An off topic start to a blog that will be about investment management, but working as a management consultant we do a lot of work in the retail banking sector so I decided to share my thoughts on the future of cash, and the overall strategy to make it superfluous.
Brainstorming around this idea I came up with the major obstacles that need to be overcome and looked at the best solutions for doing so. I see four major barriers preventing a comprehensive move to a ‘cashless’ society:
- Reliability
- Late adopters
- Security
- Cost
The first of these barriers is reliability. As Alex Knappfrom Forbes points out our debit and credit cards are reliant on electricity for the readers, telephone networks to be functioning, their bank to be operational, and the readers themselves to be functioning correctly. Very few of us would consider those to be 100% reliable and that isn’t something that looks like it will change over the next few years. In Africa mobile payments are touted as the way forward, and whilst they require less infrastructure than the card readers we are used to seeing they still require a working phone signal at the time of the transaction.
The second factor: Technophobia is naturally being addressed simply through immersion and familiarity, however there will always be plenty of late adopters that need a bit of extra encouragement to cross the finishing line. This is likely to be addressed by a government rather than the banks. South Korea have led the way by giving preferential VAT rates to non-cash transactions. The government has something to gain from pushing us towards electronic transactions – lower tax avoidance.
Another factor is security. In Britain we’re a little bit more security conscious than our American cousins, who have already readily begun adopting touchcard technology. We are happy to use Oyster cards that act as credit cards, but give someone access to our bank account and you’ve crossed an invisible line. The way to address this is either by limiting transaction amounts or the balance available on a card at any given moment
Finally we have cost. For large businesses such as national supermarkets, they welcome cards and don’t enjoy handling cash. It costs them money to employ people to collect the cash from each of their tills, re-stock them with a standard amount of change ready for the next day’s trading, securely transfer their assets to the bank. Small start-up shops have the opposite problem though. By default they have to accept cash and you see many small business limiting the cards they accept as they can't really afford to pay a transaction fee on every other sale. The industry average transaction fee is 1.9pc. If the banks want to complete the move away from cash then they need to encourage small business where margins are tight to start with electronic payment collection rather than fee-free physical payment.
I believe a solution to most of these issues requires an intermediary technology. We’ve recently seen developments such as square mobile payments that allow users to read cards but this still relies on a phone connection to work. A ‘cash card’ that is not directly connected to bank accounts but allows users to top it up (similar to an Oyster card) seems like a logical step to fill this void. Combine this with a simple interface, capped transaction amounts, and a simpler 'batch' transaction messaging system that is chearper to maintain (resulting in lower fees). Both Barclaycard and Visa have experimented with this technology but it hasn’t caught on yet. However it is only a matter of time before we swap our coins and notes for plastic with chips.
