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They said cash is costly. It didn’t work with merchants.

They launched one mobile wallet after the other to drive cashless behavior. It didn’t work with consumers.

They scared people away from currency notes, claiming they contain all kinds of germs, bacteria and viruses. It didn’t work with anyone.

  1. 85% of world’s transactions happen in cash. Source: Business Insider
  2. rkc-fiUS currency in circulation is growing, according to the chart on the right from The Wall Street Journal
  3. There are mile-long queues of people waiting to withdraw cash from ATMs (Source: Finextra). Ironically, mobile apps were supposed to eliminate cash but many of them are now facilitating cash withdrawals from ATMs! The slew of such apps launched in the last 2-3 months makes me wonder if “cardless ATM cash withdrawal” will trigger the next fintech killer app
  4. For Millennials, cash is still king. Source: Financial Brand
  5. And, according to PayPal CEO Dan Schulman, cash will never die.

Where did it all go wrong?

I tend to believe that the “War on Cash” brigade has caused the current state of affairs by:

  1. Being self-serving while promoting cashless payments. As FORTUNE rightly observes in its article about MasterCard, “(CEO) Banga espousing the benefits of going cashless is a little bit like Howard Schultz saying everyone should drink coffee – after all, this is a company that makes money on transaction fees every time someone uses credit instead of cash”
  2. Refusing to acknowledge that cash is still the only truly realtime retail payment method in the world (Source: DB Research). Cash is also the only form of payment that accomplishes transfer of value between payor and payee without any dependency on bank, hardware, software, network, battery, and other third parties
  3. Naively linking all cash use with drugs and tax evasion, thereby casting aspersions on the legitimacy of several industries. This puts off etailers, QSRs and many other industries that carry out a lot of genuine cash transactions and pay their taxes like any POS and mobile wallet wielding member of the aforementioned brigade
  4. Barking up the wrong tree that cash is costly. I haven’t come across a single merchant who refuses cash but accepts cards. A bunch of retailers in USA have sued banks over interchange fees, saying it’s their second highest cost after healthcare. So it’s silly to keep claiming that cash is costlier than cards.

Governments and regulators have tried to reduce cash by mandating lower interchange fees and EFT gateway charges. However:

  1. There’s no evidence from countries where interchange has already been capped that merchants have passed on the benefit of lower card processing charges to consumers by way of lower prices
  2. When regulators repealed the “no-surcharge” rule, merchants have been known to slap extra charges of as much as 7.5% for accepting cards although their card processing costs never exceeded 2.5%
  3. Lowering interchange fees will disincent banks from increasing the spread of POS terminals, which will in turn restrict card acceptance.

So, I doubt if regulatory intervention will work, either.

However, all is not lost.

Finserv can kill cash in many areas by reorienting its approach. It should stop being inward-looking and start focusing on the needs and concerns of payors and payees, who’re the two most important stakeholders of a payment transaction. I can think of the following tactics for doing this:

  • Relax two factor authentication for online payments below a certain threshold. This will reduce the friction of online payments and eliminate the risk of failed payments, both of which will encourage many people – including me – to go back to using credit cards online
  • Popularize the “card on delivery” option to coax ecommerce customers to pay by cards even if they’ve opted for cash on delivery at the time of making the purchase. As of now, very few etailers support this option. Even the ones that do support it use flaky smartphone-based POS terminals on which every other transaction fails. If you’re wondering why this involves finserv, merchants have complained that banks are charging exorbitant rates for supplying GPRS POS terminals.

  • Reduce hidden cost of electronic payments. By eliminating CICO costs described in my blog post Cash in Hand Is Worth More Than Card In Bush, merchants like cab drivers will stop throwing temper tantrums when their customers proffer their credit cards for payment
  • Provide enhanced remittance information along with electronic fund transfers so that payors are sure that their payments will reach the right beneficiary and that payees will receive enough information to be able to match their receipts with the true purpose of payments. Payments UK’s “Enhanced Data with Payments” is a great initiative in this direction

mobile-payment

  • Stimulate credit card use. I know many people who don’t use their credit cards. While some of the reasons for their behavior are genuine, most of them are rooted in misconception e.g. credit card means debt. Banks can get fencesitters among their cardholder base to shed their inhibitions and start using their credit cards more frequently. There are many ways of doing this. I’ll describe them in a separate blog post but suffice to mention for now that these include frictionless reward redemption, inherently superior fraud protection, better accounting, and so on.

While I doubt if cash will ever disappear totally – even after 190 years – I strongly believe that the above tactics can be the low hanging fruits for replacing cash by electronic payments. Executing them will call for changes in products, processes and mindsets of banks and fintechs alike, as well as cost money. But I’m sure banks will be able to realize a decent return on their investments by way of greater interchange revenues and reduced cash handling costs at their end when people move to cashless methods of payment.

Ketharaman Swaminathan On April - 1 - 2016

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BFSI, CX, Product, Uncategorized

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  • sketharaman
  • sketharaman

    UPDATE DATED 16-JUN-2016:

    Re. point # 2 in the post about “naively inking all cash use with drugs and tax evasion”, on a recent visit to my bank branch, I noticed that the longest queue was the one in front of the cash pay in counter. This is where people hand over cash to be deposited into their bank accounts. Going by the conventional wisdom that people use cash to evade taxes, these are exactly the people who should stay miles away from banks. On the contrary, they they queue up in front of a bank teller. This only reinforces my point that there are many legitimate businesses that generate cash legitimately and have all the contention to declare the cash to official channels. And exposes just how naive those who link all cash use with drugs and tax evasion are.

  • sketharaman

    UPDATE DATED 04-OCT-2016:

    “The amount of cash circulating in the UK economy is twice the level of a decade ago, says the Bank of England”
    https://www.finextra.com/news/fullstory.aspx?newsitemid=29537

  • sketharaman

    UPDATE DATED 24-NOV-2016:

    “Euro cash in circulation grew to EUR 1.1 trillion by Q3 2016, three times as much as in 2003. Also, cash grew faster than GDP at current prices.”
    Source: “Cash, freedom and crime: Use and impact of cash in a world going digital”, DB Research, http://www.dbresearch.com/PROD/DBR_INTERNET_EN-PROD/PROD0000000000427044/Cash,_freedom_and_crime%3A_Use_and_impact_of_cash_in.pdf

  • sketharaman

    UPDATE DATED 9-MAR-2017:

    Cash is still the most popular retail payment method in USA.

    ==========
    http://www.pymnts.com/amazon-entertainment/2017/united-states-cash-usage/

    Even as credit and debit cards become more popular and new payment methods like mobile wallets enter the scene, the world’s largest economy still relies on cash more than any other payment method.

    According to research revealed inside the new PYMNTS.com Global Cash Index™ United States Analysis, while there may be a recent onslaught of payment cards, digital wallets and contactless payments, nothing has come close to replacing cash in the U.S.

    Cash usage has remained relatively steady in the States since 2003, ranging between 14.3 percent and 15.5 percent of the gross domestic product.

    ==========

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