As I’m in Canada, I thought I might mention that a detailed investigation into the cost of payments at POS just released by the Bank of Canada shows (absolutely as I would have predicted given the scale and dynamics of the Canadian market) that
Debit cards are the least costly in terms of total resource costs, followed by credit cards, whereas cash is the most costly.
No surprise at all. What is surprising, however, is that the total cost of payments in the Canadian market is estimated at 0.78% of GDP (compared to 0.54% for Australia, which I would have e thought a reasonable comparison). I haven’t read every single page of the report but I suspect that the inefficiency must stem somewhat from the size of the country (distributing and collecting cash is expensive) and but mainly from much higher credit card use than in (say) the UK.
Me eating poutine in Montreal.
According to our Canadian cousins, cash only has the lowest cost to society for POS transactions below approximately $6, which means as far as I can see that it is irresponsible to produce banknotes above $10 since by doing so the central bank is making the economy less efficient. (I’m not familiar with their charter but this cannot be one of the goals.) It’s time for action.
The main point I wanted to make about the Canadian payment environment is how it illustrates the difference between incentives based on private costs compared to what is best for the economy. We cannot say what is the “best” payment mechanism since that varies by perspective. Indeed, as the report says:
If stakeholders make their payment choices based on their private costs alone, consumers would prefer to use credit cards, while retailers and financial institutions would prefer debit card payments.
But what we might say is that the best solution for society is the mechanism with the lowest total social cost, and that’s PIN debit (soon to be overtaken by credit push I expect). Hence that is what society should encourage. But it doesn’t: it allows a suboptimal payment system instead. The big winners with this arrangement are the credit card issuers because customer use credit cards to obtain rewards at the expense of other customers who are using debit cards and even cash. In Canada this results in unusually high credit card use because people just love their rewards, such as frequent flyer miles. These, incidentally, have turned into a huge business.
“Airlines are earning upwards of 50 percent of [income] from selling miles to a credit card company, which we believe is a great business to be in”
Scatchamagowza. Half? Seriously. Non-credit customers are subsidising a massive programme of wealth transfer to well-off people who like to fly a lot! I’m not complaining, by the way. I use my Amex card with frequent flyer rewards (well, Avios) all the time. And I’m clearly not the only Amex customer who prefers this kind of deal.
American Express says that Delta SkyMiles accounted for approximately 7 percent of its business last year and approximately 20 percent of its outstanding credit card loans as of the end of the year.
It’s amazing what a big business credit card miles have turned out to be. Every time that the person in front of me at the supermarket pays using cash or a debit card I feel like hugging them (I don’t, of course, because I’m English) and thanking them personally for their selfless contribution to my cashback, miles and Uber credits.
Well, this is interesting. On the very day of Consult Hyperion’s 20th (yes, 20th) annual Tomorrow’s Transactions Forum to discuss the future of secure electronic transactions and much besides what should fall through the internet tubes but the fifth annual “ING International Survey Mobile Banking 2017 – Cashless Society“, which surveyed nearly 15,000 people across 15 countries, and found that one in five (21%) people in Europe now rarely carries physical notes and coins, and a third (34%) would go completely cashless if given the choice.
Gin and contactless is my second favourite cocktail (after the Moscow Mule).
Like those 34%, I’d like to be given the choice, but there are still places that won’t accept cards (such as the Real Ale bar in Wembley Stadium) which is why I went to the gin bar instead (as shown above). But these are becoming fewer and farther between, and not only in London.
“Dr Michael Collins, assistant professor of Social Policy at the University College of Dublin, tried to live without cash during one month to see if Ireland could become cashless in a near future and follow the example of its Scandinavian neighbour. His investigation demonstrated that almost all transactions can be done without banknotes and coins, except for some small value transactions, such as a coffee in a train.”
Ha! Even on Southwest Trains you can pay using contactless cards or Apple Pay and, when the new Chinese owners take over later this year, I imagine that Alipay and WeChat will be on the menu too. When do we get to wave goodbye to cash in Woking then? Well, sadly no time soon because while the trains have contactless, the ticket machines don’t (and I shouldn’t have to go to ticket machines anyway, but that’s a different point). But in ten years? 20 years?
“Gala Casino used linear regression on cash usage data from 2004 to 2014, which saw a drop from 71% to 53%, and Payments UK predictions for 2024, to arrive at its guesstimate that 2043 will be the year in which the number of cash transactions reaches zero per cent.”
I would imagine the graph turns out to be show cash asymptotic to zero rather than zero, but while I’m not sure that the number of “cash” transactions will ever reach zero, because some people will always want to use some form of immediate and anonymous payment system, I am sure (as I told the BBC’s “Wake up to Money” chap when he called to invite me on this morning) that William Gibson’s words in “Count Zero” are prescient: “He had his cash money, but you couldn’t pay for food with that. It wasn’t actually illegal to have the stuff, it was just that nobody ever did anything legitimate with it”. By 2043? Sure. But rather than just let it happen, we really need to set a national policy about it.
“Reducing cash doesn’t mean big savings, but removing cash does, and without an actual national policy on this, the benefits will go to the middle classes at the expense of the poor. “
Therefore another vision for 2043 might be that cash becomes a class issue, where the middle classes never see cash from one week’s end to the next (except for the purpose of aiding and abetting tax evasion by paying the builder in £50s) but the underclass, trapped in cash, are excluded from the world of bank accounts and cards. This will be a good topic for discussion at this afternoon’s excellent expert panel on inclusion chaired by our CEO Neil McEvoy with Katie Evans (Money and Mental Health), Susie Lonie (who has years of experience in emerging markets), Elizabeth Duke from Carta Worldwide (who build pre-paid schemes for the unbanked) and our very own Paul Makin (the man who did the original feasibility study for M-PESA). Great stuff.
British Airways have instituted a new policy of annoying customers like me by making them pay for coffee. Although, to be fair, it was Marks & Spencer coffee and it was much nicer than the usual BA coffee. Naturally, as is the case for most forward-looking of retailers, they do not take cash, so I paid with one of the many cards about my person. As it now takes them ten times longer to serve the coffee, I took pity on the cabin crew and decided against my experiment of buying with contact, stripe, contactless and Apple Pay to see how the different media worked in the flight, and I just opted for a single stripe-based case study.
