Brett King

Posts Tagged ‘m-pesa’

Will the US be last in the drive towards a cashless society?

In Economics, Future of Banking, Mobile Payments on September 1, 2011 at 23:50

Although it is a long-time off yet, we can now envisage a time when most of the developed world, and indeed most of the developing world will no longer deal in hard currency. There are a number of drivers for this:

1. Impact of mobile payments
2. Tighter money laundering requirements, and
3. Cost of physical handling versus electronic transactions

Since the mid-20th century many have heralded the impending cashless society, but it may be that the emergence of mobile payments is the final tipping point in that outcome. Indeed, empirical evidence is already available that cash is in serious, if not terminal decline.

Strong incentives

For years regulators and governments have worked to track the movement of physical currency across border, and in the case of terrorist financing and criminal activities. The Financial Action Task Force developed 40 core recommendations in 1990 (revised in 1996) designed to reduce the risk of money laundering, but the greater part of the effort was focused on the movement of hard currency and it’s role in criminal undertakings. The reason for this is that it is harder to track currency, and if it can move freely around the system, the criminals, terrorists and “evil doers” can support their activities without restraint.

The strongest case for the removal of cash is around criminal activities. David Warwick posted an excellent review of the issues around cash and it’s active involvement in crime in a recent post entitled “The Case Against Cash”. In it he cites the following facts:

“Now consider that low-level drug offenses comprise 80% of the rise in the federal prison population since 1985 (though those numbers have begun to go down in more recent years)…The vast majority of those illegal transactions are cash-based. Greenbacks are also the currency of choice for Mexican drug cartels, which funnel between $19 billion and $29 billion in profits out of the United States annually, according to the U.S. government.”
David Warwick, CBS Interactive Business Network, Aug 2011

The biggest costs and risks are in cash

In recent times in places like the Netherlands, the cashless society has already started to become a reality. In 2010, the Amsterdam City Government moved to create ‘cashless’ zones in the De Pijp and Nieuw-West (New West) districts as a result of rising crime rates. You can now only use Chip and Pin to pay in those locations. This has been successful enough that it is now being rolled out across other districts in Amsterdam.

In Ireland, Belgium, Netherlands and other locations, banks are increasingly going cashless to reduce costs and crime. In recent years banks like SNS Bank in Utrecht and National Irish Bank, were two such European banks to commence the move to Cashless. Both cited the rising costs and risks of dealing with physical cash, and low volume of real ‘cash transactions’ in-branch, as a metric for justifying the move.

Emerging economies may be first

In the Philippines, Kenya, Somaliland, Nigeria, Senegal, India and other such locations, the success of mobile payments and remittances is starting to see a dramatic shift in the day-to-day operation of the economy. In Somaliland where there are no ATMS, and almost no banking infrastructure, mobile payments enabled by mobile operators, the hawalad and money changers, might mean this province could become one of the first cashless societies.

The key to moving away from cash, is reducing the reliance on cash day-to-day. RBA Governor Malcom Edy noted that cash use in Australia had declined from 40% down to 30% of traditional ‘retail’ payments. In the UK, cash usage is also in decline, with the UK Payments Council estimating that it will represent just 0.8% of retail payments by 2018 (this is down from 90% in 1999). In both cases, the use of Debit Cards has been cited as the contributing factor.

In Rural India, Sub-Saharan Africa and the Philippines mobile payments are booming

It’s all about behavioral shift in payments

The shift towards cashless requires reducing momentum in the ‘cash system’ by shifting to alternative modes of payment. The Debit Card has been an obvious ‘cash-killer’ in places like the UK and Australia, whereas mobile payments have had a much more rapid and profound effect on emerging economies. So with Peer-to-Peer (P2P) mobile and internet-based payments rapidly accelerating, and the move to NFC payments – the likelihood of ‘saving’ cash from terminal decline looks less and less likely. Check out PayPal’s P2P solution using NFC enabled Android phones for example.

In this regard, the EU with it’s strong support for debit cards, chip and PIN and increasing mobile enablement, and the emerging economies of Africa and Asia with both low friction against cash and the pressing need for financial inclusion, probably mean that the US, who is so strongly and emotively married to the ‘greenback’ and stuck with outmoded mag-stripe will likely be among the last to go largely cashless sometime in the next decade.

The momentum for these changes are building and it is a longer-term trend that will change the way we view banks and money in the very near future. The more friction you have, the more consumers will find workarounds. At the end of the day, a mobile or P2P payment will have far less friction than a cash payment.


