Have you ever thought to count how many coins and bills pass through your washing machine every year? You know, the €5 note scrunched into a pocket, the coins embedded deep into the corners… I have come up with a rough estimate that over the past 12 months, at least €115 that I know of has been washed and even tumble dried in my house (plus two iPods, but we won’t go into that… ok, let’s go into that, how hard can it be to empty out your pockets before you chuck your jeans in the wash?).
Which has led me to wonder why we still use cash. These days, with contactless, mobile and electronic payments becoming more prevalent and easy to use, is cash on its way out? Most of us still carry hefty purses or wallets with us as we head out the door. And most of us pay for small items, and some big items with bills and coins. But that does seem to be a generational instinct. Citibank recently did a survey asking about payment methods for small purchases. Over half of the over-50s but only 30% of the under-30s said cash.
Cash is comforting. Cash is convenient. Cash is reliable. But, the use of cash costs the US economy approximately $200 billion every year, according to a study from Tufts University, in ATM fees, security costs, handling time… Another report states that it costs UK businesses more than £17.8 billion per year just to handle cash. So it’s no wonder that the idea of no longer having to is attracting interest.
And as for its advantages, are they really that?
We think that cash is comforting. Yet almost $40 billion was stolen from banks in the US alone in 2011, and the Tufts study estimates that another $40 billion is stolen in cash from retail businesses annually. If we lose our wallet, we never expect to get it back with the cash still in it. Retail outlets spend upwards of $20 billion a year to protect their cash, and that doesn’t take into account the time spent in lines waiting to deposit lesser amounts. Comforting? And let’s not even think about the germs that passing cash can spread.
Is cash convenient? Its physical characteristic that people find convenient is actually one of its biggest drawbacks. You can only reliably exchange cash face-to-face. You’re at the restaurant, or the store, and you physically hand over your cash to the waiter or the check-out person. Counting out change takes time. Lugging around hefty purses or wallets full of coins is a nuisance. And its physicality makes cash simply not viable for the increasing percentage of household and business spending that is no longer done in person.
Is cash reliable? Counterfeiting of notes is a huge business. In 2011, $231 million in counterfeit cash was removed from circulation. We can assume a whole lot more wasn’t. If the medium were reliable, our stores and restaurants wouldn’t need to spend on fake note detection tools.
One big advantage of cash that is more difficult to argue with is its anonymity. A dollar bill does not care who is holding it. Electronic transfers leave a trail. I get that the right to privacy is important, and I can see some instances in which even non-criminals would want an above-the-board transaction to not be traceable, but is this the advantage that we should be focussing on? And, Bitcoin – to give one example – does protect the user’s identity, while at the same time leaving a verifiable trace.
Today, the growth of ecommerce and the increasing ease of electronic payments are reducing our dependence on physical bills and coins. While many ecommerce purchases here in Spain are paid for “cash on delivery”, as in the client hands cash to the delivery courier, that preference is declining, and is virtually unknown in other countries. Ecommerce purchases, on the whole, are paid for by electronic transfer.
E-payments are getting easier to use. I can now make App purchases on my phone with my thumbprint. I pay for my groceries by waving my credit card at a screen. E-payments are also getting cheaper. The high commission or transfer fees on the electronic transfer of small amounts made them relatively uneconomic. Now, with digital wallets and virtual currencies, the handling costs are very small. Electronic micropayments are now possible, and convenient.
A study recently released showed that cash payments in Denmark have fallen from 80% of total transactions in 1990 to just 25% in 2012. 40% of Danish adults hardly ever use cash, and the Danish government has announced its intention to allow retail establishments to refuse payments in physical currency, with the aim of reducing costs and boosting economic growth. Mastercard estimates that 60% of payments in Singapore, Netherlands, France, Sweden and Canada are done with non-cash methods. Card use in Iceland is the highest in the world, with almost 99% of private transactions being done on plastic.
Curiously enough, as the European economies improve, cash should become even less important. The two main user groups of cash today are the elderly, and low-income families who use cash as a budget management tool (when the jar is empty, it’s empty). Fewer families subsisting on marginal incomes, and more businesses being able to afford the (decreasing) cost of adapting will accelerate the transition. Non-cash transactions will get the double boost of higher transaction values (due to the economic recovery) and a higher percentage of transactions overall (due to increased adoption of electronic and mobile payments).
The impact of mobile
Mobile payments have for years been substituting cash in developing economies. Kenya, for example, sees 34% of its national payments and 66% of transaction volumes go through mobile phones. 22% of Bangladesh’s adult population use mobile payments. In December alone, a total of $7.5 billion was transacted globally through mobile money systems, and Forrester Research estimates that in-person mobile transactions will reach $34 billion annually by the end of the decade. That’s only in five years. That’s huge.
Smartphones and tables can also be used to accept credit card payments with a little device, called an mPOS terminal, which makes it much easier for small retailers and itinerant sellers to reduce their dependence on cash. In Stockholm, some unemployed people selling street magazines now accept electronic payments.
The entrance of new players
In Europe, the main providers of payment solutions have up until now been the traditional banks. Our online transfers are done through our banks, and contactless payments are so far controlled by the banks. Paypal only accounts for 20% of total online payments in Europe. Fintech startups and even the big Internet providers and tech companies are moving into this sector: Apple, Google and Facebook are just some of the names gearing up for a battle over our online and mobile wallets.
The EU directives on e-money and payment services have created a legal framework that regulates the payments sector and encourages innovation, in that the regulation increases consumer trust and thus makes it less risky to introduce a new idea. Payments are “hot”, according to venture capital and angel investors, and judging from the number of startups vying to make transactions easier.
And then there’s the role of crypto-currencies such as Bitcoin and Litecoin (just two examples, there are many), and the effect they will have on international payments. Although they are struggling to gain mass acceptance, it’s early days yet, but I believe that they will end up being an important part of the payments scene.
Yes, online banking and mobile transfers do have some element of risk. Smartphones with embedded wallets can be stolen, payment information can be hacked. But cash has considerable risks, too, such as the untraceable theft and counterfeiting that we’ve already talked about. And technological advances are reducing the threat of fraud in e-money. Secure servers and two-step verification are becoming the norm. The awareness of the need for password protection is becoming more prominent. Soon our phones will be able to biometrically verify that it is us who is asking for the transfer, by scanning your iris or mapping your voice.
True, criminals are ingenious, and there probably already is a hefty black market for false contact readers or mobile credit card scanners. But as they adapt, so do we, and security will continue to become easier and more reliable. Yes, there is some risk, but less, and decreasing.
As more outlets accept and encourage non-cash payments, more consumers will try them out. As more consumers are comfortable with the new payment mechanisms, more outlets will adapt. And the cycle will lead us all towards a more convenient but probably more fragmented payments scenario.
We’re not going cashless any time soon. But it will happen, most likely before my 12-year-old graduates from university. Personally, I’m not going to miss scrambling after dropped coins or unfolding wrinkled bank notes. I concede that, except for the having to carry it, cash is convenient. You hand some over, you get some back, no hassle. But e-money is becoming increasingly convenient, too. It will end up being very easy to use, from your phone or your watch or your fitness tracker. And it reduces cost and increases efficiency for the businesses that receive it, which allows for higher profit margins and/or lower prices for us.
Governments spending less on note printing and coin minting… Businesses saving on security and handling costs… Individuals having more streamlined wallets and more information on where the monthly budget went… All that sounds like a win-win idea to me. Could the replacement of cash end up being the main “disruption” of our era?