Cash: will it ever die?

Published: Jun 2013

Reports of the death of cash are greatly exaggerated. In 2010, $14.4 trillion of consumer payments were made with cash worldwide, compared to consumer payment card transactions valued (excluding commercial payments) at $9.582 trillion, according to ‘The Global Cash Digest’, published by global trade body the ATM Industry Association. A total of 62 billion ATM cash withdrawals worldwide in 2009, says the report, is forecast to rise to 94 billion cash withdrawals in 2015.

While cash is still around, the global volume of non-cash payments continues to show healthy growth, with the largest gain in volumes occurring in developing markets, according to the ‘World Payments Report 2012’ (WPR12). Non-cash transaction volumes grew by 7.1% to reach 283 billion in 2010.

Volumes jumped 16.9% in developing markets, boosted by an increase of more than 30% in both Russia and China. That growth far outpaced the modest increase in volumes in developed markets, which were still suffering the effects of the financial and sovereign debt crisis. Even in developed markets, though, the growth in non-cash payments volumes – at 4.9% – outpaced the rate of growth in gross domestic product (GDP), and developed markets still accounted for about 80% of all non-cash payments transactions globally. Debit and credit cards, says the WPR12, are the biggest driver of non-cash payments volumes globally. They accounted for 55.8% of all non-cash payments in 2010, up from 53.4% in 2009 and 35.3% in 2001. Debit cards alone accounted for more than one in three of all payments, partly as the use of cards for smaller-ticket transactions becomes more widespread.

But for many, cash remains king – and even more so since the onset of the global financial crisis. Rodney Gardner, Head of Global Receivables, Global Transaction Services at Bank of America Merrill Lynch (BofA Merrill), points out that in the US 43% of the population do not hold any credit cards and 20% have no type of payment card. Moreover, 17 million US citizens do not have a bank account. “For my corporate clients, the cost for accepting and handling cash must be accounted for. But there is opportunity for clients to take advantage of new technologies that can significantly reduce the cost of handling cash.”

There is much discussion about cash dying out, but there are only two or three countries worldwide where less than 50% of payment transactions are made in cash, says Gareth Lodge, Senior Analyst in the Banking Group at financial industry analysts Celent. “By the number of transactions, cash is the dominant payment type in every country in the world. It is, in fact, typically more dominant than all other payment types put together,” he says.

Most payments industry experts interviewed by Treasury Today admit that the demise of cash will be a long, slow burn. Moreover, it is difficult – or too early – to predict which non-cash payments instruments will prevail. However, cash is in the sights of financial institutions and governments as it is deemed to be expensive and vulnerable to criminal usage. Some of the typical reasons cash is being targeted are outlined in the Cashless Lagos Project in Nigeria, for example. Here, the government is supporting a cashless policy as part of a drive to develop and modernise the country’s payments system.

New developments: Nigeria leads the way

Under the scheme, the Central Bank of Nigeria (CBN) has introduced a cash-handling charge on daily cash withdrawals or deposits, aimed at reducing the amount of physical cash circulating in the economy and to encourage consumers and businesses to switch to electronic payment (e-payments) transactions. The Nigerian government believes an “efficient and modern” payments system is “positively correlated with economic development and is a key enabler for economic growth”.

Additionally, the cashless project is designed to reduce the cost of banking services, including the cost of credit, and to drive financial inclusion by providing more efficient transaction options and greater reach. Finally, it is hoped a reduction in cash transactions will help to improve the effectiveness of monetary policy in managing inflation and driving economic growth.

The negatives of cash, say Nigeria’s authorities, manifest themselves in a variety of ways, including:

  • A high cost of handling.
  • High risk in terms of robberies and other cash-related crimes.
  • A high subsidy – investigation has revealed that the entire banking population subsidises the costs of a tiny minority of cash users.
  • The existence of money outside the formal economy, which limits the effectiveness of monetary policy.
  • Inefficiency and corruption.

Authorities in other countries, including Canada, Sweden and the Netherlands, are also pursuing cash reduction initiatives. For example, Canada’s MintChip, announced by the Royal Canadian Mint in 2012, is a digital currency for digital payment transactions, based on a secure smart card chip that can connect to computers and mobile devices. A survey of Canadians conducted by Leger Marketing in 2011 suggested that a majority of people in the country would be happy using digital forms of payment instead of physical currency. Of the 1512 Canadians surveyed, 56% said they would prefer to use a digital wallet and 34% said they would rather use a smart phone than cash to make a payment.

Additionally, in February Canada removed the copper one penny coin from circulation. Authorities cited the coin’s eroded purchasing power, rising manufacturing costs, hoarding by households and the outlay by retailers in handling the coins as reasons for its removal. Other countries to have removed copper coins from circulation include Australia, Brazil and Sweden.

The Nigerian project is noteworthy because developing markets tend to be more cash-based for the reasons BofA Merrill’s Gardner cites – low penetration of bank accounts, a lack of cards and higher poverty levels. However, in Africa more citizens have mobile phones than bank accounts and many organisations believe mobile payments (m-payments) represent a huge opportunity. This may be true but to date only M-Pesa in Kenya has been successful; a success that has proved difficult to replicate.

“By the number of transactions, cash is the dominant payment type in every country in the world. It is, in fact, typically more dominant than all other payment types put together.”

Gareth Lodge, Senior Analyst, Celent

“In most emerging markets cash is still very much an integral part of buyer’s behaviour and we do not see markets moving away from cash any time soon,” says Karin Flinspach, EMEA Head of Payments and Receivables, Treasury and Trade Solutions, Citi. In such markets Citi works with companies that have innovative cash handling solutions that may reduce the risk and cost of handling cash.