BA are not alone in opting out of the overheads, annoyances and inconveniences of the industrial age cash economy. Perry Kramer, vice president and practice lead at consultant Boston Retail Partners, contends that as many as four-fifths of (US, I presume) retailers are already “largely cashless”.
“Retailers don’t really want to be banks. It’s not their sweet spot,” he says. “It is much less expensive to process credit and debit than it is cash, because cash has a lot of labor involved.”
Still, it’s a big step to go from “largely cashless” to “cashless”, as many retailers are doing. You can see the attraction. If you are largely cashless, you still need a cash register, you still need to reconcile at the end of the day and you still have to go to the night safe on the way home. To stop all of this unproductive nonsense you need to stop cash altogether. If you do, the benefits are not limited to safety, security and a quicker trip home.
The company says that employees can perform 5% to 15% more transactions every hour when they don’t have to handle money.
I’ve never been to Sweetgreen, which I understand provides salad-based offers to busy office workers, but I will make the effort to reward their futuristic stance next time I am near one and between proper meals. A great company, no doubt, but when it comes to payments, I do not see their trajectory as unrepresentative at all. Apps and chat are steadily encroaching.
Domino’s Pizza, which launched a “zero-clicks” pizza ordering app earlier this year. In the past, the company has baked ordering into Facebook Messenger, Twitter, Siri, Amazon’s Echo, Google Home, smart televisions, and even Ford Sync. In the third quarter this year, Domino’s revenue grew 16.9% year-over-year.
Back to BA. As I said earlier, they don’t take cash so I paid by card. What I didn’t mention was that the card was a BA Executive Club card and that the currency was Avios, their “rewards” points. Interestingly, when I last paid for something on board with a payment card I had to through the rigmarole of showing my passport as well as signing the transaction. But with my Gold card it was just swipe and go. Quick as you like.
At the time of writing (three days later), these 300 Avios have yet to be deducted from my account, so I suspect the system may not be real-time. I will see if I can double-spend the Avios on my next flight and then write to BA to suggest they consider the blockchain for future implementations. Meanwhile, I will use the remaining gazillion Avios to take my wife on a lovely trip to her home town this summer. Let’s go book a flight right now!
I expect that most of you will by now have read a fair bit about the (to my mind) fabulous living monetary experiment that is India. Obviously, I feel sorry for people who have been (to put it mildly) inconvenienced by the chaos caused by the removal of 85% of the currency “in circulation” in the country but as a student of monetary history and the interaction between technology and economics, it is absolutely fascinating to look at what is happening. I’m sure it will be a case study for years to come, and who knows what the long term impact will be, but I couldn’t wait and I couldn’t resist blogging. So let’s start at the beginning…
Indian Prime Minister Narendra Modi has announced that the existing 500 and 1,000 rupee banknotes will be withdrawn from the financial system overnight. The surprise move is part of a crackdown on corruption and illegal cash holdings, he said in a nationwide address on television.
I saw some television reports of aggrieved and panicked Indians who were unable to get any cash and since much of the economy is cash-based, worrying about a slowdown in economic activity. It’s a bit of shock to go to the bank and discover it is closed. When the banks re-opened, it was with new money. Or at least it would have been with new money, had replacement been produced and distributed beforehand.
On November 8 evening, Reserve Bank of India governor Urijit Patel and senior government officials unveiled the new currency note of Rs 2000 and redesigned Rs 500 note.
The result was pandemonium. People went to ATMs to try to obtain new bills only find that there were none to be had. Rich people started paying poor people to stand in line for them to get money. I even saw a photo of people praying to a garlanded ATM! India is a big country and the ATM vendors had no more warning of the change than anyone else, so as you can imagine the planning and logistics were complex. The ATM operators were as non-plussed as the general public by the sudden change.
“Re-configurations takes time so it has to be done one by one. Things should be normal in ten days. You have to understand there are 2 lakh ATMs in the country but there are only three to four vendors.”
The net result of all of this was that the country ran out of money. Literally. There was no money available for commercial transactions. So to Indians, it really was a big deal and a major disruption. So why was this done? There were two explicit reasons given for the de-monetisation. One was that it was an attack on terrorist funding and the second was that it was an attack on the black economy. I don’t know enough about terrorist financing in India to comment on the efficacy of the move, but it seemed to target counterfeiting operations in Pakistan.
It disrupts the production of FICN in Pakistan, and makes redundant existing stocks of fake currency with a vast network of terror funders-the hawala traders and money launderers. “The phaseout of these notes is a double whammy for Pakistan,” says Colonel Vivek Chadha of the Institute of Defence Studies and Analyses, Delhi.
As for the black economy, there is no doubt that the move has had, and will have, an impact. There was an awful lot of money sloshing around outside of the banking system and as far as I understand there was rampant tax evasion amongst the more well-off amongst the population. Having spoken to a couple of people recently returned from India, I got the impression that members of the public were comfortable that the distruption, bad though it was, was a price worth paying. And there is no doubt that the move shifted many transactions on the record immediately.
“A majority of our transactions have suddenly become white because of card payments and people are also not tipping as much now,” a waiter at the restaurant said.
The government’s plan was that people would bring their cash to the bank, declare it, pay tax on it and then either get new cash in return or actually start using bank accounts (a great many of which are dormant). And, indeed, this is what seems to have happened, with the cash being returned in amounts greatly exceeding the government’s calculations. By the end of the year, almost all of the notes had been deposited.
Banks have received 14.97 trillion rupees ($220 billion) as of Dec. 30, the deadline for handing in the old bank notes, the people said, asking not to be identified citing rules for speaking with the media. The government had initially estimated about 5 trillion rupees of the 15.4 trillion rupees rendered worthless by the sudden move on Nov. 9 to remain undeclared
This was taken to mean that Modi had been ill-informed and that there was no corruption and that certainly may be the case. But an alternative explanation is that people who may have been uncomfortable with depositing their money for one reason or another laundered the money before it got to the banking systems. They went out to start buying gold and jewellery for cash instead.
