Today there is widespread speculation as to which new financial technology will disrupt cash. Our understanding of the past and future of payments, however, is characterised through an antagonism between cash and cashless systems. This apparent contradiction suggests that the future of retail payments is a complex interplay of forces deeply rooted in consumer preferences, geographic and cultural elements, as well as government legislation; which together diminish the likelihood of realising the potential of any broad scope futuristic vision.
Introduction – A Traditional Paradox
M-Pesa in Kenya, Apple Pay, Bitcoin, WeChat and potential applications of blockchain technology are witness to the increasing interest in digital retail payments around the world. Industry has coined the term “fintech” to describe start-up businesses focusing on this area in places as far afield as London, San Francisco, Tel Aviv and Mexico City. Numerous research documents have been produced while exploring, evaluating and analysing the past and future of payment systems. Journalists also cover these developments regularly in mass media while asking questions such as: how close are we really to a cashless economy? How near is a transition to a society with no material money?
But for the frustration of all that great technology out there, people are not embracing it because, for the most part, cash and plastic work well to solve most small-value, retail, on-the-spot transactions. Journalists also forget to consider that ideas of cashless are long lived,1 and dated to the early days of computers in banking in the 1950s and 1960s.2 Yet in spite of the recent innovative spur, we often find that choices for cashless payments are almost as diverse as human preferences. Evidence also suggests there is little consensus on how a cashless economy should look like – as every stakeholder wants their preferred solution to dominate the payments ecosystem and the vast majority of these propositions are mutually exclusive. To explain this conundrum, let us reverse the question and explore how would a world without digital payments look like: Could today’s society function with no digital transactions? How would people interact if deprived of payment cards and Points of Sale (POSs) terminals?
We don’t really need to speculate into a dystopian future in the realm of the “Day After Tomorrow”, “In Time” or any other science fiction movie to explore these questions. Banknotes and coins are prevalent subsequents to natural disasters such as flooding in the south of the USA or earthquakes in Italy. In spite of their increasing regularity and emerging evidence of being man-made, we tend to think of these events as exceptions as they associate with a total collapse of the infrastructure that supports everyday life and not only those relating to the pipelines and highways for digital retail payments.
But can we expect the same during what we deem to be normal times? Based on recent events in Europe such as the crises in Greece and Cyprus, it would seem that a society facing adversity turns towards cash, gifts, favours, and barter.3 Consider that as the Greek and Cypriot crises became acute, long queues of people formed in bank branches and ATMs. The existing “bricks and mortar” infrastructure was unable to meet the demand for withdrawals while shortages of coins and banknotes quickly led to a severe contraction in transaction volume. Piles of unprocessed personal cheques accumulated as bank staff were unable to cope with the workload – at the same time, banks’ operational costs grew rapidly. Soon after, retailers and individual market traders stopped accepting personal cheques, employees were reluctant to accept direct to account payment of salaries and this eventually brought all economic activity into a standstill. Meanwhile, the inability to make cross-border payments kept cargos of livestock and containers trapped at shipping docks. Soon after, people observed shortages in essential goods such as medicines and petrol. The spur in the demand for cash also resulted in people hoarding banknotes at home for future spending, aggravating their disappearance from the overall economy. In turn, and to prevent a wider economic collapse, central authorities kept extending the duration of capital controls.
In short, events recorded during the recent banking-system shutdowns in Greece and Cyprus left people in both countries subsisting solely on ATMs and cash payments.4 In both occasions, it became clear that modern society was unable to survive for too long without digital payments. But it is also paradoxical that during those times of crisis, the lack of digital systems led to the disappearance of cash. Of course, central banks could have abandoned the euro, printed increasing numbers of drachmas and Cypriot pounds while the subsequent hyperinflation render these worthless – as is the case in some African countries like Zimbabwe and Somalia. Hence, it would seem that digital payment systems have become not only vital for today’s economy, world trade and society, as they assure a steady circulation of money; but digital payments also reinforce the permanence of banknotes and coins. This apparent paradox is not unique. As we explain below, the payments ecosystem is full of contradictions where people select a payment method as a matter of preference, taste, accessibility, government policy, convenience and transaction patterns.
Readiness and Culture
In a forthcoming edited book titled The Book of Payments: Historical and Contemporary Views on the Cashless Economy,5 academics and industry specialists from around the world discussed how, ahead of their time, many cashless technologies failed to perform because they were introduced before people were ready for them. Among other reasons there was a lack of market interest, legislation and infrastructure; poor corporate strategy; even fear and uncertainty in the adoption of new technologies. Failure, in turn, cultivated uncertainty around the technologies that followed but at the same time, these failures were disregarded as inconsequential and actually reinforced the idea that a cashless economy was possible. This view was further fuelled by innovations in the cashless spectrum (such as credit and debit cards), which grew alongside the continuing use of cash.
While cashless payments increased, the demand for cash also increased.6 At the time of writing, cash in circulation is rising in some developing countries, as well as in Canada, the Eurozone, Japan and the United States.7 In a parallel development, China and India (followed by the Middle East and some African countries) are today’s growth markets for manufacturers of automated teller machines (ATMs),8 suggesting high use of banknotes in the everyday life of people in these countries. In the USA transactions under $50 are still chiefly solved in cash.9 In sharp contrast, cash has fallen out of favour in Scandinavian countries, Australia, the Netherlands and the UK. Journalists report that the Swedish society shows a high tendency to cashless transactions as retailers and customers overwhelmingly pay with plastic or mobile phone apps. Similarly, there are reports that in the Netherlands cafes and even supermarkets no longer accept cash.10 But in an apparent contradiction, in many of these countries, banknotes and coins are more than simply a method to fulfill an on-the-spot transaction, numeral or store of value as economists’ conceptions often suggest. Banknotes and coins, for instance, play an important social role such as that of the tooth fairy, dressing a bride at her wedding reception and teaching budgeting to children.
