27 February 2017
Hari Subramanian

Payments changing lives

Hari Subramanian - Wipro

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Achilles heels of payments, cash and batch, will they disappear?

24 October 2015  |  2346 views  |  0

Having just returned from SIBOS where every one was talking about real time and digital payments, my contrarian mind was tempted to think about cash and batch.

Cash

Cash has existed among humans for 27+ centuries and accounts for about 80% of payments. In addition there are fundamental driving factors such as black economies that rely on cold hard cash. I compared the the size of black economies in many countries around the world. Finextra won't allow me to include a table in this blog. If you are interested in a copy of the table, please contact me. Even in developed economies where the use of cash is lower, black economies are about 10% of official GDP’s. Of course, developing countries have disproportionately sized black economies (75% for India, 58% for China, 39% for Brazil). Running to trillions of dollars, these black economies rely on cash heavily as they want transactions to go unreported (it is usually easier for Governments to catch electronic transactions).

Even with digitization and mobile payments, rapid growth of M-Pesa in Kenya did not reduce cash in circulation. On the contrary, cash in circulation in Kenya grew along with M-Pesa payments.

Regulatory changes and digitization can minimize cash but not eliminate it. Expect cash to stick around for a long time even after pervasive digitization!

Batch

With the move towards real time accelerating, we are tempted to ask “will batch go away?”. I think it is unlikely. History lesson from Telecom would help here. When Telecom industry invented “Caller ID”, everyone was required to pay for the feature. Eventually when people realized they needed to block their ID’s, Telco’s promptly charged them for blocking the ID’s. Similarly users are likely to pay for real time transactions to begin with. Over time as everything gets to real time, users will be asked to pay for slowing down their payments to benefit from the time value of money.

Here are some reasons why batch won’t go away:

  • Not all types of payments require real time funds availability. For example, it doesn’t matter whether you are paying a bill 2 days or 5 days before the due date. It only matters when the bill is past due.
  • Business schools have always taught that accept receivables as quick as possible and delay payables as much as possible. This simple logic to generate working capital is not going to go away. Users will always have a need to slow down payables as much as possible without violating contractual obligations.
  • Most batch systems have sunk costs associated with their legacy systems. As volume of batch payments reduce and technology migration continues, they are likely to incur lower operational costs due to downsizing. However, when users start paying for “slowing down” transactions, all of a sudden, batch could become more profitable due to sunk costs, lower operating costs and new incremental revenues.

What do you think? Will cash and batch go away soon completely? Are their other factors I might have missed? Add your comments below.

Achilles heels of Payments TagsMobile & onlineInnovation

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job title CxO Advisor - Banking and Payments
location Greater New York City
member since 2014
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Hari is a management consultant and industry advisor in banking and payments with over 20 years of global experience in Telecom and Banking and Financial Services. He has advised a number of the leade...

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