The gold and jewellery route has been followed by persons with black money to convert their Rs 500 and Rs 1,000 notes at a haircut of 20-40%.
That seems a reasonable deal. Pay tax to the government and potentially have to give up the rest o the cash because of anti-corruption investigations or pay tax to the jeweller and mum’s the word. Since India has a long tradition of using gold jewellery as a store of value, this seems unsurprising in retrospect. It led to another crackdown on those who decided to convert their black money into black but still quite liquid gold.
This move will halt such sales of gold at a huge premium against old currency notes, which jewellers were doing till the Income Tax (I-T) department raided them across the country on Friday and sent around 600 notices to jewellers asking the details of daily sales from November 7 to 10. The I-T department, in its notices, also asked for CCTV footages, especially of cameras near cash counters, to seek date-wise information and to check if PAN numbers or ID proofs were collected from customers.
CCTV footage! Incredible. Anyway, the upshot of all of this was that cash vanished from circulation without a viable alternative in place. What kind of alternative might there have been? Well, the answer is obvious. India really should have a widespread, vibrant and effective mobile payment infrastructure but it has been slow to develop. I wrote about this a few years ago, noting that it was the regulatory environment that was holding back the evolution of the sector (the Reserve Bank of India’s “calibrated approach” to mobile payments). As the figures from Kenya that I posted last week show, it is possible to use mobile phones as an alternative to cash.
Look at Kenya, where there are now more than 33 million mobile money users and 174,000 mobile agent locations. The most recent figures from the Central Bank of Kenya (CBA) show an astonishing trend. From February 2013 until September 2016, the number of monthly M-PESA transactions almost tripled, going from 53 million to 131 million, while the number of card transactions fell from 34 million down to 18 million.
So Kenya (and, for that matter, China) show just how effective mobile solutions can be. Hence my thinking that it may have been better for India to have waited until the more flexible regulatory regime had begun bear fruit before taking the quite drastic step of removing those banknotes. I’m sure I will blog again and in more detail about the Indian experiment as more data comes in, but I think we can already see a shift in government rhetoric from corruption and terrorism to cashlessness and efficiency, with officials urging banks, merchants and mobile players to accelerate the deployment of alternatives. Meanwhile, I just want to pull in a couple of other observations on the great experiment underway in India right now. First, the potential for alternatives:
In fact Bitcoin volume on India exchanges doubled in the couple of weeks following the announcement but then fell back again at the end of the year. I think it highly unlikely that Bitcoin will step in to fill the gap left by the removal of the highest value banknotes. It looks to me that a more widely-used alternative to cash will be… nothing. In the cities the merchants are getting payment terminals or mobile phone alternatives but outside the cities, people could easily get by for some time without a circulating means of exchange. This is not wild prediction. I have previously posted about the famous case study of the Irish bank strikes that demonetised the Emerald Isle in the 1960s and 1970s. Subsequent economic analysis showed that the absence of money had surprisingly little impact on the economy! People just began to write cheques or IOUs and these debt instruments began to circulate.
Murphy points out that one of the key reasons why a “personalised credit system” could substitute for cash was the local nature of the circulation — which… was centred on pubs — so that the credit risk was minimised.
In summary Ireland was a more rural economy in those days so life continued in a reputation-based transaction economy. Well, guess what: the same thing is happening in India.
However being a very close knit society, local people count on each other so they are able to buy the essential commodities from the shops in good faith, the payment of which they would make later on after having money. So this way, they are not feeling panicky like rest of the country
OK so the demonetisation of Ireland and the demonetisation of India are wholly different in origin, scale, purpose and destination. Still. Mr. Modi’s actions must have set a few more national leaders thinking about taking radical action to move toward a less-cash economy more quickly than otherwise might have been the case especially since we know that high-value banknotes in many countries (e.g., the UK) are primarily used for criminal purposes.
My good friend Geronimo Emili invited me along to a session at Money2020 in Copenhagen today to deliver a manifesto for cashlessness in Europe. He challenged me to come up with a five minute talk (which is very, very difficult for me) that would contain practical advice for European politicians setting their political and economic stalls before an uninformed public. So this is what I said…
Speaking at this year’s World Economic Forum in Davos, John Cryan (the co-CEO of Deutsche Bank AG), said that cash could become history “within a decade”, going on to note that it is terribly inefficient. Mr. Cryan also focused on the way in which cash supports the underground economy, saying that cash should be dematerialised and that governments should be interested in this process because it would make transitions more traceable and would help to combat crime. I agree. Hence it seems to reasonable to ask, and were I to have been present in Davos I would certainly have asked, why it is that central banks keep pumping the stuff out? On Deutsche Bank’s home turf, for example, cash is already undermining the law-abiding majority. The Bundesbank estimate thatonly 10-15% of the cash in Germany is used to support the needs of commerce and this tallies with the Bank of England’s estimates of the cash used for what they call “transactional purposes”.
So in two of the world’s largest economies, at most a quarter of the cash out there is actually used as a medium of exchange. And this fraction is, as you might imagine, steadily falling as cash is replaced at POS and, increasingly, in inter-personal transactions.
If we look around the world, we can see that some countries are on the verge of cashlessness, others are a long way from it. In Europe, we should make it a goal! We must aim to be effectively cashless in the timescale he discusses. By cashless, incidentally, I do not mean that every single banknote and every single coin has been ritually cursed and then hurled into Mount Doom. By cashlessness, I mean that cash has ceased to be relevant to monetary policy, become irrelevant to most individuals and vanished from most businesses.
As we look to the future, we can begin to ask, quite reasonably, whether developments in digital payment technology and changes in payments and banking regulation will bring us to the point of this kind of cashlessness within, say, a generation (as Mr. Cryan and I expect)? The answer is probably yes, but that doesn’t mean we can’t take action to make sure! Assuming there still is a European Union in a decade then there will still be Euro banknotes and there will still be Euro coins. But they won’t matter for business or for the economy. Without policy changes, however, this will leave us with a cashlessness that is too conservative to reap the benefits of a truly cashless economy, too disorganised to reign in the criminal exploitation of cash and too wedded to the symbolism of physical money to switch it off (just as we switched off analogue TV not that long ago).
