De­mon­eti­sa­tion is gain­ing trac­tion around the world, but are we truly ready to let go of phys­i­cal cur­rency?

De­mon­eti­sa­tion is gain­ing trac­tion around the world, but are we truly ready to let go of phys­i­cal cur­rency?

Norway-Asia Business Review - - Contents - HENRI VIIRALT

Elec­tronic and dig­i­tal trans­ac­tions are fast gain­ing trac­tion and sur­pass­ing cash as the pre­ferred medium of trans­ac­tions in many cor­ners of the world. Con­sult­ing firm Capgem­ini re­cently pro­jected that elec­tronic pay­ments will grow 11% per an­num be­tween 2015 and 2020 while Statista, an on­line busi­ness in­tel­li­gence por­tal ex­pects the to­tal trans­ac­tion value in dig­i­tal pay­ments to de­liver an an­nual growth rate of 14.8% be­tween 2017-2021 world­wide. The pace at which coun­tries are mov­ing away from cash is, how­ever, hap­pen­ing at vary­ing paces around the world.

Ac­cord­ing to the Fed­eral Re­serve’s most re­cent sur­vey of pay­ment op­tions, Amer­i­can con­sumers used cash in 32% of all re­tail trans­ac­tions in 2015, down from 40% just three years prior. In a 2016 sur­vey, pay­ment pro­ces­sor TSYS asked over 1,000 US con­sumers which pay­ment form they pre­fer. 40% chose credit cards, while 35% se­lected debit cards, and only 11% spec­i­fied a pref­er­ence for us­ing cash.

China is one of the fron­trun­ners in adopt­ing dig­i­tal pay­ment sys­tems, where the likes of Ali­pay and WeChat Pay have seen mas­sive up­take in re­cent years, and only 25% of re­spon­ders to PayPal’s re­cent APAC re­port in­di­cated they pre­ferred us­ing cash for trans­ac­tions.

Other places in Asia are lag­ging far be­hind. The same PayPal re­port re­vealed that more that 70% of the re­spon­dents in In­dia, Philip­pines and In­done­sia use cash most of­ten. Even fi­nan­cial hubs Hong Kong and Sin­ga­pore say 44% and 43% re­spec­tively would rather use phys­i­cal cur­rency.

Per­haps quite sur­pris­ingly, So­ma­liland may be­come the first coun­try in the world where cash will go ex­tinct. Although no of­fi­cial sta­tis­tics ex­ist, a lack of in­ter­na­tional in­vest­ment has en­abled So­ma­liland to nur­ture, from the ground up, a lo­cally unique and broadly suc­cess­ful mo­bile pay­ment ecosys­tem.

Ac­cord­ing to a BBC re­port­ing the, “use of mo­bile pay­ments has in­creased from around 10 to 20% a year ago to nearer 50% now, the tech­nol­ogy is fast be­com­ing the pre­ferred way to make trans­ac­tions in tiny So­ma­liland, a coun­try with a mi­nus­cule econ­omy and where camel is the largest ex­port. In So­ma­liland, some em­ploy­ers have even be­gan pay­ing through mo­bile.”

In 2009, So­ma­liland’s largest mo­bile net­work op­er­a­tor, Te­le­som, rolled out their mo­bile pay­ment sys­tem, Zaad. It al­lows for trans­fer, re­ceiv­ing and de­posit­ing, and it is used for pay­ing for any­thing from gro­ceries to util­i­ties and rent. In So­ma­liland, there are no in­ter­na­tional com­mer­cial banks op­er­at­ing, be­cause of the lack of recog­ni­tion as an in­de­pen­dent coun­try.

In 2013, So­ma­lilan­ders car­ried out 30 ZAAD trans­ac­tions per month on av­er­age, com­pared to the global av­er­age of 8.5 trans­ac­tions, ac­cord­ing to GSMA. What sets ZAAD apart from other mo­bile pay­ment ser­vices and the suc­cess be­hind its me­te­oric growth is that Te­le­som doesn’t charge ser­vice fees – in­stead ZAAD prof­its from dif­fer­ent ser­vices, such as air­time recharge.

In Europe, all eyes are cur­rently on Swe­den, where barely 1% of the value of all pay­ments made in 2016, used phys­i­cal cur­rency, com­pared to around 7% across

the EU and US. Ac­cord­ing to Sveriges Riks­bank, Swe­den’s cen­tral bank, cash is now used in less than 20% of trans­ac­tions in stores – down from 39% five years prior.

Swe­den is con­sid­ered a hot­bed of in­no­va­tive star­tups and en­trepreneur­ship, so it is nat­u­ral that Swedes are em­brac­ing dig­i­tal pay­ment sys­tems. ‘We don’t ac­cept cash’ signs are be­com­ing com­mon­place in Stock­holm, and coins and ban­knotes have been banned on buses for sev­eral years, af­ter con­cerns for the driv­ers’ safety had been raised by the unions.

“In gen­eral, con­sumers are very in­ter­ested in new tech­nolo­gies, so we’re quite early to adopt [them],” ex­plains Nik­las Arvids­son, a pro­fes­sor at Stock­holm’s Royal In­sti­tute of Tech­nol­ogy in an in­ter­view with BBC.

This is partly down to in­fra­struc­ture (Swe­den is among the most con­nected coun­tries in the EU); a rel­a­tively small pop­u­la­tion that is an ideal test-bed for in­no­va­tions; and the coun­try’s his­tor­i­cally low cor­rup­tion lev­els, he ar­gues.