The end to hard cash is nigh!

In Economics, Mobile Banking on November 11, 2010 at 10:47

I’ve been at the E-Money, Cards and Payments conference in Moscow today. Coming off the back of SIBOS it is quite interesting to have a discussion not just about payments, but around modality and the emergence of strong mobile payments methodologies and practices. We already know that checks/cheques are in terminal decline, but when you bring up the ‘end of cash’ this gets a great deal of emotive responses or general disbelief that this is possible or probable. It is becoming quite clear, however, that regardless of the emotion and habitual systemic behavior that there is an number of issues that are combining to create a critical decision point for governments, regulators and the banking community to get actively behind the removal of cash from the system. Here are some highlights:

Net Social Cost

Cash costs society comparatively significantly more than alternative payments methods such as debit cards. At the conference Leo van Hove, Associate Professor of Economics at the Free University of Brussels, presented data showing that in Belgium 10.24 Euro is the threshold where cash starts to lose it’s efficiency due to marginal costs, and in Netherlands this is about 11 Euro. In a discussions from the floor between Leo and Dave Birch (@dgwbirch), however, the two experts identified additional social costs beyond distribution, including money laundering, gambling, crime, etc that make physical money a net negative in the social impact picture under most scenarios.

Base Materials and Production

An average US 1 Penny coin costs 1.67 cents to manufacture, and the Dime (5 cent piece) costs 7.7 cents to manufacture. So it is clear that coins in general are becoming untenable as raw materials costs for copper, silver, gold, etc climb yet further. A great quote from SIBOS of a few weeks ago from Carol Realini (@carolrealini) was that projecting the future need for physical cash into the Indian economy would take more paper than can be produced from all the trees in the world if based on real physical currency. With an increasing focus on carbon cost of production, then surely cash itself is a massively expensive proposition for society and is no longer an efficient mechanism for governments. Banks may be holding on to cash because their retail businesses are still largely based on physical cash distribution, but the reality is this is a false economy for society as a whole and is certainly not responsible as we move towards a greener future.

Not mathematically efficient

Ok, so this one I can’t put claim to. This was the discussion going on virtually between Leo van Hove and Dave Birch today via Twitter, etc. Dave points to a recent Blog Post from the Freakonomics gang that suggests the correct denominations for coins should be 3-cents, 11-cents and 37-cents based on correlations between pricing, spend, coin production, distribution, etc. Alan Burdick puts this combination slightly differently when he supposes that we need 5-cent, 18-cent and half-dollar combination.

By one estimate, $10.5 billion in coins just sits around in people’s homes gathering dust…
Alan Burdick, Discover – The Physics of Pocket Change

Mobile Payments and contactless Debit Cards

There’s been a lot of chatter about mobile payments, the NFC integrated iPhone, M-PESA, G-Cash, PayPal and so forth in the blogosphere of late. It is clear there is a lot of anticipation of this potential, but there remains some challenges. Ubiquity is going to be challenging because just like with physical cash and currency, competing standards may actual work against adoption. Interoperability between payments networks, between e-Cash and physical cash, etc will be a challenge too.

Nobuhiko Sugiura, a Special Research Fellow of Japan’s Financial Services Authority, and the Associate Dean of Chuo University Business School also presented at the e-Money conference in Moscow. He highlighted the fact that one the regulators got behind e-Money that it’s success was rapid. Just in the last 3 years use of e-Money has increased 300% now to be one of the most frequented personal payment mechanisms in Japan. In fact, one third of Japanese, according to Sugiura-san are already e-Money users. He cited some other great drivers behind e-Money’s success in Japan, which translate as equally well to countries outside of Japan, namely:

    1. Japanese banks have no interest in micro-payments because of the relatively cost base
    2. Convenience stores favor e-Money so that they can reduce their cash float
    3. The unwritten law in Japan is that refunds are “prohibited in principle”, because the Japanese governments want to replace Physical cash with e-Money as quickly as possible

      In the UK, 43 per cent of retail payments are done by debit card and 23 per cent by credit card. Cash still makes up 32 per cent of these payments, but as a percentage of the whole, it continues to reduce. This is a trend throughout the EU and much of the Western world.

      There are compelling reasons why physical cash should disappear, quickly...


      Given all of the above, it must just be pure momentum in the system as to why we are still using cash. In terms of cries from industry that “cash is back” it would appear that this sentiment should be discouraged at all costs. If you want to encourage savings then promote debit card and e-Money usage, but physical cash is bad for the system all round.

      I say – Bring on the iPhone 5!