That “rump cash” (and I exclude various categories of post-functional cash from this definition) should be actively managed out of existence.
Europe needs politicians to take this seriously and put forward concrete and reasonable plans to achieve effective cashlessness. This is hardly a new thought! Returning to Davos, two decades ago at the 1997 World Economic Forum there was a discussion about the electronic cash that attempted to cover all of the relevant topics and I think it provides a useful starting point. I’ve updated that list of issues and brought them together in a structure that I think rather helpfully identifies four key policy areas for European governments to focus on.
Identifying practical actions to take in each of these policy areas gives us a “manifesto for cashlessness” that policy makers can add to their agendas across the continent. There are immediate and significant benefits to countries, companies and citizens.
Governments are responsible for managing the money supply, but they presumably want to the system to deliver an efficient money supply for the modern age. But right now, European money is really, really inefficient. Jack Dorsey of Twitter and Square fame once tweeted that “In general, the shift toward a cashless society appears to improve economic welfare.” He is, of course, correct and we must “nudge” consumers toward this future.
The European Central Bank has published a detailed analysis of the costs of retail payments instruments (Occasional Paper no. 137, September 2012) with the participation of 13 national central banks in the European System of Central Banks (ESCB). It showed that the costs to society of providing retail payments are substantial, amounting to almost 1% of GDP for the sample of participating EU countries. Half of the social costs are incurred by banks and infrastructures, while the other half of all costs are incurred by retailers.
My friend Professor Leo van Hove, Europe’s foremost expert on such matters has long held that cross-subsidising cash is not a welfare-maximising strategy. The social costs of cash payments represent nearly half of the total social costs and as the proportion of retail payments made in cash falls, so in some countries cash already does not have the lower cost per transaction. These social costs of payments systems have only recently been studied to any degree of accuracy by, for example, the Dutch and Belgian central banks (who found the social cost to be .65% and .74% of GDP respectively). In both of these countries, which have well-developed debit infrastructures, cash accounts for three quarters of the total social cost. (In other words, each family in the Netherlands pays about 300 Euros per annum to use cash.)
Dr Laura Rinaldi from the Centre for Economic Studies at Leuven University, carried out some research which confirmed that customers see cash as being “almost free” despite the costs. She concluded that proper cost-based pricing would shift debit cards from being 4% of retail transactions in Europe to a quarter, a change that would add 19 basis points to the European economy.
Manifesto Commitment 1: we will halve the total social cost of the payment system in the next decade, starting by allowing retailers to surcharge for all forms of payment including cash, except for “card present / cardholder present” debit.
The high-value notes account for more than half the outstanding currency in many OECD nations, are mainly held for stashing, hoarding and exporting. The non-utility of these notes was highlighted in a 2011 ECB survey among households and companies that estimated that only around one-third of the €500 notes in circulation were used for transaction purposes and that the remainder were hoarded as store-of-value in the euro area or held abroad. Recent figures from the Bank of England show a similar pattern, with about a quarter of the cash in circulation used for transactions. High-value notes no longer support trade and industry. Dr. Rinaldi’s research mentioned above further concluded that shifting European economy away from cash would grow it an additional nine basis points because moving to electronic money would shrink the cash-based “shadow economy”.
The European Commission has already said that it wants to investigate the connection between cash (specifically €500 notes) and terrorism. Cash, however, is desirable for all sorts of criminal purposes, not merely terrorism. Now, clearly, removing cash won’t end crime. The reason to make electronic money a firm policy goal is to raise the cost of criminal activity. Whether that crime is drug dealing or money laundering, bribing politicians or evading tax, cash makes it easy and cost-effective.
Manifesto Commitment 2: We will remove €100, €200 and €500 notes from circulation within five years and €50 (and £50) notes from circulation in a decade.
UK research indicates that families who use cash are around hundreds of pounds per annum worse off than families who don’t. The reasons are multiple: the cost of cash acquisition, the inability to pay utilities through direct debit, exclusion from online deals and a variety of losses. There’s something unfair about this. People who choose to exist in a cash economy to avoid taxes (e.g., gangsters) are cross-subsidised by the rest of us. People who have no choice but to exist in a cash economy are not cross-subsidised at all.
Those Europeans trapped in the cash economy are the ones who are most vulnerable to theft and extortion, most likely to lose their hard-earned notes and coins or have them destroyed by monetary policies, paying the highest transaction costs, lacking credit ratings or references and (in an example I once heard from Elizabeth Berthe of Grameen at the Consult Hyperion Forum back in 2011) most likely to have their life savings eaten by rats. So what should be done?
Well, the answer is clear. Make electronic payment accounts, capable of supporting account-to-account push payments available to every European citizen at no cost. Notice that I do not say “bank accounts”. Bank accounts are an expensive route to inclusion. Now, financial exclusion is often associated with an inability to provide a proof of identity or address (e.g. immigrants, homeless people), unemployment or financial distress in general and low educational attainment. Electronic money itself does not attack any of these issues hence we must have relaxed KYC for low-maximum balance accounts.
Manifesto Commitment 3: We will regulate for an on-demand electronic payment account capable of holding a maximum of €1,000 without further KYC other than unique recognition (e.g., a mobile phone number).
Control and regulation
With electronic payment accounts available to all and no necessity for cash in day-to-day transactions, we must be sensitive to privacy of transactions. Regulatory authorities ought to be able to monitor economic activity and the advantages of knowing in near real time what is happening in the real economy ought to be substantial for national economic management. However, there is a world of difference between the Minister of Finance knowing that people spent €1,548,399 in restaurants yesterday and knowing that I spent $8.47 on a burrito in Chipotle.
Most of the concerns that reasonable people have about moving away from cash are to do with privacy and security. Since we will have to have security in order to have privacy, we should set our goals around privacy as the central narrative to address these concerns. We have all of the technology that we need to deliver payment systems with the appropriate degree of pseudonymity for a democratic and accountable society.