“These innovative solutions include, for example, the use of terminals for immediate cash deposit after collection from the buyer and thereby removing the need to keep the cash in office premises, which poses risk and also delays the cash crediting process associated with traditional over-the-counter (OTC) deposits or cash pick-up deposits,” she adds.

Generally in developed markets there is a strong trend towards “electronification” and digitisation, says Flinspach. “In retail, growth is mainly seen in online ecommerce, which popularises cards as a method of paying that in essence reduces days sales outstanding (DSO) to real-time confirmation.”

In addition, online retailers are also searching for other instruments to integrate into their online platforms so that they can offer a wider range of payment methods to their customer base. “This is further accelerated by the fact that market infrastructure is changing for electronic transfers, so-called faster payments, and now allows for the instant movement of cash online which is very suitable for the online retail model,” she says.

Celent’s Lodge says in order to replace cash, the payments industry and businesses need to consider what cash does that other payments types don’t do. “Payments behaviour is driven by habit and convenience, which are characteristics of cash. Anyone developing alternative payment systems has to compete with that.” To date, debit cards have done a good job because many consumers regard them as an electronic form of cash. The number of people who switched from using credit cards to debit cards post-financial crisis was “staggering”, says Lodge. “People know that debit cards represent what is in their account and therefore what they can spend.”

The corporate cash conundrum

Bank of American Merrill Lynch’s Gardner says corporates at times lack the complete picture of what impact cash payments have on their bottom lines. There are hidden costs with cash – a retailer will typically require reconciliation staff, people who could otherwise be on the floor making sales. Also, there is a high cost associated with the physical handling of cash because specialist security companies have to be paid to pick up and deliver cash.

Cash is trapped in stores until it is delivered to the bank and the corporate has no visibility over its cash position. One of BofA Merrill’s focuses is on reducing cash in the business-to-business (B2B) sector. “Take, for example, a retail distributor – it will employ a driver to deliver goods to a number of small grocery stores, the proprietors of which are likely to pay by either cash or cheque. So the delivery van goes out full of goods and returns full of cash and cheques,” he says. This has generated some interesting business models including companies that have instructed delivery drivers to convert cash into a money order at Western Union whenever a certain level of cash was reached, in order to reduce risk. At the end of the day the money order was then taken to a bank. “People at those companies thought about the risk connected to cash but didn’t think about trying to get away from cash completely.”

To reduce cash in these scenarios, Gardner says banks can set up electronic transfers between the grocery stores and the distribution company. It is important that these solutions enable the information to accompany the transaction, to make reconciliation as straight through as possible, he says.

What is tipped to replace cash?

While corporates mark time on the demise of cash and use solutions to reduce the pain and costs of cash handling, a debate continues about which non-cash instruments will succeed. At this year’s International Payments Summit (IPS) in London, Niklas Bartelt, Managing Director at DZ Bank, said the question about whether m-payments would replace cash, debit and credit cards hinged on who would “pay to make that happen”. He said m-payments would benefit retailers more than any other players in the payments industry (ie banks). “Retailers will be the winners with m-payments as they can be used to revolutionise and improve the point-of-sale (POS) experience and perhaps even help in the total rethink of how retail works,” he said.

Any innovation in non-cash requires an infrastructure that will enable solutions to work. Marcelino Castrillo, Head of SME for Santander Corporate and Commercial, says cash will be around for a long time as it is perceived by some groups – those on lower incomes, students and the elderly – as a better way of managing their finances and controlling their spend. Any alternative to cash will have to provide the control of finances that is valued by cash users and be more convenient. Like Flinspach, he cites immediate payments, such as the UK’s Faster Payments, as an important move. “Faster Payments in the UK is providing an infrastructure for alternative payments instruments. Plans to link mobile numbers to bank accounts will be a further step towards non-cash payments.”

Chris Dunne, Payment Services Director at UK payments processor VocaLink, which operates Faster Payments, says the mobile proxy database will target friction in the system. At present, anyone wanting to pay someone via Faster Payments has to set them up as a new beneficiary in their bank account, which can be a convoluted process. The main UK banks have committed to the project, which will enable users to give their mobile number, rather than bank details to the person paying them. “People will feel this is a more confidential system. It also has the potential to be a mass market solution that will reduce friction. Cash has very little friction but it does depend on the payer and beneficiary being in the same room.”

“Retailers will be the winners with m-payments as they can be used to revolutionise and improve the point-of-sale (POS) experience and perhaps even help in the total rethink of how retail works.”

Niklas Bartelt, Managing Director, DZ Bank

Dunne says the mobile database has been built for peer-to-peer (P2P) m-payments; a much broader set of applications will also be developed for corporate applications, enabling request for push payments. “We are building an ecosystem that will allow the biller to send an invoice to a customer on their mobile phone. All of the invoice details will go with the payment, which is important for companies as they need to know which transaction a payment is related to.”

Picking the winners and losers in non-cash instruments is difficult. Marcus Treacher, Global Head of eCommerce for Payments and Cash Management at HSBC, predicts that smartphone contactless payments could quickly reduce cash payments significantly in many parts of the world. “That will have a huge impact in terms of cost reduction on the cash cycle and more efficient receivables handling for bank processing centres and large retailers such as supermarkets.” Today one in seven payment transactions below £20 at Marks & Spencer stores have been made via contactless cards; Pret a Manger, a very early adopter of contactless cards, has seen the use of contactless payments grow from 3% to 20% since they were introduced in 2008.

Contactless card solutions are becoming more integrated with smartphone devices, which will accelerate the mass adoption of m-payments using technologies such as NFC, he adds. “There is a great deal of innovation occurring in the mobile and cloud arenas. Although it is difficult to work out what and who will be successful, the clear trend is towards contactless payments. Mobiles will increasingly displace cash because they will be used to make e-payments, but it will take a while.”

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