Written by [Paul Makin] I am personally of the view that much of our thinking about cash, and the move to a cashless society, is shaped by our personal experiences; let’s face it, most of us lead comfortable lives, and that can often lead to a blinkered outlook. And I’m not just referring to consultants here, but the whole financial community.
So I’d like to present an alternative viewpoint, based on some recent work we’ve been doing around mobile money. In less well off areas all over the UK, it’s very easy to be a mile, or even, in more rural areas, 10 miles away from a bank-owned ATM. Or a bank. Many so-called ‘local shopping centres’ have become deserts, populated only by convenience stores, betting shops, bars and pharmacies. But local people – even poor people – still want access to cash, since that’s the medium they are most comfortable with in managing their finances.
As is well known, a number of independent ATM operating companies have sprung up to service this market, with a radically different business model: They rent an ATM to a small corner shop, for a relatively low monthly fee. Instead of expensive visits from men in security vans with cash to top-up the ATM, the retailer is responsible for keeping it full. Instead of free cash withdrawals, the customer is charged per transaction (anything up to £3, depending on local competition), with the fee being shared between the retailer and the ATM operator. To use the ATM, people have to come into the shop. They are not withdrawing £300; more like under £50, or even £20. In view of the charges, this is economic madness, but remember it’s always the poor in any country that pay most for financial services.
ATM users will spend some of the cash in the shop. Some passers-by will come into the shop specifically to use the ATM, and buy something whilst they’re there on impulse, so the ATM drives up turnover. Some notes that are taken in the shop – both from the ATM and brought in from outside by customers – are recycled from the till to the ATM. The rest are used to pay staff (and the shop owner) – an opportunity to avoid/evade tax – and to buy stock. Notes are rarely banked. The ATM also operates as an overnight safe. An individual banknote might go around the loop several times before leaving the shop. The shop owner never has to pay to deposit cash at the bank (though he might have to pay for coins for change). He might need to top-up his ecosystem with cash from his bank account (which has been credited every time a customer withdraws cash from the ATM); he does this by withdrawing banknotes from a bank ATM, probably for free. So, far from being a cost, as is often thought to be the case, bank notes are actually a source of additional profit/reduced costs for the shop owner, in a variety of legal and less-than-legal ways. Of course, this only works if the shop is profitable. But that applies to a lot of things.
In view of the transaction costs, moves to alternatives to cash may well be desirable for customers in these areas, but acceptance will always be difficult when cash is contributing to the profitability of a shop, and alternatives would instead impose additional costs.
[Dave Birch] Paul’s observations illustrate perfectly the difference between the individual private costs of a payment mechanism and the total social cost of a payment mechanism.
These are personal opinions and should not be misunderstood as representing the opinions of
Consult Hyperion or any of its clients or suppliers