Manifesto Commitment 4: We will create a privacy-enhancing infrastructure for transactions and for the sharing of transaction data, beginning with a law preventing payment cards from displaying the cardholder name either physically or electronically.
I hope that you will all agree that these deliver a sensible and practical set of steps to improve the lives of European citizens and I look forward to your comments!
Speaking at the European Payment Summit this year, where he was chairing the panel discussion on Mobile Digital Payments, Michiel Verhaagen (Chief Commercial Officer at AirPlus International) told a story about forgetting his wallet and made the point that he always looks for taxis that accept credit cards and the problems he had trying to find one after arriving in Brussels for the conference. I had exactly the same problem, and I’m steadily becoming more militant about it. When I arrived in Brussels for the event I went to the taxi line at Zaventem and got into the first taxi in line, reassured by the Visa/MC sticker in the window. I loaded my luggage in the back and settled down. Just as the taxi was about to move off, I saw a sign in the back saying, in several languages, “no cards, cash only”. I told the driver to stop and got out. A woman, next in line, walked toward the taxi and asked, in an American accent, if I didn’t need the taxi. I told I didn’t, because it didn’t take cards. She told me that in that case she did want it either.
My heart skipped a beat. I’m a sucker for an American accent and a dislike of cash. A payments soulmate! We walked down the line of taxis together to find one that took cards. When we did, I think it was like the fourth or fifth in line, I naturally opened the door for her and moved on down the line. Fortunately the next taxi took cards as well, so I hopped in and headed to La Hulpe.
Unless we vote with our feet, nothing will change. The same is true in London, by the way, where if I get in a cab and it says “cash only”, I get out right away. It’s the only language they understand. The Mayor of London has just said that all London cabs must take cards by October, but there’s about to be some pushback on this.
However, the group said it was now planning to use the money it has raised so far, more than £350,000, to prevent TfL’s plans to have a contactless credit card reader installed in every cab, which it said could cost cabbies “tens of millions”.
I think I might be able to pour some oil on troubled waters here. The goal is for the average passenger to be able to get in a taxi and get somewhere in London without having to use cash. Another goal is for the average business passenger (eg, me) is to get a receipt that you can use when you submit your expenses at the end of the month. Frankly, an app like Hailo does both of these things and it does them much better than a card does, contactless or otherwise.
It’s not about tap and pay, it’s about app and pay.
Hence the obvious compromise position. Instead of regulating on the basis of specific technology like contactless, taxis should be regulated on the basis of the desired outcome, which is cashlessness. Why not require taxis to accept contactless payments or any one of a number of acceptable in-app solutions. If the driver refuses to accept any one of the acceptable in-app solutions (e.g., Hailo) then the ride is free. Furthermore, I would make it illegal to surcharge for a debit transaction or an in-app debit or (soon) instant payment transactions. Let them surcharge whatever they like for credit cards, cash, cheques, Bitcoins, cowrie shells or tickets to West End shows.
But back to the story from the Summit. Michael was making a point about how close we are to having the phone replace the wallet and the cusp at which forgetting your wallet now longer matters. Well, I think we are close. If I forget my wallet in the morning, I apply this algorithm…
Am I going to our office in Guildford? If so, continue to office in Guildford. I can use my phone to buy lunch, coffee, whatever, so I don’t need my wallet.
Am I going into central London? If so, I call South West Trains every name under the sun, because the ticket machines at Woking station don’t take contactless, and return home for wallet. I can pay for the bus to the station with an app, I can pay for parking at the station with an app, I can pay for anything I need in London during the day (coffee, lunch, taxis, buses, tube) with my iPhone, but on South West Trains I am trapped in 2006 time warp.
Am I going overseas? If so, I’ve got my travel wallet in my bag and that has my passport, an Amex card, and a Caxton FX card that I can top up from an app, so continue.
Am I going somewhere else in the UK? If so… well it depends. If I’m driving somewhere, I can use my phone to buy coffee and lunch, I can use my Shell app to buy petrol. I’ll probably go. I once did drive off without my wallet, in the days before Apple Pay and Shell apps, and I ran out of petrol in Watford. I called the AA, and they told me that they couldn’t bring petrol because it’s against health and safety regulations, so they towed me to a garage. I filled up the car, wandered in to pay and… discovered I’d left my wallet at home. (Not the first time I’ve done this.). Having thought about it, and left the car keys with the clerk at the filling station, I phoned my bank. It turned out that there was a branch a few minutes walk away, so I set off to find it. On the phone, I answered some security questions, and when I got to the branch there was (if memory serves) £30 waiting for me. Hats off to Barclays.
We are surely (South West Trains unique role as boat anchor against progress notwithstanding) not that far away from the day that I started dreaming about when I saw my first Nokia phone will contactless payment all those years ago. The day when it finally doesn’t matter if you leave your wallet at home. Or “VC-Day” as I intend to call it (for Victory over Cash Day).
Speaking at this year’s World Economic Forum in Davos, John Cryan (the co-CEO of Deutsche Bank AG), said that cash could become history “within a decade”, going on to note that it is terribly inefficient. Mr. Cryan also focused on the way in which cash supports the underground economy.
Cash should be dematerialised, he said in a panel on the future of finance – and governments should be interested in this process because it would make transitions more traceable and would help to combat illegal financing or money laundry.
Yes, all good reasons for getting rid of it. Hence it seems to reasonable to ask, and were I to have been present in Davos I would certainly have asked, why it is that central banks keep pumping the stuff out? On Deutsche Bank’s home turf, for example, cash is already undermining the law-abiding majority.
As even the most cursory examination of the statistics shows, virtually none of this cash is used to support the needs of commerce (the Bundesbank estimated that only 10-15% was used for this) and the rest of it is unexplained , as they say.
This tallies with the Bank of England’s estimates that perhaps a quarter of the cash in circulation in the United Kingdom is for what they call “transactional purposes”. So in two of the world’s largest economies, at most a quarter of the cash out there is actually used as a medium of exchange. And this fraction is, as you might imagine, steadily falling as cash is replaced at POS and, increasingly, in inter-personal transactions. I just paid Vic Keegan the money I owed him for the football on Saturday using my bank’s app and I can’t imagine how I might be persuaded to go to an ATM and draw out money to post to him instead.
