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Disruption in Retail Banking

Growth in internet and mobile technologies has transformed many industries and economies. The market forces and competitive landscape has completely changed in many sectors. iTunes has fundamentally changed music industry, Amazon has driven most big brick and mortar book sellers out of business, Expedia is one of the worlds' biggest travel company….. the list goes on. Internet and mobile technologies are big disrupters for most industries. What started (and tapered a bit!) with the dot com boom of 2000 has become a lethal threat to most business models today. Powered by mass adoption in mobiles phones, proliferation of smart phones and cheaper band-width, internet and mobile technology have changed many industries. The banking industry in has been dominated by a handful of big global or regional banks for 100s of years. While the credit crisis has shaken this industry, the core market forces for the industry have not changed. Will Innovation in Internet and Mobile technologies disrupt retail banking? Will there be 5 new names in global top 10 retail banks in 2020?

Cash vs. Mobile, desperately seeking a different answer!

19 May 2016  |  2977 views  |  0

Having spent nearly two decades of my career defending the use and longevity of cash I find myself reviewing this position.  I have now crossed over from finance and cash/transaction automation into the world of mobile apps and I desperately want to be able to controversially state “that’s it, time is up for cash” but like so many things it’s just not that simple.   

Everyone has an opinion on this topic.  For the last 20 years that I’ve been involved, there hasn’t been a single year go by without analysts, consultants or research companies predicting the demise of cash within the following decade.  Each year we’d duly critique the research and find holes and exceptions.   The forecasts haven’t changed but a lot of other things in and around cash have so we’ve asked Adam Warburton, Head of Mobile for Travelex to join us in this blog to consider the implications for cash over the next decade.  

Adam has an interesting balance to drive mobile within a seemingly traditional cash-based business.  But actually, the reality is very different with Travelex embracing digital services including mobile apps and cards in order to continue delivering useful services to their customer base. And if you think they are inextricably linked to cash, just consider that the pilot of their ‘Supercard’ product has over 25,000 users, had 100,000 downloads within the first day that put them at 6th in the App Store charts (and it hasn’t been launched to the general public yet).   

We’re going to look back on all the arguments we’ve refuted over the years including;  

  1. Cash is the most available and reliable payment method

  2. Physical cash has a more stable ‘value’ than electronic cash

  3. Cash usage is linked to older generations

  4. Small transactions will always be done with cash

  5. Cash is anonymous and untraceable

  6. ‘Developing’ countries rely on cash

  7. Cash equals greater budgeting control

1. Cash is more reliable

No doubt about it, cash is certainly more reliable.   If you have it, you are not reliant on access to networks to check your credentials, verify your identification and ascertain your balance.  However, if you need to get it there are very few places in the world where you can get cash without the need of some kind of network.   That drives a lot of the behaviour around the continued demand for foreign currency.  As Adam discussed even seasoned travellers will take out some cash before travelling - “just in case the cab doesn’t take cards, or my card is declined or not accepted”.    Getting cash is inextricably linked to needing access to a network.    It’s fair to say that the philosophy of keeping money ‘for a rainy day’ is still strong.  

It’s is of course true that if you have cash it is reliable and universally accepted. Although, there are few places that no longer accept cash or who impose upper limits on cash transactions and  there are more than just murmurs of this happening in Denmark, the Netherlands and German supermarket chains.   Even in countries like these, with high technology adoption and acceptance, there is a resistance to losing the ability to use cash.   

When we talked with Adam we agreed phrases like “cash will die” were far too dramatic and instead we felt that we will see a channel shift, in the same way that apps haven’t killed websites, but customers have changed their browsing behaviour.   The reality is they will of course co-exist and provide an extended service offering to customers.   Just as Travelex has seen a shift of travellers using more credit and debit cards for overseas spending than cash, the cards have not in anyway replaced cash.  The “just in case” feeling we just discussed means the two work together for different scenarios.  

