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Brett King

Brett King - Moven

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Innovation in Financial Services

A discussion of trends in innovation management within financial institutions, and the key processes, technology and cultural shifts driving innovation.

The perfect storm to put an end to CASH

11 November 2010  |  5073 views  |  3

I've been at the E-Money, Cards and Payments conference in Moscow today. Coming off the back of SIBOS it is quite interesting to have a discussion not just about payments, but around modality and the emergence of strong mobile payments methodologies and practices. We already know that checks/cheques are in terminal decline, but when you bring up the 'end of cash' this gets a great deal of emotive responses or general disbelief that this is possible or probable. It is becoming quite clear, however, that regardless of the emotion and habitual systemic behavior that there is an number of issues that are combining to create a critical decision point for governments, regulators and the banking community to get actively behind the removal of cash from the system. Here are some highlights:

Net Social Cost

Cash costs society comparatively significantly more than alternative payments methods such as debit cards. At the conference Leo van Hove, Associate Professor of Economics at the Free University of Brussels, presented data showing that in Belgium 10.24 Euro is the threshold where cash starts to lose it's efficiency due to marginal costs, and in Netherlands this is about 11 Euro. In a discussions from the floor between Leo and Dave Birch (@dgwbirch), however, the two experts identified additional social costs beyond distribution, including money laundering, gambling, crime, etc that make physical money a net negative in the social impact picture under most scenarios.

Base Materials and Production

An average US 1 Penny coin costs 1.67 cents to manufacture, and the Dime (5 cent piece) costs 7.7 cents to manufacture. So it is clear that coins in general are becoming untenable as raw materials costs for copper, silver, gold, etc climb yet further. A great quote from SIBOS of a few weeks ago from Carol Realini (@carolrealini) was that projecting the future need for physical cash into the Indian economy would take more paper than can be produced from all the trees in the world if based on real physical currency. With an increasing focus on carbon cost of production, then surely cash itself is a massively expensive proposition for society and is no longer an efficient mechanism for governments. Banks may be holding on to cash because their retail businesses are still largely based on physical cash distribution, but the reality is this is a false economy for society as a whole and is certainly not responsible as we move towards a greener future.

Not mathematically efficient

Ok, so this one I can't put claim to. This was the discussion going on virtually between Leo van Hove and Dave Birch today via Twitter, etc. Dave points to a recent Blog Post from the Freakonomics gang that suggests the correct denominations for coins should be 3-cents, 11-cents and 37-cents based on correlations between pricing, spend, coin production, distribution, etc. Alan Burdick puts this combination slightly differently when he supposes that we need 5-cent, 18-cent and half-dollar combination.

By one estimate, $10.5 billion in coins just sits around in people's homes gathering dust...
Alan Burdick, Discover - The Physics of Pocket Change

Mobile Payments and contactless Debit Cards

There's been a lot of chatter about mobile payments, the NFC integrated iPhone, M-PESA, G-Cash, PayPal and so forth in the blogosphere of late. It is clear there is a lot of anticipation of this potential, but there remains some challenges. Ubiquity is going to be challenging because just like with physical cash and currency, competing standards may actual work against adoption. Interoperability between payments networks, between e-Cash and physical cash, etc will be a challenge too.

Nobuhiko Sugiura, a Special Research Fellow of Japan's Financial Services Authority, and the Associate Dean of Chuo University Business School also presented at the e-Money conference in Moscow. He highlighted the fact that one the regulators got behind e-Money that it's success was rapid. Just in the last 3 years use of e-Money has increased 300% now to be one of the most frequented personal payment mechanisms in Japan. In fact, one third of Japanese, according to Sugiura-san are already e-Money users. He cited some other great drivers behind e-Money's success in Japan, which translate as equally well to countries outside of Japan, namely:

  1. Japanese banks have no interest in micro-payments because of the relatively cost base
  2. Convenience stores favor e-Money so that they can reduce their cash float
  3. The unwritten law in Japan is that refunds are "prohibited in principle", because the Japanese governments want to replace Physical cash with e-Money as quickly as possible

In the UK, 43 per cent of retail payments are done by debit card and 23 per cent by credit card. Cash still makes up 32 per cent of these payments, but as a percentage of the whole, it continues to reduce. This is a trend throughout the EU and much of the Western world.

 

Conclusion

Given all of the above, it must just be pure momentum in the system as to why we are still using cash. In terms of cries from industry that "cash is back" it would appear that this sentiment should be discouraged at all costs. If you want to encourage savings then promote debit card and e-Money usage, but physical cash is bad for the system all round.

I say - Bring on the iPhone 5!