Nevertheless, as cash is falling out of favour as a means of exchange, the amount of the stuff “in circulation” continues to grow. Here are the Bank of England’s figures for the UK over the last forty years.
So. Cash on the road to extinction? Well, as the chart above shows, there is now more cash than ever in circulation in the UK and the amount of cash as a fraction of GDP is trending up, not down. What on Earth is going on? More £50 notes than ever out there and I never see one from one year’s end to the next. Cash increasing as a proportion of GDP but falling as a share of retailer payments so, as we discussed here recently, who is using it and what for?
Look, I think Mr. Cryan is right, although probably not in the way that he means it. I mean that we will be effectively cashless in the timescale he discusses. Cashless in the Count Zero sense: cash will still be around and it will still be legal tender (although I don’t think people understand what a limited concept this is), but cash will disappear from polite society and from the daily lives of most people. The middle classes will never see the stuff. Although, to be frank, they pretty much don’t see it now as we are a debit card society.
He had his cash money, but you couldn’t pay for food with that. It wasn’t actually illegal to have the stuff, it was just that nobody ever did anything legitimate with it.
Assuming there still is a European Union in a decade then there will still be Euro banknotes and there will still be Eurocoins coins. But they won’t matter for business or for the economy. If this is the cashlessness that the Deutsche Bank co-CEO is imagining, then I’d say he is spot on. It’s a cashlessness that is too conservative to reap the benefits of a truly cashless economy, too disorganised to reign in the criminal exploitation of cash and too wedded to the symbolism of physical money to switch it off (just as we switched off analogue TV not that long ago).
Thus by “cashless”, I mean that cash has ceased to be relevant to monetary policy, become irrelevant to most individuals and vanished from most businesses. As we look to the future, we can begin to ask, quite reasonably, whether developments in digital payment technology and changes in payments and banking regulation will bring us to the point of this kind of cashlessness within, say, a generation as Mr. Cryan and I expect? The answer is probably yes, but that doesn’t mean we can’t take action to make sure!
That M0 rump cash (and I exclude various categories of post-functional cash from this definition) should be actively managed out of existence. Europe needs politicians to take this seriously and put forward concrete and reasonable plans to achieve effective cashlessness. In order to help them in this endeavour, I am gathering input from a group of colleagues to assemble a “Manifesto for Cashlessness” to put forward with my good friend Geronimo Emili from Cashlessway at Money2020 Europe in Copenhagen. Way back at the 1997 World Economic Forum in Davos there was a discussion about the electronic cash that attempted to cover all of the relevant topics and I’ve used it a few times because it provides a useful starting point for discussions. I’ve updated that list of issues and brought them together in a structure that I think rather helpfully identifies four key areas that I’m going to use to structure the manifesto (any more than four key points and no-one will remember them!) over the next couple of weeks.
So… if you have any comments on any of these issues please don’t be show and post them as comments on this post. I am genuinely interested to see what you think.
Last week I wrote a comment piece for The Guardian, in connection with the Bank of England’s latest figures on the use of cash. I put an expanded version of the piece here on the blog. Little did I know just how immediate and widespread would be the influence of this polemic. Only a day later and the Chief Economist at the Bank of England was agreeing with me, for sound monetary policy reasons.
“It would allow negative interest rates to be levied on currency easily and speedily,” Mr Haldane added, using technology similar to that embodied in Bitcoin.
A couple of days after that, and the noted economist John Kay (I am reading his excellent book “Other People’s Money” at the moment) is agreeing with me as well! In yesterday’s Financial Times he also noted the strange paradox of cash use falling yet cash “in circulation” continuing to rise and drew the same conclusion that I did. We need policy action.
The volume of currency in circulation has risen as the need for such currency in legitimate activity has declined. This is not a comforting combination. Policymakers should progress towards a cashless society.
So let’s take it as read that it should be government policy to start reducing the amount of cash in circulation and that the Bank of England needs to come up with a plan to introduce a digital alternative. The Chief Economist touched on this, although his implausible implementation outline involving “technology similar to that embodied in Bitcoin” owed more, I think, to newspaper nonsense about cryptocurrency than to reasoned high-level architectural reflection, since the computational expense of a proof-of-work blockchain is completely pointless in a centralised Bank of England e-fiat digital cash scheme. Nevertheless, his point about a Bank of England electronic cash alternative is worth examining.
“This would preserve the social convention of a state-issued unit of account and medium of exchange, albeit with currency now held in digital rather than physical wallets,” he said.
I noticed that some commentators took this remark to mean something positive for Bitcoin. That I seriously doubt, since the whole point of Bitcoin is to not have an issuer. As Chris Cook said on Twitter, this would be a financial platypus! Had Andy been more informed on the complexities of digital money and had he consulted a relevant expert (eg, me), I imagine that would instead have said “a technology similar to that embodied in M-PESA, Venmo and FPS”. The idea of the Bank of England running a national pre-paid account scheme is not at all far-fetched and if it was given a decent mobile front-end (like Venmo), had instant transfers in and out of the banking system (like FPS) and was super-efficient since transfers between accounts would just be a few bytes changing in a database (like M-PESA) it could easily handle a few thousand transactions per second. And with some decent APIs for developers to get hold of, it shouldn’t take long before it became a standard component of national commerce and, as Adam Smith would have said, a superhighway bringing goods and services to market.
Naturally the system should work on the basis of paynames so that if, for example, you wanted to make a valuable contribution to a worthy cause, such as the Dave Birch Holiday Home in the South of France Emergency Appeal Fund, then you would simply use your Bank of England app to send the e-cash to £dgwbirch. Anyone would be able to open an account – no KYC/AML/ATF or any other buggering around until the amount transacted exceeded £10,000 – and we could fund the whole thing by selling vanity paynames. I’m sure someone would pay a shedload of money to get £007 or £888 or £wad or £sergioaquero or whatever so it wouldn’t even cost that much to put together. I should have liked to have put this idea forward as part of the UK’s Payment Strategy Forum but unfortunately the powers that be decided there was no room for a tribune of the people and influential innovator in this august body.
