor, Head of Transaction Services at J.P. Morgan. “But it does have the potential to.” It can make treasury processes much more efficient and lean – allowing treasurers to transact on-the-move. It can also improve cash handling, and help right down to the working capital level, as money collected through mobile channels often comes in before it would through more traditional methods. Treasury functions that collect payments in mobile form could also benefit from mining consumer behaviour data, previously lost through cash transactions. “Security and how comfortable corporates become using mobile will have a big role to play in regard to how quickly this happens,” adds Challenor.
Elsewhere, mobile could also transform the way some corporates invoice customers. As an alternative to Direct Debits (DD), invoices with a Quick Response (QR) Code allow mobile payments that are almost instantaneous. Furthermore, these payments have a token embedded in them containing information about the customer and the bill, thus saving the corporate on administration costs, as well as making it easier for the customer to pay. This form of payment could bring particular benefits to regulated utilities in billing customers who are either unable or unwilling to pay by DD.
Despite all of these benefits for governments, society and corporations, the move away from cash is likely to be slow. As J.P. Morgan’s Challenor explains: “I think that Asia should move away from cash for the benefit of everyone. But it is not a simple task and there is a lot of work to do around building the correct infrastructure, once this is compete then the next task is changing the behaviour of individuals and business. And as we have seen recently, if these two factors aren’t completed correctly then cashless projects can turn into multi-million dollar failures.”