According to a
recent report by Citi, cash is slowly but steadily on its way out. At the same time, questions are being raised on why we should not accelerate the transition as much as possible. Converting payments to digital helps with transparency, and reduces both
social and other labor costs on the overall system.
No doubt the benefits are many:
- Digital payments provide protection from fraud and easy incentives in many forms from both payment processors and merchants
- They are convenient for remote / online transactions. In fact, a significant part of our commerce is possible because of digital payments
- They help reduce the overhead in the system due to automation
- Digital payments help us build a digital persona (credit profile) which then rewards us by way of lower interest rates on loads
- And the possibilities in subsequent revenue models like loyalty programs are amazingly simple
Some of the above – such as the credit profile – we could probably achieve with cash as well. But it’s far more convenient with digital.
Why then is cash still going strong? Almost all studies including
this often quoted one by Federal Reserve Bank of San Francisco point to cash being the dominant form of payments for low value transactions, even in advanced economies like the US. When we analyze the reasons, we often look at demographic such as income
and age groups, acceptance of cards, reliability of digital instruments etc. The following might be indications of a wave of innovation that's yet to come:
- Perhaps the most important stakeholders in the low value payments are the small merchants. In fact, it’s actually expensive for merchants to pay interchange for every transaction, when they are trying so hard to compete. Why would they not request their
patrons to pay cash? Whether the payment is mobile or by card, merchants still end up paying a part of the revenue they don’t want to part with. Read this
reaction by a merchant in Sweden, a country that’s supposed to moving to a cashless economy (towards the end of the article). In fact this was such a valid issue that the
Dodd-Frank bill accounted for $10 minimum payments for merchants. The opportunity cost of handling cash is not too high. It’s a similar reason why a lot of startups bootstrap until they have a viable product. There is opportunity cost for the effort they
put in, but it doesn’t matter so long as they conserve cash. In fact, regular patrons are either prepared or generally upsize their purchases if they want to pay by card. And in many places, they get discounts for doing so.
- Important psychological factors play a role as well. We should reflect upon our own behaviors as customers. Are we more likely to fumble in our pockets for a small amount of cash at a small merchant, or at an established retail chain? In our hearts, we
know the costs we are subjecting the merchants to, and we mind our actions more at local, small merchants. Do we mind making a quick trip to the ATM to cash up before we go buy lunch? The sentiment to
support local businesses is growing, and that feeds into the cash phenomenon as well.
- Cash – and debit cards – to some extent are also mechanisms customers use to control their spending habits, another key psychological factor. They consider mobile as just another way of paying by credit card because the payments are automatic regardless
of interchange fees. See
this article by Ramit Sethi on why he advocates that cash actually saves you money. Its good sense if you can manage to pay by cash for your transactions so you’re less automatic on making payments for many expenses you actually would do well to trim. Anyone
who’s using Apple Pay or Amazon Prime
knows the feeling.
Taken together, these reasons could be signaling the foundation for the next innovation frontier in payments, and something that the emerging Fintech economy is definitely encouraging.
- ACH based mobile payment models are on the rise, and especially with same day ACH transactions coming in soon, the merchant’s perspective on intermediary fees might just be heard. Services like Dwolla which bypass the payment networks are starting to catch
up. Essentially you fund your Dwolla account, and payments are immediate with small transactions completely free. Same goes for several person-to-person payment services like Venmo (now PayPal).
- A potential issue with alternate payment modes is user registrations – how do you get enough merchants and users to sign up? With the rapid Fintech advancements, and the role that banks have to play – or must play - in the community, that issue is likely
to be resolved with community engagement models and enough incentives. No doubt we will see aggregator models rising here, although at much lower core cost if they are to succeed. The lack of credit for local businesses that helped create the alternative lending
space will probably arise here as well. Hopefully that will be an opportunity for community banks to step in, supported by technology innovations to cut down core costs.
- Consumer incentives for a growing digital payments ecosystem will come in the form of associated services such a loyalty programs for frequent purchases, and even bringing different businesses together. Such
theme based and social oriented loyalty programs are just now starting to take off.
- An important dimension stems from personal finance oriented ecosystems that will help the customer as per their needs and future goals, rather than encouraging them to spend or invest at the first sign of temptation. A significant proportion of Fintech
are focused on the personal finance space.
Is a big innovation cycle be in the making? This next phase will be fueled by mobile and advice based ecosystems which are personalized for maximum context through the use of analytics. The incumbent players have the potential to take their relationship
with the customer one step further. It might also mean that the disruptors of recent times will themselves be disrupted as the model shifts again!
What do you think?
Photo credit: GotCredit via Foter.com / CC BY