Apple Store, Covent Garden (September 2015). Apparently, oligarchs and drug dealers are slow to convert to tokenisation.
If the government really was committed to innovation, then it would have included cash in the Payment System Regulator’s remit and given her specific targets for a reduction in the total social cost of payments in the economy. Had this happened, then the idea of a national e-money would already been under discussion. I shall mention this at the Payments UK Customer Engagement Network coffee morning today and test the water.
A few days ago, I happened to be at an event where the Chief Cashier of the Bank of England gave an interesting speech about the trajectory of banknotes. These are important to the Bank of England, because the note issuing department of the bank is the most profitable nationalised industry in history. And demand for their product continues to grow.
Aggregate demand for Bank of England notes has grown quickly, increasing by around three-quarters over the past decade, and has outpaced the growth in GDP since the 1990s. Today there are nearly three-and-a-half billion notes in circulation, totalling over £60bn.
But what was most interesting to me about the speech, since I don’t care about plastic banknotes and Victoria seemed most unenthusiastic about my campaign to have Sir Thomas Gresham replace the Queen on all British banknotes when I told her about it afterwards, was that she gave up heads up on today’s Bank of England Quarterly Review (3Q15), in which the Bank looks at cash usage. In the same speech, Victoria said that while “demand for cash as a medium of exchange appears broadly stable, its use as a store of value appears to have grown… We estimate that around 20% to 30% of total UK cash was in, what we refer to as, the ‘transactional cycle’ – cash held by banks, consumers, and retailers for the purposes of facilitating everyday transactions”.
In essence she said that their latest figures show that only about a quarter of the cash that they put into circulation is for transactional purposes (i.e., used). The rest of it is either shipped overseas (i.e., exported), which we will put to one side for the moment, kept outside of the banking system (i.e., hoarded) or used to support the shadow economy (i.e., stashed). In other words, not in circulation at all but stuffed under mattresses.
If you look at the trend growth of that cash “in circulation” over the last few years it has accelerated well ahead of trend GDP growth as well as past trend ATM withdrawal growth. And we also know that the use of cash in retailing has continued to fall steadily so the “cash gap” between the small amount of cash that is used to support the needs of commerce and the large amounts of cash that are used for other purposes has been growing. The interesting question that the Quarterly Bulletin article by Tom Fish and Roy Whymark stimulates is straightforward: “if the majority of Bank of England notes are not being used for everyday transactions in the domestic economy, what are they being used for?”
I was invited to write a comment piece on this for The Guardian, so having looked at the high level picture I thought it would be interesting to look at each category and what the key drivers in each of them might be. The first, cash that is used, is easy. We know that the driver is technology but that the impact is weak. In other words, new technology does reduce the amount of cash in circulation, but very slowly.
Moving on to the next category, I know it’s a rather simplistic analysis, but if the amount of cash that is being hoarded has been growing then that would tend to indicate that people have lost confidence in formal financial services or are happy to have loss, theft and inflation eat away their store of value while forgoing the safety and security of bank deposits irrespective of the value of the interest paid. The Bank say that “a small number of individuals hoard large amounts of cash” (Ken Dodd, rather famously, had £336,000 in suitcases in his attic) and so might account of a lot of the notes.
If, on the other hand the amount of cash that is being stashed has been growing then the Bank of England is facilitating an increasing tax gap that the rest of us are having to pay for. In this context cash is a mechanism for greatly reducing the cost of criminality while it remains a penalty on the poor who have to shoulder an unfair proportion of the cost of cash. In this case, we should expect to see a strategy to change this obviously suboptimal element of policy.
The amount of cash that is being exported is hard to calculate, although the Bank itself does comment that the £50 note (which makes up a fifth of the cash out there by value) is “primarily demanded by foreign exchange wholesalers abroad”. I suppose some of this may be transactional use for tourists and business people coming to the UK, and I suppose some of it may be hoarded, but surely the strong suspicion must be that these notes are going into stashes.
The Bank notes that “given the untraceable nature of cash” they cannot tell where cash is going. That’s true. I’m not suggesting we adopt the Chinese policy of having ATMs record the serial numbers of notes that they dispense and having cash recycling centres record the serial numbers of notes coming in to rectify this lack of data, but clearly we can look at some proxies to help us establish the rough proportions of used and hoarded, stashed and exported. The Bank says that it thinks around 25% is used and around 25% is hoarded, the rest stashed and exported. If most of the exported cash is stashed, then heading towards half of the cash out there is for, not to put to fine a point on it. criminals.
So where is the demand coming from? The Bank says that “no single source of demand is likely to have been behind the sustained growth” but I’m not so sure, because I think stashes have grown at the expense of hoards. In a fascinating paper that I looked at last year by Prof. Charles Goodhart (London School of Economics) and Jonathan Ashworth (UK economist at Morgan Stanley), they note that the ratio of currency to GDP in the UK has been rising and argue that the rapid growth in the shadow economy has been a key cause. If you look at the detailed figures, you can see that there was a jump in cash held outside of banks around about the time of the Northern Rock affair, but as public confidence in the banks was restored fairly quickly and the impact of low interest rates on hoarding behaviour seems pretty marginal, there must be some other explanation as to why the amount of cash out there kept rising. Two rather obvious factors that do seem to support the shape of the curve are the increase in VAT to 20% and the continuing rise in self-employment (this came up a couple of times in comments to The Guardian piece), both of which serve to reinforce the contribution of cash to the shadow economy. The Bank say that there is “limited research to confirm the extent of cash held for use in the shadow economy”, but Charles and Jonathan make a reasonable estimate that the shadow economy in the UK could have expanded by around 3% of UK GDP since the beginning of the current financial crisis.
