Cash Vs Cashless:  The War has Just Begun 

Guillaume Lepecq
CEO, AGIS Consulting

In his recently published white paper ‘Cash Essentials,’ Guillaume Lepecq, a globally recognized expert in the subjects of payments and cash provided an in-depth analysis of the economic and social utility of banknotes and coins. We spoke to him to know the reason and agenda behind this war on cash led by e-payment service providers and the few European governments who believe in a cashless society

India is the largest producer and consumer of currency notes, next only to China. Currency continues to be the dominant means of payment with the banknotes in circulation (in value terms) placed at ₹14.3 trillion as of end March 2015.

According to Reserve Bank of India Annual Report 2015, the value of banknotes in circulation increased by 11.4 per cent to ₹14,289 billion as of March 2015 over the previous year. Further, the volume of banknotes in circulation increased by 8.1 per cent to 83.6 billion pieces over the same period.

Though in a country like India usage of cashless mechanisms can ensure that loopholes in public systems get plugged, and the proposed beneficiaries get to avail what is rightfully theirs.

We spoke to him to know the reason and agenda behind this war on cash led by e-payment service providers and few European governments who believe in a cashless society.

Cash is Universal

Electronic payments offer convenience and particularly for new channels including e-and m-commerce. But, they are in no way a substitute for cash.

They lack the universality of cash. Cash can be used by all, regardless of age, gender or financial situation. And because the same notes and coins are used by all, cash does not discriminate against users. This is why Uber accepts cash in India.

They depend on an infrastructure, which is subject to failures. On the other hand, cash works everywhere, anytime and for everyone. It is not subject to technological breakdowns or failures. This is also true in the case of severe floods, such as those that hit southern India during the last monsoon season.

The last and perhaps the most compelling reason is that cash connects people. In 2002, a group of OECD economists wrote in a forward-leaning paper called “The Future of Money,” that a proliferation of new payment methods could actually harm social dynamism by “further fragmenting and ghettoizing certain communities and regions.” The portrait of Mahatma Gandhi gracing the Indian banknotes is a powerful symbol and example of the social cohesion role of cash.

Interoperability Between Services and Countries 

Interoperability is an important element but it is not sufficient.

Cash can be used for a broad range of transactions: they can be used for low and high-value payments; they can be used across different channels such as face-to-face but they are also used for e-commerce transactions as we have seen with Uber. And they can be used between different parties: consumer-to-business, person-to-person etc.… It is a general-purpose instrument.

On the other hand, electronic payment instruments are increasingly specialized: dedicated to a specific channel, or a specific spending category. Cash will not be replaced by a single payment instrument.

Unlocking the True Potential of Mobile Money

While mobile payment systems, such as Kenya’s M-Pesa and South Africa’s SnapScan, are proliferating, the real technology powering Africa’s economic growth is cash. As GDP in Africa grows, so, too, does the banking system and the demand for banknotes.

It’s easy to overlook it, but cash is a technology itself. Banknotes are constantly being improved, whether with watermarks, metallic threads, color-shifting inks, or holograms. These improvements – and others like them – make cash a more durable, more secure and more efficient payment instrument. To be sure, M-Pesa—a mobile phone-based money transfer system—and similar services have been a positive development for payment systems in Africa, and has made Africa an exciting place for financial technology investment and development.

More than half of Kenyan adults have an M-Pesa account, and it is used for millions of transactions each year. Its rise over the last decade has coincided with a rapid expansion of traditional and mobile banking services in sub-Saharan Africa. According to the World Bank, 34 per cent of sub-Saharan Africans over age 15 had a bank account in 2014, up ten percentage points from 2011. And 12 per cent of adults in sub-Saharan Africa had a mobile money account in 2014, compared to just 2 per cent worldwide. Mobile money transactions in Sub-Saharan Africa hit $656 million in 2014, and could more than double to $1.3 billion in the next four years.

Digital payment systems won’t and shouldn’t go away. But these innovations contribute to the efficiency and widespread use of cash. M-Pesa is essentially a cash transfer system, enabling users to send cash across the country using a network of 60,000 agents.

The situation is not that different in India. According to an RBI report published in March and entitled Concept Paper on Card Acceptance Infrastructure, ATM withdrawals account for 90 per cent of the total volume of debit cards transactions and approximately 95 per cent of the total value. Between October 2013 and October 2015, the number of POS terminals increased by 28 per cent whereas the number of ATMs grew by around 43 per cent.

Millennials and Virtual Economy

I can’t speak for India, but in the US, millennials prefer cash.

Although they are most likely to adopt other payment tools, these tools have yet to replace traditional payment methods. In fact, 58 per cent of the 18 to 34 age group still prefer using cash for person-to-person (P2P) transactions and 45 per cent of them have acknowledged being more likely to pay with cash now than they were a few years ago.

Millennials are the age group that is most open to lending and borrowing money and when it comes to exchanging money with family and friends, they are more likely to rely on cash.

A Mix of Cash and Cashless Transactions

The drive towards cashless economies is driven by commercial banks and payment service providers rather than governments or central banks. In Sweden, for example, the exercise has been driven by the two major commercial banks, which are closing down ATMs and denying cash services at branches, making it more expensive and burdensome to get hold of cash. But recently the central bank has declared that these banks have gone too far and is calling for a debate in Parliament on the minimum level of cash services banks should offer.

Our research shows that cash is more than just a payment instrument - it is a store of value; it also plays a critical role in emergencies and when technology breaks down. For instance, on January 1 this year, the electronic payment system of the London Underground - what is popularly known as the Oyster Card - broke down and they had to let people use the Underground for free. But, what happens when a whole economy is on a cashless system? In Belgium, the entire card payment system broke down the day before Christmas, so those doing their last-minute Christmas shopping had to rely on cash payments exclusively. In fact, if you want examples of cash-less economies, you have Panama, which has no central bank and uses the US dollar as a currency. Or Zimbabwe, which ceased printing banknotes in 2009 because they had lost value following an extended period of hyperinflation!

To Conclude…

While cash remains the preferred choice for people all over, there has been a significant build-up in the payments infrastructure. Last year, the finance minister, in his budget speech, talked about the idea of making India a cashless society, with one-point agenda of curbing the flow of black money. Going cashless would mean that our financial data would be on the servers for which the minimum requirements would be a bank account, a device, electricity and connectivity. Jan-Dhan Yojana is bringing people under the financial ambit of banks but the required infrastructure for providing uninterrupted service round the clock has to be ensured before India truly turns cashless. For now, we’re only good enough for cashless transactions, and not a cashless society.