Friday, September 11, 2015

Cash is Still King – but freedom movement towards cashless societies has begun…

All nations provide billion of currency notes/ bills to facilitate instant value exchange among people and businesses. With growth of economy, demand for more currency notes is also growing in addition of need to replenish old currency notes.

Below charts provides a quick view of currency notes in circulation in few regions in 2014.

Currency notes (Cash) provide instant value exchange anytime anywhere to complete transaction and considered highest form of liquidity.  It offers security against double spend as each note is unique by design. Transactions in cash don’t incur any service charge and also provide anonymity for consumers. It doesn't require any intermediaries, active network connection or costly devices to complete a transaction.

Currency notes are considered symbols of nation sovereignty & pride and languages & pictures shown on currency notes provides emotional connection to people of the country.

It does have some drawbacks such as counterfeiting, friction, risk of loss or theft, need of change and only works best in close proximity of transacting people. A remote payment settlement often requires intermediaries with additional service charges to complete transaction.

Government, consumers & businesses all face various challenges in managing cash based transactions. While government spends millions of dollars in issuing, distributing and replenishing banknotes, businesses also spend huge sums for cash management in collections & operations.
Cheques & inter-bank transfers have reduced business transaction volumes in cash while person to person payments and consumers to business payments for smaller amounts largely remain in cash.

Here are some of the key hurdles in large scale adoption of electronic money

  • ·        Large illiterate population in developing nations
  • ·        Consumer behaviour and comfort with cash
  • ·        Lack of payment infrastructure in many regions and long settlement time
  • ·        Significant usage costs to consumers & merchants
  • ·        Diverse languages in different regions of country
  • ·        Few entities with banking licenses

Arrival of Digital Money in plastic forms

Plastic money (debit/ credit cards, cash cards) have been in use for last few decades for proximity (in stores, malls, theaters) & remote transactions payments (online & tele-sales). They have been quite successful in cutting down on cash transactions volumes in mainly urban areas where infrastructure to support plastic cards based transactions is available.
Plastic cards operational costs and transactions frauds & thefts have kept many consumers away from adopting plastic money even in urban areas. Segment based risks assessment and lack of swift settlement of disputes with defaulter also has been a deterrent in accelerating cards issuance rate.

Arrival of Mobile Phones acting as carrier for money transfers

Telecom and internet growth has made a very major impact on financial industry allowing them to provide services in many new innovative ways to existing and new consumers. It facilitated electronic banking access to consumers pushing bank transfers transactions volumes to new levels.
Still billions of people are unbanked or underbanked and not able to use banking & payment services in a cost effective & convenient way.

Since past few years, mobile phones are being used to transform cash payments into mobile money payments thus reducing share of cash transactions and reducing need of issuing new currency.

Millions of people have adopted this payment mode to reduce their reliance on cash alone especially for bills payments to businesses and government. Mobile wallets service has now started addressing person to person payment needs.  Mobile Point of Sale devices supporting card payments and mobile to mobile payments are pushing cash usage further down.

Below graphics shows an indicative view of cash usage across different types of transactions in a developing nation.

Freedom movement from Cash has just begun in developing nations.

Over past few years, millions of people have signed up for bank accounts and majority of population in developing nations is able to afford a mobile phone causing behaviour changes suitable for digital money adoption.

Based on the MasterCard Cashless Journey study for retail payments, following countries have been deemed nearly cashless (having 80-90% transactions volume cashless) now.

Belgium, France, Canada, United Kingdom, Sweden, Denmark, Norway, Australia, Netherlands, USA

Developing nations are also building & expanding their payment infrastructure in addition of introducing various new policies and payment initiatives to promote e-payments. Financial Institutions are also accelerating their efforts to onboard merchants to their payments systems. Due to such efforts in India, cards payment market has reached $50 billion and is growing at 30% rate to get a major share from $750 billion cash market. Almost a million shops from 15 million local stores also are equipped now to accept card payments and growing further.

While retail payments in urban area are moving to electronic & mobile payments, person to person payment yet to see a major shift from cash transfers. Also electronic & Mobile payments yet to make any significant impact in rural areas so it seems cash will continue to rule in rural markets for some more time while tis territory will reduce in urban areas to negligible size in next 3-4 years.

Government & businesses should incentivise e-payments for people to move towards a cashless economy and ensure people & merchants at all points of goods & service supply chain are equipped with e-payments facilities.Acceptance of cash cards should be encouraged for bus & taxi fare and fresh food purchases.

Government should setup national level agencies to improve collaboration among telecom, banks, payment networks, payment gateway, POS & mobile device providers to ensure consumers get the service convenience at fair price to make switch to e-payments.

Declining rate of new currency notes release from central banks despite growth in overall economy will strengthen people belief that we are in fact moving towards a cashless economy. As next milestone, we should see withdrawal of large denominations notes and smaller denominations notes and finally coins. 

May be it should be a ‘Mantra’ now towards a cashless new economy.

Less Cash Please!