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In a weaker economic climate the search for methods to reduce cash is receiving significant attention but is the war on cash doomed to failure? Governments all over the world would like to see more cash payments made electronically. Electronic payments are traceable and help to reduce the growth of cash-based black economies which leak tax revenue. However, evidence suggests that this desire to abolish paper from the financial system is meeting with mixed results. In fact, Peter Jones, writing for KAL points out that the volume of euro denominated cash in circulation has actually doubled since its introduction in 2002 and appears to be growing at a faster pace than digital cash transactions. This has happened in the face of the European Commission‘s best efforts to persuade Europeans to adopt a cashless economy.
Why are traditional payment methods such as cash and cheques proving so difficult to dislodge? Last October, in our post What the future of Cheques means for innovation in payments, we discussed the efforts of the UK Payments Council to eradicate cheques by 2018. This was met by significant opposition for many social and convenience reasons, and the plans were subsequently abandoned. Despite the best efforts of the Payments industry and Governments, most of us still like to have the choice to use cheques or cash to make daily payments. And, for many of us, electronic methods still fall short in replicating the functionality offered by these antiquated but proven instruments. According to MasterCard, 85% of retail payments world wide are still made with cash. You can’t force people to use alternative methods if they aren’t fulfilling peoples needs in the same way as cash – or the cheque – does. In his report, Peter makes a good point that cash will not be eradicated but will need to become competitive with other payment systems. Even at a fundamental level, many countries are now upgrading bank notes from paper to polymer materials which will improve durability and security. At the same time, and this may be the crux of the matter, other payment systems need to become competitive with cash. This could mean one very good mobile payments system but it is more likely to be a combination of fit-for-purpose offerings including Internet payments, contactless cards, mobile payments, virtual currencies, and so on.
Governments are working hard on the problem. In one example Canada has just launched mintchip, its own digital currency.
Whilst branding mintchip as “better than cash”, the Royal Canadian Mint has also simultaneously recognized the need to incentivize the payments industry to develop ways in which mintchip can be deployed to emulate cash with a high profile $50,000 contest. Interestingly – at the same time as this announcement – Canada is stopping the production of pennies which, apparently, each cost 1.6 cents to produce.
In any discussion on displacing cash, the “last mile” problem is never too far away. Although the majority of consumer payments worldwide are still cash this is often because it’s the final interaction, or “last mile” in the payment chain that requires cash in paper form. This is true of ATM transactions, cash back at the Point of Sale transactions, and even cash withdrawals at the bank. In any payments ecosystem someone, somewhere in the payments chain, will want to get cash out or put cash in. Identifying these cases and how they can be addressed is often the key to an effective ‘cashless’ business model. There are also opportunities for electronic payment methods to combine with cash to provide the benefits, and eliminate the drawbacks, of both to business and consumers. A case in point is the cash back facility which allows retailers to reduce the cost of holding cash floats and overnight cash depositing by offering cash back to consumers who use a payment card for purchases. Similarly, cash fuels Mobile P2P payment services with cash deposits to mobile accounts via an agent or a retail point of sale, allowing more commerce and facilitating people who don’t have a bank account.
So we’re agreed that cash will probably continue as an important payment mechanism for quite some time. It still has a major role to play for the majority of the world’s consumers. There are many battles yet to be fought in the war on cash and much work is still needed to identify electronic payments method that offer sufficiently compelling alternatives to win the hearts and minds of cash-loving consumers.
Our client is one of Europe’s largest point of sale payment networks providing Prepaid Mobile top-up, utility bill payments, debt and credit card, and travel payments. We were appointed to provide new insights for their business model and to develop new market opportunities.