I have started to lose track of the number of times we’ve covered “cashless” as a topic of interest in Fintech Innovation. Just to recap, by many metrics [and reports by analysts and consultants], Asia is on a pre-deterministic path towards cashless.
UBS says the catalyzing factor is access to technology-led innovations like real-time payments using smart mobile devices, the arrival of new innovative market players outside of traditional banking, the rise of e-commerce, and favorable government policy and regulation.
Digital solutions provide un- and underbanked people and businesses access to financial services they previously lacked, thereby fostering financial inclusion. In this context, the use of mobile devices to transact payments has allowed people in many emerging markets to leapfrog over credit/debit card use – China is, arguably, the most prominent example of this.
Figure 1: Non-cash transactions going up
Source: Capgemini-BNP Paribas
Aspirations aside, there are hurdles toward cashless. Setting aside legislation, socio-economic and political issues, handling cash is an expensive exercise for banks. Why is that?
For one thing, you need tellers to make sure each bill is in the right physical form before it is placed in a currency (money) counter to be counted. Tellers are also trained to spot fakes or suspicious bills. The bills have to be bundled together and someone needs to haul them to the bank vault for later collection by a security detail to move it from a bank. Don’t forget the wads of cash that have to be manually installed into ATM machines, as well as the cash deposits that have to be taken back to a central processing operation. All of the cash eventually may need to move back to a central bank with the worn or demonetized cash prepared for “authorized” destruction. You get the gist, right?
So how much does it cost to handle cash?
According to the paper, Measuring the Costs of Retail Payment Methods, by Fumiko Hayashi and William R. Keeton of the Federal Reserve Bank of Kansas City in the United States, the aggregate cost of making retail payments varies from 0.5% to 0.9% of GDP. The 2017 GDP of the U.S. is estimated at 19.39 trillion. So 0.5% is US$96.95 billion. That is a lot of money just to handle cash!
Figure 2: Cash vs non-Cash in Asia
Kapronasia analysts wrote separate opinion pieces on the cashless moves of Japan, Malaysia, and Singapore, so maybe worth comparing notes.
Cash and checks still account for 40% of Singapore's payments. Analysts say that older Singaporeans, especially vendors in hawker stands and wet markets, are reluctant to accept forms of payment other than cash. In many cases, they simply aren't equipped to handle transactions any other way, and if they have an established business, may not feel any obligation to accommodate the digitally inclined.
Given Singapore's demographic situation – 20% of the population over 65 by 2025 – cash could remain popular for a long time.
Another obstacle to digital payment adoption could be the dizzying array of options, consumers and merchants may both feel overwhelmed. Consumers may figure it's just easier to use cash. Merchants, meanwhile, need all kinds of terminals and apps if they want to capture business from mobile wallet users.
A study by UnionPay International and Nielsen published in November 2018 found that Singaporeans expect that the country won't be cashless until roughly 2030. Respondents estimated that it would take Singapore around 12 years on average to go completely cashless.
Nearly a decade ago, Malaysian regulators outlined a goal to reduce dependence on cash by 2020, targeting 200 annual e-payment transactions per person, compared to 44 in 2010. But a cashless society remains elusive in the short term.
Data from BNM show 833.9 million internet banking transactions from January-November 2018, up from 741.9 million a year earlier and 588.2 million in 2016.
[Today] Malaysians prefer cash for lower value everyday transactions and incidental expenditures. Mobile wallet penetration remains in the single digits. That could certainly change given the country's high smartphone penetration rate and tech-savvy young population. It could be that mobile internet services targeting young consumers spur broader adoption of mobile wallets.
Still, cash has its place in Malaysia, say some industry experts. “In my view, cash is the efficient payment system for low-value transactions because these are free, universally accepted and instantly settled between parties," Hari Sivan, founder and CEO of fFntech startup Cash Pte Ltd. told The Edge Malaysia in a January interview. Sivan questioned if a cashless economy was right for Malaysia, suggesting it might be "mostly paid propaganda financed by payment intermediaries, who are driven by the potential of recurring revenue and data collection opportunities."
Of course, Malaysians have security concerns about cashless payments and want to ensure that their data privacy is respected. Given the interest in data collection amongst many businesses, that's an understandable concern.
Cash accounts for 80% of transactions in Japan, compared to 40% in China and 10% in South Korea.
With that in mind, the key impetus for Japan's cashless revolution is not business from China [8 million Chinese tourists visited Japan in 2018 spending US$14 billion] but the 2020 Tokyo Olympics. The whole world will descend on Tokyo for the Games.
Many of the visitors will want to pay with their credit cards or mobile wallets. Japanese financial giant Mitsubishi UFJ Financial Group (MUFG) has teamed up with the U.S. internet firm Akamai to develop a consumer payment network on the blockchain in time for the Olympics. If the network is successfully implemented, it could be the most advanced of its kind globally.
Hurdles to cashless adoption include lack of clear cashless payment standard, very low risk of being robbed (Japan is one of the safest in the world), and a lack of counterfeit currency problem has meant Japanese trust their banknotes.
The direction to go cashless is an aspiration Asian governments share. If you go back to the estimates of cost of cash to a country – US$96.95 billion – it is easy to see why it would make sense to go cashless. There are however non-financial ramifications for going cashless.
CashEssentials lists four potential issues that industry, government and society must be ready to tackle in their cashless journey. These include abolishing cash could potential discriminate against low-income works as they have to adapt to the new system*; going digital will not stop criminal elements as they will just find other means to continue doing business; there is still no evidence to suggests that electronic transactions are actually more efficient and cost-effective than cash; and the removal of tangible money would enable central banks to exercise a full control over interest rates, something that cannot be done today.
In China, beggars are said to use QR codes and e-wallets to solicit alms – so CashEssential’s concern about derailing financial inclusion initiatives may not necessarily apply. Sweden has recently moved to nearly cashless society with only 13% of surveyed respondents still using cash, down from 40% in 2010.
The UBS report, The road to cashless society, suggests that Asia’s cashless journey is at an “inflection point due to a confluence of demand and supply factors. This structural shift has already started, and we expect it to last for more than five years.”
In “Attacking the cost of cash” McKinsey offers five exercises for banks to pursue to lower the cost of cash:
- Examine cash-sorting and handling processes to identify waste, streamline processes, and reduce labor expense.
- Build a comprehensive view of cash inventory, aggregating data from the diverse software systems used in cash centers, branches, and ATMs. Apply advanced analytical tools, incorporating both external and internal data, to forecast both cyclical and noncyclical fluctuations.
- Analyze cash in transit with the aim of reducing the number of trips, ensuring that trucks carry a full load, and analyzing traffic patterns to identify the fastest route at different times of the day.
- Review volume trends at cash points. Eliminate machines that operate well below capacity and maintain an even distribution of ATMs and branches.
- Once banks have optimized their own networks they should explore the idea of creating a national utility to manage ATMs, undertaking discussions within their own institutions as well as with other institutions, industry associations, and regulatory authorities.