While the BoE paper notes that academic evidence does not suggest the black economy is expanding in the UK
According to Tax Justice UK, there were £100 billion in sales not declared to UK tax authorities that meant a tax loss of £40 billion in 2011/12 and that will rise to £47 billion this year. That sounds like expansion to me. The IMF have noted that while Her Majesty’s Revenue and Customs (HMRC) is not good at estimating losses outside the declared tax system, which is why their latest estimates for the tax gap are low at £33 billion for 2011/12. And while we all read about Starbucks and Google and other large corporates engaging in (entirely legal) tax avoidance, half of all tax evasion is down to SMEs and a further quarter down to individuals (according to HMRC). There are a awful lot of people not paying tax and simple calculations will show that the tax gap that can be attributed to cash is vastly greater than the seigniorage earned by the Bank on the note issue. Cash makes the government (i.e. us) considerably worse off.
In summary, I think think that the Bank’s view on hoarding is generous and that it is the shadow economy fuelling the growth in cash “in circulation”. There’s something wrong about this, especially when we know that the cost of cash falls unfairly on the poor. It is time for Bank of England to develop an active strategy to start reducing the amount of cash in circulation. For a start they could take a look at what’s been going on in Sweden where a broad alliance between the government, banks, trade unions (it is their members who get beaten up and stabbed in cash robberies) and Bjorn from ABBA has made it the first country in the world where the amount of cash “in circulation” is falling.
Next week we’ll take a look at the second part of the Quarterly Bulletin article about what might influence the demand for cash in the future.
Being a keen consumer of baked pastry goods, and having a firm desire to see the pieces of plastic & cardboard in my wallet transferred to my phone, you can understand my excitement when the award-winning Greggs Rewards app was released early in 2014. The app combines the processes of payment, loyalty, and rewards into a single interaction at the point of sale, with a prepaid payment account which can be automatically topped up via credit card or PayPal. In eager anticipation of a tasty lunchtime treat, I therefore ventured out of the office and off to the town centre.
My first expedition ended in disappointment. In order to perform a transaction the customer opens the app, presses the ‘spend now’ button, and receives a dynamically generated token (an eight digit number) which is to be presented to the POS in the form of a QR code. But… in order to receive the token, I had to have a network connection. Now, whilst there is a very good network connection all the way up to the front door of the store, once through the doors my phone decided to connect to “The Cloud”. For some reason, my phone has an on-off relationship with “The Cloud” and, it appears, its relationship with this particular hotspot appears to be more ‘off’ than ‘on’. No matter, I can turn WiFi off. But what’s this? It appears that my mobile network didn’t share my longing for a sausage roll and decided to only let the GPRS signal through the door. It turns out that GPRS, whilst a revelation 15 years ago, does not appear to offer a particularly suitable channel for today’s mobile apps. Unable to obtain a token, I resorted to my plastic card.
Armed with this knowledge, I anticipated a successful second visit. This time, not only did I press the button to obtain the token before I got anywhere near the store, but I also took a screenshot of the QR code just in case. Ready to pay, and having got past the inevitable learning curve for the checkout operator who hadn’t been shown what to do with this new scheme, I was ready to finally scan my code – except that this store didn’t have any scanners at that time. So instead, I had to enter the 8 digit number on the keypad of the card reader. Happily, once the POS had my token, everything else went smoothly. I had redeemed an offer for a free item, paid for the outstanding items, and had a coffee loyalty purchase recorded all in a single interaction.
“But hang on,” I remember thinking, “they already accept contactless cards. And I have an NFC phone which can talk to their readers. Wouldn’t it be great if the app could do NFC?”
Well, sixteen months later, and Greggs Rewards has now quietly added support for contactless in its Android app. Full of even more excitement than last February (well, I have been waiting for two years to pay for something by NFC) I headed out.
Having informed the operator that I would be paying with my phone, I was interested to note that she enabled the terminal for ‘card’ payment and not ‘rewards’ payment. Having seen that the app requires at least Android 4.4, and so concluding that it must be using Host Card Emulation (HCE), I was hopeful that this meant that it was seamlessly integrated into the ‘normal’ payment process.
Alas, the terminal was actually expecting a payment card and so the transaction failed. The operator told me that, when I had waved my phone at her, she had automatically assumed it was a contactless payment (which, as an aside, is actually good news for this month’s Apple Pay launch.) It turns out that trying to integrate everything into a more seamless experience means impacting the existing card payment certifications, so for now they’re stuck with having to tell the POS what type of payment it should be expecting in advance.
Using the rewards app, even over contactless, still requires the operator to press the a special “rewards” button on the POS. This she did, and the contactless reader was ready to read my phone, the barcode reader was ready to scan my QR, and the terminal was ready for me to type in the number.
Unfortunately, this was the moment my phone decided it no longer wanted to play. With me having accidentally switched apps, on re-opening the Greggs app it decided it needed to connect back ‘home’ again. Because I hadn’t disabled WiFi, I was at the mercy of my phone’s long-term “It’s Complicated” relationship with The Cloud and so unable to provide the token. After disabling the WiFi, restarting the app (which for some reason was complaining that the 4G connection my phone now had was ‘too slow’), inwardly cringing at the complaints from the lengthening queue behind, and ignoring my colleague’s offer to just hand over some cash to get us out of there, I finally performed my first real world NFC transaction and was the proud owner of a free doughnut.
So what can we take away from all this? Firstly, the mobile app must not rely on hardware or OS services that are not absolutely critical. Reliance on network connections is understandable for e-commerce, or for refreshing the app content, but for a POS transaction the app must be able to work without one – even if it is using dynamic tokens. The card schemes have already worked this out and catered for it in their HCE specifications.
Secondly, the payment experience must be seamless. It is frustrating to be a customer trying to explain a company’s mobile offering to the checkout operator, especially when the payment terminals are adorned with collateral advertising that very scheme. “Why,” I ask wearing the hat of a less well-informed member of the public, “can the till not work out for itself what payment method is being presented to it? I don’t know about payment certifications and the resulting workarounds; I only care that the process is more complicated than it seems it should be.”
Only those of us with an unnatural interest in mobile payments (or a hearty appetite for pasties) will put up with a poor user experience more than once. Normal people will give up and uninstall the app if it doesn’t work flawlessly; the people waiting in the resulting queue – such as the woman behind me who observed that “this is ridiculous” are unlikely to try it even that once.
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