Flash, without cash?

The concept of the cashless society is an intriguing one, as it moves from concept to nearer reality. Deutsche Bank’s chief executive, John Cryan, predicted at Davos last year that cash probably won’t exist in ten years’ time. Sweden, where only 20% of all consumer payments are now made in cash, appears to be the main contender as the first country to phase out notes and coins completely. It has been predicted that Australia could become cashless as early as 2022, and in recent months India’s citizens and small businesses have been actively exploring alternatives to cash since the government’s recently-launched demonetisation process.

The millennial generation born in the late 20^th century (of which this writer is a member) has grown up understanding both the importance of cash and the ease and simplicity of digitally managing money. They appreciate the rise in device payments: the simplicity of tapping your phone to pay and having the receipt appear on the screen in seconds. Consumers have been driving the need for a cashless society, and the benefits of instant payments are easy to understand.

There has been a shift towards greater digitalisation of payments, but are consumers and companies ready to flush cash from the payments system completely? For all its shortcomings, cash remains the main option for retaining financial privacy simply because it doesn’t automatically create a permanent record of every purchasing and transaction made – hence India’s recent move, which aims to clamp down on the so-called ‘black economy’.

Innovation in digitalising payments has escalated in recent years. Charity boxes rattled on high streets confirm ‘contactless payments accepted’, consumers tap their Apple watches and use their fingerprints to authorise their lunch hour shopping. At the same time, businesses have been moving to eliminate cash, cheques and manual processes for some time, as Andrew Reid, head of cash management corporates for Europe, the Middle East and Africa (EMEA) at Deutsche Bank points out.

“Corporate treasurers are already cashless in their minds – removing the costs and risks of dealing with cash is part of a wider drive for corporate efficiency (supported by their banking partners). As such, we can expect accelerated digitisation in the corporate space over the next few years, with the emergence of new business models and a stronger convergence with retail developments.” Innovation is happening everywhere and it’s here to make our lives easier – or at least that’s the official message.

Our society is moving towards greater digitalisation. Ask a young adult in the street, whether he/she is carrying cash and the odds – according to one recent report – are four to one against. Cheques are increasingly obsolete, there’s an increase in credit and debit card payments and innovations in device payments proliferate. However, not everyone in the global population classifies as an innovative customer.

Unless cash is regulated out of the economy, as India appears to be attempting, it will continue to fulfil certain needs in society. Cash gives us freedom, is reliable and allows us to manage our personal finances with ease. It also helps keep the economy stable, with cash flow enabling management in smaller businesses particularly and allowing them to operate and grow.

A cashless society might sound appealing, but with a McKinsey study finding that 2.5bn adults worldwide are still unbanked (with Africa, Asia, Latin America and the Middle East accounting for 2.2bn), it poses the question of how far and how fast the shift could happen.

Slow, but steady

A total of 417bn cashless payments were made in 60 countries worldwide in 2014, according to consultancy Retail Banking Research’s (RBR) study Global Payment Cards Data and Forecasts to 2020. These are increasing at only a slightly faster rate than the number of automated teller machine (ATM) cash withdrawals. Cash is still favoured as a means of payment for a significant proportion of the global population.

One in four card payments in the UK are now contactless payments, according to recent data from the UK Cards Association and there are now over 101m contactless debit and credit cards in Britons’ wallets; a total that equals the population of Denmark, Hong Kong, Sweden, Australia, Spain, Greece, and Finland. There are also 42m smartphones now used in the UK, pointing to further payments innovation.

As treasury departments will be aware, the steady progress in much of Europe and the Nordics towards cashless contrasts with the US. Still the world’s biggest economy, America is a decade behind in introducing chip and PIN technology and is still working towards an initiative such as the UK’s Faster Payments, which has been enabling almost instantaneous internet and mobile payments since 2008.

At the same time, while an estimated 2.7m Britons have weaned themselves off cash almost entirely in 2015, there were still 2.2m who still depend on it, according to Adrian Buckle, chief economist at the UK payments industry body Payments UK. Those who use cash to process all their payments are said to be better at budgeting, and don’t enable spontaneous buying. Using cash is a “visual way of being able to budget,” says Buckle. “Consumers don’t change their habits very quickly.” Nonetheless, Payments UK expects debit cards to have overtaken cash as the most popular method of payment by 2021.

