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:
- Japanese banks have no interest in micro-payments because of the relatively cost base
- Convenience stores favor e-Money so that they can reduce their cash float
- 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!