There is no doubt that cash is an expensive convenience. Its anonymity offers the opportunity for tax avoidance and money laundering, both of which cost governments billions. The business costs of handling cash are escalating, too.
According to a recent study by analysts at McKinsey, the cost of cash to society is about €200 per person; European banks alone could save between €45bn and €90bn per year by eliminating cash from their systems. The costs include both the security and the labour involved in processing and transporting cash, maintaining automated teller machines (ATMs) and removing cash from circulation.
But handling money is what banks are about, and many see the provision of payment services through current accounts as a way of capturing customers who can then be sold additional, more profitable products. With this in mind, the banking industry in many developed economies has favoured cashless technologies that allow customers to make payments at point of sale terminals with credit or debit cards. By linking these card accounts to a bank account, the banks ensure that the customer is still firmly in their grasp.
Use of these cards has become popular as a replacement for the use of cheques on high value items, making payment service providers (PSPs) very wealthy. Visa, the largest retail electronic payment network in the world, posted income of $774m for the fourth quarter of 2010. But cards have not replaced the use of cash. According to the latest figures from the UK’s Payments Council, over 60 percent of payment transactions are still in cash, although this accounts for only 23 percent of retail payments by value.
The reason for the discrepancy is that cash is still used for low value purchases, such as the daily newspaper, a sandwich or the bus fare, where the cost of a credit or debit card transaction makes its use prohibitive. To address this end of the market, several banks and PSPs are introducing ‘contactless’ payment systems using NFC (near-field communication) technology. This involves a chip embedded in either a card or a mobile phone, which can be presented to within four centimetres of a reading device that will automatically deduct the funds. No user authorisation such as a signature or a PIN number is required, making the transaction simple and fast. Limits are currently in place restricting each transaction to below €15 and four transactions per day without authorisation to protect the customer from fraudulent use.
Despite heavy development and marketing investments on the part of the banks and their partners, however, these systems are not going to replace the use of cash overnight. While retailers and PSPs argue over who will bear the cost of installing the point of sale equipment (it is estimated that there are nearly 30 million point of sale locations in the world), mobile phone manufacturers are still busy developing the next generation phones that will accommodate the NFC chip.
In the meantime, demand is patchy. Customers in some regions are resisting the use of these systems due to concerns about security and the lack of a paper trail. In others, society is demanding rapid implementation to protect its citizens. Sweden’s unions, for example, have demanded the early introduction of cashless systems because they are fed up with the high levels of armed robbery targeting the movements of large amounts of cash around the city.
As momentum slowly gathers, the old problem of technology standardisation comes to the fore. With the major players all jockeying for position in what promises to be a lucrative market, retailers and customers will be faced with a confusing array of options. The city of Istanbul, which had little established payments infrastructure in place, has become a testing ground for cashless systems with no fewer than five different pilot projects running over the past five years. Each one has a different combination of bank, PSP, telco and technology provider participating. Clearly the will to move to cashless is there but working out the scheme details, building in security, negotiating profit shares and installing the infrastructure will all take time.
A different paradigm
Compare this to the developing world where huge segments of the population have never had access to a bank. In many rural areas bricks and mortar banking infrastructure does not exist, and the low incomes typical of the area mean that banks have frankly not seen any market potential. In Nigeria, where GNI averages £3 per day, it is estimated that 74 percent of the population have never used a bank; 40 percent of the municipalities in the Philippine islands do not have banks within their jurisdictions.
But what many people in these areas do have is mobile phones. “In Ghana,” says Bruno Akapa, from MTN Ghana, “less than ten percent of the population has access to a bank, but 50 percent have access to mobile telecommunications. We can build on that infrastructure to provide banking services to a much wider segment of the community.” MTN Ghana, a telecoms network provider, launched a service called Mobile Money in 2009 and now claims that 88 percent of the population has access to its service. The service allows mobile owners to store and transfer money, pay bills and purchase goods, without needing a bank account.
To the consternation of the banks, a number of non-bank entities are jumping in to a market they considered their own fiefdom. Telecommunications companies are in the forefront of offering mobile money solutions, while in many rural areas all across developing countries in Africa, Asia and South America, local shops are becoming agents for taking cash deposits and making payments against digital money transfers. Using this system, a young man working in Nairobi can send money via an SMS message from his mobile money account to his family in the country, safely and securely. The recipient of the message can take her phone to a local agent who will pay out the cash once the SMS has been properly validated.
Should the banks be worried? Many are. Despite a rapid increase in demand-driven schemes starting up around the developing world, some banks are turning to legislation in an attempt to resist this incursion into their traditional business activities. The Indian Reserve Bank, under pressure from internal banking institutions, has set out some stringent rules about how mobile banking should work that effectively excludes non-licensed participants. Within this protected environment, the banks are introducing their own mobile schemes but growth is slow compared to the telco-led initiatives in other countries.
Time for a new business model
“This supports my argument that the banks would be better off letting the telcos and PSP specialists deliver payment services and concentrating their efforts on creating other products to sell on the new platforms,” comments Dave Birch of Consult Hyperion.
For most European banks in normal years, Birch points out, payments account for around a third of income and 40 percent of costs. Strip out the payments and you increase the profitability of the bank. Payment services can then be handled by specialist organisations operating under payment institution rather than the more onerous credit institution licenses, giving them much lower cost burdens.
These specialist PSPs will also have the flexibility to handle the very low value transactions that many experts believe will drive the final push to a totally cash free society. Recent innovation has produced end-to-end transaction aggregation which reduces the per transaction cost by eliminating the need for per transaction reconciliation, posting or processing at any point in the value chain.
Once these facilities are in place, the market potential is huge. Forget the people buying a single apple or the daily newspaper: savvy marketers are eying the potential for monetising online content such as music, gaming and journalism. “Zynga, an online social game developer with 360 million active monthly users, is currently the second biggest merchant on PayPal, and that is all clocked up from low value payments to buy virtual goods within the game scenario,” notes Birch. “The market potential for low value transactions is vast.”
Mobile banking in less developed economies is also opening new markets, in addition to helping people with the basic necessities of life. In Haiti, an initiative that has the backing of the William and Melinda Gates Foundation and the US Agency for International Development is enabling residents to access the money needed to rebuild lives shattered by last year’s hurricane. Around the world in Senegal, people in outlying areas with no access to banks were able to use their mobile phones to send payment to satellite providers and watch the World Cup.
The most successful mobile money scheme to date is M-PESA, launched in Kenya in 2007, which today has an estimated 12 million users. A recent study has shown that the incomes in households with M-PESA users have increased between five and 30 percent and the banks are beginning to wake up to the opportunity this represents. Equity Bank Ltd., Kenya’s largest provider of small loans, has recently formed a partnership with Safricom to allow Kenyans to open bank accounts through M-PESA.
“This service has, [by September 2010], already led to something like 750,000 new accounts being opened,” notes Birch, “so it’s absolutely clear that mobile money provided by non-banks not only does not compete with banking services, it can actually turbocharge them.”