2. Physical cash has a more stable ‘value’ than electronic cash

Technically of course this is not true, however, let’s again assume you have cash and potentially swathes of it hidden somewhere then there is some context to the ‘feeling’ that physical cash has more value.   Forgetting cash security issues for now, imagine the scenario of a run-on-banks or fears around online security.  When there are queues upon queues outside bank branches waiting to withdraw every last penny there can’t be great comfort at the ability to look at your balance on whatever device you want, wherever you are.  And though unlikely it has happened in the last decade with the onset of the credit crisis in 2007 to Northern Rock and then more again in Greece.  Understandably people feel more secure with cash in their hands than a balance on a statement when a bank or currency is facing financial ruin.  But it’s arguable, how much cash would you need to feel really secure and then rethink the other vulnerabilities you’d have.

Electronic cash is stolen today through various forms of identify fraud, phishing and so on but the money is still yours. Though it might take considerable action to recover ‘electronic money’ it is traceable (unlike most cash).   The strong feeling of comfort might well be one of the factors that keep us holding on to cash just a little bit longer.

3. Cash usage is linked to older generations

Here’s the argument that older people won’t adopt new technology and they won’t relinquish their grasp on cash.  The logic being that if you have grown up without the technologies of today and have a reliance on cash you’ll not change easily.    Certainly adoption of new technologies or even online banking rates are not highest amongst the elderly in our population, however, that’s a broad brush to tar them with.  In fact, there is as much to suggest that the most talked about ‘millennials’ embrace cash as much as any other demographic group.  A recent Cardtronics survey reported that nearly half of the Millennials (45%) suggested they “were more likely to pay more with cash now than they did a few years ago”.   The reasons include all the refuting facts we’re covering here and perhaps most importantly to help them stay within a budget.   These are the same people who reported to say their smartphone never leaves their side, night or day and that “everything would be done on mobile devices” in the future (Mary Meeker reporting on Zobgy Analytics).  

If this is coming from the rising generation then what for the rest of us who supposedly grew up and are reliant on cash?   As Adam recounted from a recent conference discussion about the adoption of smartphones it was suggested that “UK smartphone adoption rates were up around 75%.   The country would see rates nearer 100% when the 15% who didn’t have smartphones died”.    Possibly harsh, but with some truth. Possibly the same thing will happen with cash; people who haven’t grown up with cash won’t have the reliance upon it.   

Recent stats aren’t quite so damning of the more elderly adoption of technology.   A recent Pew Internet & American Life survey suggest 65+ year olds adoption of internet banking was approx 47% of those surveyed (compared to 67% for 18 - 29 year olds).  Mobile banking adoption was certainly lower at approx. 14% (compared to 54% for 18 - 29 year olds) but that’s not overly surprising if you revert back to overall smartphone adoption rates.   We know what is happening to the older generation; what will be more interesting to watch in terms of cash usage is if infact the feeling of being in control will outweigh digital convenience  -  we  have our doubts.

4. Small transactions will always be done with cash

Would you pay for an item less than £20 with a card?  Yes, I certainly would.  What about under £5?  There has been a common belief thought that people have a reticence for using cards (or now contactless or mobile pay) for very small amounts.   But isn’t that exactly what contactless, Apple Pay, Android Pay, V.me and so on are all about?   Buying a coffee with Apple Pay is now surely as acceptable as buying it with cash.  If using cash over a debit card was done because you wouldn’t use a card for such a small transaction then will we see a big change in the association with cash and small transactions?

“Convenience will win over everything” is how Adam summed it up.   Suggesting that if you look at any successful technology adoption then the ultimate winning factor is it offers complete ease and convenience, in fact once you are used to using it, it’s almost invisible.   Going on further we considered the example of Amazon.   “At first it was arguably the cheapest offer online but over time it has changed with more sellers, amazing distribution, understood and reliable customer service and of course Prime. It’s now perhaps not the cheapest but it’s so darn convenient that you don’t bother shopping other places”.   With super-convenient mobile services, arguably cash is inconvenient in comparison.   