Demographics also offer other payments paradox. For instance, recent studies suggest that 72 percent of “Millennials” (ages 18-34) use their mobile devices to access financial services, as opposed to “Generation X” members (between 35 and 50 years old) and “Baby Boomers” (ages 52-70) with rates at 50 percent and 19 percent respectively.11 In other words, a teenager will easily register his/her fingerprint to make a payment through his/her mobile wallet. Mobile payments are indeed successful in some African countries, such as Kenya and Botswana, where there has been little investment retail bank infrastructure but have not been as popular in countries like South Africa, that have a well functioning banking system. Meanwhile the mobile app WeChat in China counts 650m users and is used to send both RMB and even cryptocurrencies between users. But note that, as mentioned, China is one of the leading growth markets for ATMs (where, by the way, the same device performs hundreds of different types of transactions while in Europe and North America is limited to distributing cash, balance enquires and mobile phone top ups).
Other research has found that, a Baby Boomer will be likely to interact with an ATM. Good news for Baby Boomers as predictions suggests that ATMs will increase in volume and importance over the next several years; and are expected to shift away from a purely transactional experience to a center of advice, learning and consultation while the role of the branch will continue.12 In a more futuristic sense, China already boasts e-banking processes where accounts can be set up in a minute with just a mobile phone number, national ID number and a selfie.13
But a more ecumenical view, leads to an interesting finding. In countries with an aging population, Baby Boomers comprise proportionally the largest population group. In Australia, for instance, although the percentage of Baby Boomers going cashless is lower than other demographics, they control a third of the nation’s wealth. In addition, they spend more than all other age groups combined and they drive innovation and technology in the Australian economy.14
Some governments have taken the lead in discouraging the use of cash while others have imposed cashless means of payments upon societies. For example, to limit tax evasion, the Greek government recently introduced a system where taxpayers have to spend up to a certain amount of their incomes via bank and card transactions in order to qualify for an annual tax-free exemption.15 In other words, the Greek government is making both supply and demand dependent on cashless systems and access to trade is subject to imperatives. At the same time, countries such as France and Italy have made cash transactions over €1,000 illegal,16 while the European Central Bank has discontinued the production of €500 notes.17
Another example is Chile where cashless technologies such as mobile payments are used to promote financial inclusion to populations that hardly have access to financial services. Using similar technologies, India attempts to limit its $460 billion a year unrecorded transactions and unbanked savings (transactions that by themselves have a bigger GDP than that of Argentina), also known as black, grey, dual, hidden or parallel economy, through mobile banking and a growing private network made up of 140,000 private business and public sector bank correspondents.
Another contrast has to do with the use of personal cheques. As far back as the 1950s, there was a clear necessity to replace the increasing use and associated costs of paper cheques with electronic means.18 Today, the use of cheques is in sharp decline – but not everywhere. While the use of cheques in Australia and the UK is quaint and volume insignificant; in Ireland, India, France and North America the use of cheques is regular and widespread.19 Interestingly, there is a higher recorded proportion of fraud within the use of cheques than other forms of client-present transactions. A European Central Bank (ECB) study suggested that a processing paper cheques amounts to approximately €3.55 when all costs are included – a very large sum when compared with the fractional cost of processing ATM, electronic and mobile payments (where the cost of client-not-present fraud can be much higher).20
Nevertheless, the debate around the use of personal cheques shows how the only form of consensus around the idea of a cashless economy is getting rid of paper, plastic and other forms of materiality within retail payments.
Conclusion – Now You See Me, Now You Don’t …
The questions “how close are we really to a cashless economy” and “how near is a transition to a society with no material money” express an antagonism; a dualism that implies two opposing alternatives: cash or cashless. It is a rather dialectic dichotomy which is neither indicative of reality, nor an accurate representation of the historical analogies in the field of digital payments. In the next several years, it would be impossible for either cash or cashless systems to stand on their own.
But here is the conundrum for the future. On the one hand, individuals are increasingly paying for goods and services through cashless means such as contactless cards and electronic banking. Mobile payments have yet to make their mark, specially as malware moves to the mobile/tablet space and people learn how to deal with it. On the other hand, banknotes, coins and payment cards are still popular and their use is growing within small value transactions. Cash is convenient as a medium of exchange; easy to handle, anonymous, reliable and widely accepted. Overall, the cash(less) dualism often misses the ambiguity and complex interplay that consumer preferences, geographic and cultural elements, as well as government legislation, often entail.
Featured image: People stand in a queue to use ATM cash machine of a bank in central Athens. Photo courtesy: AP Photo/Daniel Ochoa de Olza
About the Author
Bernardo Bátiz-Lazo is a professor of business history and bank management at Bangor University, Wales. His teaching and research interests include technological change and management practice in depositary financial institutions. Bátiz-Lazo is a fellow of the Royal Historical Society and runs a weekly report on research in payments and financial technology (http://nep.repec.org/nep-pay.html). Contact him at firstname.lastname@example.org or @BatizLazo.
Leonidas Efthymiou is a lecturer in Management and Strategy at Intercollege – UNICAF Online since 2010. He received his PhD from the University of Leicester in 2011 through an ethnographic study on workplace control and resistance. His PhD Thesis received the 2012 Best Dissertation award at the Academy of Management Meeting, held at Boston, Massachusetts. He is interested in a wide range of business phenomena, varying from service workers performing emotional, affective and aesthetic labour to cashless payments and the future of money. Contact him at email@example.com.
Reposted with permission.
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