The UK’s roll out of new polymer bank notes suggests that the demise of cash isn’t expected just yet though, with the Royal Mint replacing paper currency with polymer-based notes with extended longevity. Following in the path of seven other countries, including Australia, Canada and New Zealand, the UK began by launching a new £5 polymer note last September is the first European country to make the transition, with a new £10 note to follow this year and a £20 polymer note by 2020.

Faster payments and online transactions also open up new possibilities for fraud, with digital banking also exposing users to potentially much bigger losses. According to Visa Europe’s 2016 Digital Payments Survey, the number of Europeans regularly using mobile devices for payments has tripled in just one year, from 18% to 54%. At the same time, PwC’s Global Economic Crime Survey noted: “Digital technology continues to transform and disrupt the world of business, exposing organisations to both opportunities and threats. So, it’s hardly surprising that cybercrime continues to escalate – ranking as this year’s second most reported economic crime.”

There are two main challenges that accompany the cashless trend, says Reid. “The extinction of physical cash certainly has many upsides. However, there is significant work taking place between payment providers and regulators around how best to adopt, secure and regulate digitalised and electronic payments, and ensure both consumers and the trade itself are safeguarded. At the same time, physical money is one of the most universally acceptable forms of value sharing that we have. After all, when you misplace your bitcoin, you can’t look down the back of the couch.”

Contrasting routes

This year has already seen the European Union (EU) step up moves to limit cash transactions across the region, by introducing a ban on anonymous cash exchanges over a certain value. The declared motive is to prevent illegal activities. It follows the announcement last May by the European Central Bank (ECB) that it would no longer produce the €500 note because of concerns that the higher-denomination notes could facilitate illegal activities.

India has taken a more sudden and direct move towards the cashless society. Last November, prime minister Narendra Modi removed 86% of his country’s currency from circulation by announcing that all 500 rupee (US$7.60) and 1,000 rupee (INR) notes would cease to be legal tender. The sudden demonetisation was justified as abid to curb tax evasion, corruption and shut down the black money economy.

“The cashless society will really flush out the black money out of the economy and bring it back into the legitimate economy, so it’s a good thing.” says Amit Dua, executive vice president of SunTec Business Solutions.

“Innovation in India is huge. They’ve taken the whole pain of the know-your-customer (KYC) regime out of the system by allowing the Aadhaar (the financial social security number for 1.3bn Indians) which is all linked to the fingerprint of the individuals. It’s the largest database in the world now; 900m of the 1.3bn were issued an Aadhaar card, with fingerprint tagging, so if they want to open up a bank account all they need is their Aadhaar card and fingerprint, and it opens the account instantly.”

The Nordic region countries are also leaders in the race towards a cashless society. Denmark’s government has attempted to accelerate the trend; for instance proposing that retailers should no longer be obliged to accept cash payments.

Neighbours Norway and Sweden are also contenders to be first. “Sweden is a highly-digitalised society and we’ve been first for a lot of things,” says Ollie Zetterberg, chief executive officer (CEO) of the investment promotion agency Stockholm Business Region. “We’ve been quite early with technology. What’s happening now in the past decade is that there are a lot of new companies and fintech is emerging.”

“There are a lot of technologies that make it easy to live without cash. Now all shops are accepting credits card. If you look to the future, plastic cards are also going to disappear as there will be new and existing methods such as payments with mobiles and smart devices.”

“Yet apart from all of this, there will still be transactions with cash going on as in some circumstances people will have to use it. For example, in Sweden there are rural areas where your connection for your mobile isn’t that good, and then that creates a need for cash if you need to buy something. But, all the payment systems are about trust.”

Ultimately, the benefits of going cashless are greater speed and convenience for corporates and consumers, while for governments it promises fewer transactions that evade the radar and avoid tax. Whether small businesses and society’s unbanked are left behind on the journey remains to be seen.

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