Cash needs to go digital as soon as possible TagsCardsPayments

Comments: (6)

Keith Richbell - eftpos Payments Australia Ltd. (ePAL) - Sydney | 12 November, 2010, 03:28

Dear Brett,

What a load of rubbish. You really think governments, regulators and the banking community will get actively behind the removal of cash? Look up "Seigniorage" in the dictionary. I think you might come to a different conclusion as to govermental motivations. In addition your statistics on UK payments are simply wrong. To suggest 66% of all UK payment transactions are made using plastic cards is hilarious. But then your not the first person to fabricate "facts" to support a point of view. Have you ever considered a career in Marketing or Advertising?

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Brett King - Moven - New York | 12 November, 2010, 08:01

Keith,

I'm sorry, maybe you just aren't aware of the latest credible information on this from the likes of APACS

Read the following:

http://www.politics.co.uk/opinion-formers/press-releases/apacs-payments-industry-publishes-2008-spending-data-$1300210$366425.htm

According to APACS as of 2008 66% of retail payments were done by credit/debit card. This is not fiction...

Those are indisputable facts. I'm not talking B2B payments here, I'm talking payments where cash work. 

We already know cheques are effectively dead. Cash is an inefficient mechanism. With mobile payments and NFC, combined with customer behavior shift, cash can't not survive long-term. Sure, it will take 15-20 years to completely remove cash from the system, but all the components are there.

Brett

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Steve Brunswick - Thales - Long Crendon | 12 November, 2010, 22:40

Some excellent references in this post. I’ve seen Leo van Hove speak elsewhere and I like his ‘scientific’ approach to thinking about payment efficiencies. I’m also a big freakonomics fan.

I always enjoy a lively debate about the merits of cash vs electronic payments, and we seem to have one here. So I can’t resist making a few comments.

No trees are in danger from the growth in the Indian economy. Banknotes are printed on cotton based paper or cotton/linen based paper (US) or plastic (Australia and other countries). But even if banknotes were printed on wood-pulp paper, I doubt if trees would be endangered. I cannot find the tweet you refer to, but I assume the calculation on banknote usage make no assumptions about changes in denominational structure, or the switch to electronic payments for higher value payments that seems to occur as economies develop. Lack of a change in denominational structure is one reason why the penny and nickel cost more to make than they are worth (in addition to the increasing cost of base metals which you point out). They should have been demonetised years ago, but the public doesn’t like change, and the government don’t like to admit the coins make no sense given their current purchasing power. There is no such cost problem for banknotes of course, which cost pennies to make.

I can see possibly some confusion between volume and value in the exchange between Keith Richabell and yourself.  So let’s look at the latest statistics, rather than the out-of-date stats in the post. Plastic card purchases now account for 67.3% of UK purchases by value (2010 Q2 statistical report) but cash makes up 59% of transactions by volume  (“The Way We Pay 2010”) Nether the less cash usage is declining, and “The Way We Pay 2010” also points out like your post that the value per cash transaction is decreasing - “…close to 80% of [cash transactions] are below £10…”.

I do buy into the argument that the cost of cash to society is a reason to switch to electronic payments For example, the EPC estimate the cost is €84 billion; equivalent to 0.60% of Europe's GDP or €130 per person. But the case for consumers to switch has to be compelling. I don’t think contactless cards are as compelling as phone based NFC payments at the point of sale and P2P. It is the widespread use of NFC phones bringing ubiquity that could make the switch happen. This providing also of course that they are trusted and secure (see page 5 “Review of the contactless and prepaid card markets”). Even with trust and a compelling case, cash could be around a long time though, because consumers just like paying in cash.

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Brett King - Moven - New York | 13 November, 2010, 11:10

Steve,

A nice way to round out the debate, which is what I intended to create. I think that what we will see is momentum to change payments practices first through NFC/Phone integration, just as we have with debit cards. Cash will take a long time to shift, but we'll continue to see transactional and P2P habits change over time in the retail and personal/individual payments landscape. They key, of course, is simplicity. It is pretty simple to pull out your wallet, take cash and pay. We need to make phone payments faster than that benchmark for real improvement.

The bigger challenge, sort of related, is the issue of B2B payments transactions. Right now you have Check/Cheque, TT or Internet Banking. We need more options cross-border and interbank solutions that don't involve complicated paperwork, and lengthy float periods.

Thanks again - nice way to round out the discussion.

BK

 

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Rob Walker - Rob Walker Management Consultants Ltd. - Haslemere | 15 November, 2010, 10:23

I have just come across the article after a couple of days' absence from my desk. Noting that the author wishes to terminate further discussion, I simply want readers to note that it was not the EPC but the RBR report The Future of Cash and Payments, released earlier this year and for which I was the lead author, that calculated that the cost of cash in Europe (in 2008) was €84 billion, or 0.60% of GDP. The report also discusses many of the other issues in the article and the above comments.

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Brett King - Moven - New York | 15 November, 2010, 18:44

Rob,

That was not my attempt to close out the discussion, but a nice way to round out what I expected was a more moderate view.

On your clarification, thanks. Certainly adds fuel to the discussion.

Brett King, BANK 2.0

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