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.
The use of paper IOUs led to paper currency being used.
Banks started buying currencies from other nations and created the first currency market.
Money rendered for a product or service through a portable electronic device.
E-wallet payments are instant and seamless allowing for fast and safe P2P and C2B payments.
Payments that don’t require a card or a phone, just a fingerprint.
Virtual currencies have no physical coinage. Bitcoin is the most famous.
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”.
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.”