Cash transactions often relate to cash-in-hand type transactions to pay tradespeople, cleaners, gardeners etc.    There has been more than one occasion that I’ve had to run around the house scraping together enough cash to pay our babysitter.   If they accepted peer-to-peer I’d use it without hesitation.  The use of Venmo fascinates me, not from the payment point of view, but the social sharing of the payment you have made.   The rest of my non-cash life revolves almost entirely around PayPal so long as the infrastructure is there I’d have no hardship giving up cash for these type of transactions.

5. Cash is anonymous and untraceable

Yes, true.   One of the key facts that isn’t really arguable and therefore there is very little to say on this fact.   Cash is anonymous and mostly untraceable.  Cash does not have RFID tags that could trace even it’s movement through the system and this is why it is and will remain popular in segments of society that are perhaps less desirable.  An undercurrent that just doesn’t go away.

6. ‘Developing’ countries rely on cash  

When we discussed  this we of course had the same gut feel that there was an element of truth about this statement.  However many of the markets considered developing are exactly the markets who have leapfrogged ‘developed’ countries in terms of technology adoption and versions.   There are other economic and political issues that may mean cash will stay around longer, that cannot be disputed.   

Though adoption rates have always been high in countries like the UK, USA and Australia, ‘developing’ countries like India and China are now reaching smart device adoption rates reaching 60 and 70%.  Kenya is often cited for M-Pesa which has become one of the most successful mobile phone based financial service in the ‘developing’ world.   Launched by Vodafone, M-Pesa delivers phone-based money transfer, financing and micro financing.  Of course, the interesting point about M-Pesa with regards to this article is that it is reloaded primarily using cash.  Cash may well be strong in many of these countries but so is technological acceptance and adoption once it arrives.  

7. Cash equals greater budgeting control

The final point we explored was the idea that holding cash means you can better keep control of your money.   Understandably, as less people go into branch and many do not get regular balances at ATMs, it could be considered easier to manage your finances by keeping track of the amount of cash you hold.  However, it’s arguably never been easier to get regular updates of your balances any time of day or night, no matter where you are.  

So many of the app solutions on the market offer fantastic budgeting tools.   Other apps such as Westpac’s or Barclay’s provide instant access to balances (you don’t even need to sign in for a balance update), reminders of regular expenses (with the option to pay via your phone),  alerts if your spending pattern is going above what you can afford or recommending saving advice if you’re looking on track to be under in any given month.   

The prospect of the banking industry opening up APIs to cover read-only access to some or all transaction history data, other account information and occasional write access to initiate payments could see fundamental changes in how we approach financial transactions and how we deal with our bank.  In essence this will mean a standard process for legally sharing data for the purposes of providing better services to customers.  In the past account aggregation has been one example talked about however to date it has mostly been achieved through screen scraping.  We’ve already seen many new entrants opening up digital and mobile only banks such as Mondo, Fidor and Atom to name a few and their approach to banking and payments is already a significant break from the traditional norm.

Will all of this information at your fingertips result in a change of behaviour towards cash?    Maybe overtime, as Adam suggested “mobile banking makes your data more accessible but doesn’t necessarily encourage a behaviour change between cash and electronic methods.   Certainly I check more often and I’m more engaged with my data but it doesn’t change my spending behaviour or relationship with cash necessarily”.  

What do we actually believe?

I’m disappointed not to be able to say ‘that’s it, curtain call for cash’ but I knew that wouldn’t be the case.  It’s too soon and Adam and I are in agreement about this.    We do believe that the strongholds will remain around the universal reliability of cash, especially in relation of overseas travel,  and the feeling that cash is more secure and controllable.  Perhaps to a lesser degree for smaller transactions given the rise in the infrastructure and use of contactless, mobile pay and peer-to-peer payments.   

We are facing an interesting time whereby the phenomenal progress in mobile technologies and apps (on phones, wearables or other devices) coupled with the entry of more ‘non-traditional/non-cash’ players in the financial industry and the accessibility and acceptance of new services must surely mean a significant change in the way we all do business and our relationship with cash.  Cash will still be around but it’s in for a bit of a kicking.

 

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