“Swedes tend to trust banks, we trust in­sti­tu­tions... peo­ple are not afraid of the sort-of ‘Big Brother’ is­sues or fraud con­nected to elec­tronic pay­ment.”

Swe­den’s cen­tral bank is cur­rently ex­plor­ing the vi­a­bil­ity and ne­ces­sity of in­tro­duc­ing a dig­i­tal cur­rency, the so­called e-krona, to com­ple­ment other pay­ment op­tions. The op­po­nents ar­gue that this trend of go­ing cash­less could ul­ti­mately make so­ci­ety more vul­ner­a­ble. They claim that the pay­ment mar­ket would be con­cen­trated among a small group of pri­vate par­tic­i­pants. The claims are sim­i­lar to crit­i­cism against Te­le­som in So­ma­liland where in­ter­na­tional watch­dogs warn of the po­ten­tial to let tele­coms run amok with lit­tle to no reper­cus­sions due to the lack of trans­parency and over­sight.

Ac­cord­ing to McKin­sey Global In­sti­tute, dig­i­tal fi­nance could pro­vide an ad­di­tional USD 2.1 tril­lion of loans to in­di­vid­u­als and small busi­nesses. Ad­di­tion­ally, mov­ing to dig­i­tal pay­ment sys­tems is ex­pected to po­ten­tially save around USD 400 bil­lion in an­nual ser­vic­ing fees glob­ally.

Tax eva­sion is an­other key area that would see in­creased trans­parency to trans­ac­tions, which would help gov­ern­ments bet­ter track and an­a­lyse cit­i­zens’ fi­nan­cial ac­tiv­i­ties - es­pe­cially with in­no­va­tive tech­nol­ogy like blockchain, where the ledger for all trans­ac­tions is avail­able for any­one to see at all times.

De­mon­eti­sa­tion in In­dia has also seen a pos­i­tive ef­fect on crime rates re­lated to fi­nan­cial mo­tives.

In Novem­ber 2016, In­dia’s De­fence Min­is­ter Manohar Par­rikar an­nounced that In­dia’s de­mon­eti­sa­tion move had seen the rate of crime in Mumbai and Delhi, in­clud­ing con­tract killings, mur­ders, ex­tor­tion and drug traf­fick­ing come down dras­ti­cally.

“The de­ci­sion taken by Prime Min­is­ter Naren­dra Modi is a his­toric one. The ‘ black money’, cor­rup­tion money, ter­ror fund­ing and drug money has re­ceived a jolt,” he said while ad­dress­ing a rally in Al­dona con­stituency in North Goa.

Aside from hav­ing a pos­i­tive im­pact on so­ci­ety, dig­i­tal pay­ment sys­tems tend to of­fer more se­cu­rity and con­ve­nience. The tech­no­log­i­cal ad­vances and ease of set­ting up dig­i­tal ac­counts means that there will be in­creased ac­cess to credit for peo­ple who do not fall in any bank­ing net­work. Be­tween 2011 and 2014, the unbanked pop­u­la­tion fell by 20%. Based on in­for­ma­tion from more than 140 coun­tries, there are still around 2 bil­lion peo­ple glob­ally that don’t have ac­cess to credit, ac­cord­ing to the World Bank’s Global Fi­nan­cial In­clu­sion data­base.

As with any com­plex topic, there are ob­vi­ously go­ing to be naysay­ers.

“Ban­ning cash is in­her­ently dis­crim­i­na­tory. It doesn’t dis­tin­guish be­tween le­git­i­mate and il­le­git­i­mate uses of paper money, as­sum­ing that any­one hold­ing large amounts of cash must be guilty of some­thing. This dis­ad­van­tages the clear ma­jor­ity of the pop­u­la­tion in or­der to pun­ish a mi­nor­ity.

More im­por­tantly, abol­ish­ing cash isn’t likely to solve the prob­lems it’s meant to ad­dress. Crim­i­nals and ter­ror­ists will sim­ply seek out al­ter­na­tive meth­ods of trans­fer­ring funds, even if they hap­pen to be more ex­pen­sive. Un­less taken un­awares, tax cheats can eas­ily con­vert their il­licit hoardings into gold, for­eign cur­rency or prop­erty. Even in In­dia, where Modi’s de­ci­sion came out of the blue, most of the out­stand­ing cur­rency was re­de­posited into bank ac­counts with­out pro­vid­ing the pre­dicted in­crease in tax col­lec­tions,” writes Satya­jit Das in a re­cent Bloomberg ar­ti­cle.

Africa, Latin Amer­ica and emerg­ing Asia-Pa­cific still rely heav­ily on hard cash. While dig­i­tal pay­ment meth­ods may hold sev­eral ad­van­tages for the poor and the un­der­banked, many poorer re­gions in the world still lack the nec­es­sary tech­no­log­i­cal in­fra­struc­ture to make this a re­al­ity.

It seems the con­sen­sus is that cash is on the way out, but in the in­terim, the pros and cons of de­mon­eti­sa­tion should be ex­plored fur­ther. In the end, though, it is very likely that the fu­ture of money will not be de­ter­mined by pol­i­cy­mak­ers, but rather the fin­tech in­dus­try’s suc­cesses in cut­ting out the mid­dle­men and low­er­ing ser­vice fees, all the while mak­ing it eas­ier than ever for us to pay for our lunch or morn­ing cof­fee with­out hav­ing to reach for our wal­lets.



Above left: Thai­land's 7-Eleven al­lows cash­less pay­ment through TrueMoney Wal­let, an app de­vel­oped by C.P. All. On­line shop­ping and cash­less shop­ping at re­tail stores in Asia is quickly catch­ing up with the west­ern world.

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