Climbing the Financial Pyramid: Moving Toward a Cashless Society
Erica M. Salinas
Federal Consulting Practice
In my last post, we began our climb up the financial needs pyramid by discussing the most basic financial need of storing and maintaining value. I actively argued that a place to store cash was insufficient and explained how digital storage of value (particularly via mobile phone) was superior to holding physical cash. As we enter into the second tier of the financial needs pyramid, we inevitably encounter this timeless debate of whether cash will always be king or if a cashless society is inevitable.
On that note, let’s enter the second tier: “Pay for Goods and Services.” In developing countries, mobile money is slowly replacing cash transactions and creating a new digital record of money movement in previously cash-based societies. In developed countries, we are definitely moving toward electronic transactions through the use of cards and non-traditional payment services such as PayPal. The question thus remains as to whether cash will eventually be dethroned or if it will always be tucked somewhere in our lives.
Mobile Money Struggles to Steal Cash’s Throne
Mobile money services are making a serious dent in cash use as they move into the payments sphere. In Kenya, M-PESA has allowed a number of monthly and daily tasks to go mobile. When I first arrived in Nairobi, I remember fearfully carrying a literal pile of Shillings about a half mile to pay my rent. By the time I left, I quickly transferred my share to my roommate, who then remotely sent over our combined payment via her cell phone. Mobile money is very enticing for these types of remote transactions and sending domestic remittances. However, it still fails to provide the incentives necessary to replace cash in point-of-sale transactions.
In an effort to reveal the roadblocks to going cashless, my friend Amrit Pal led the Kopo Kopo team in doing just that for 60 days. The plan was to only use M-PESA for all transactions. They succeeded, though it was not easy. Matatu (bus) drivers demanded cash, leaving them stranded at times. The delay in confirmation messages made the customers behind them angry at the Uchumi (grocery store). And the overall cost of transaction fees took a large bite out of their allotted 60-day budget. Fees can be intolerably high, reaching 33% for the low-value transactions that are common in emerging markets.
In fact, merchants were willing to turn away business to avoid accepting an M-PESA payment. Amrit states, "The store managers were so irritated that upon my arrival, they'd come up and inform me that M-PESA was down, even when it wasn't.” While I know the Kopo Kopo team will not be giving up their quest to go cashless, they admit that just like we would not use Western Union to pay for gas, using M-PESA for daily purchases is not yet a good fit.
Mobile money has the potential to change lives and is rightfully touted as a poverty alleviation tool. But when it comes to buying a soda, cash is still king. It appears there is still a long way to go before it is even feasible for emerging markets to go cashless.
Cashless Societies Today
So do we have any examples of a cashless society? Almost.
A recent AP article commented that while Sweden was the “first European country to introduce bank notes in 1661,” it is now well ahead of the game in going cashless with only 3% of its retail transactions occurring in cash. Credit and debit cards are currently the payment method of choice. This is a definite boon to payment giants like Visa, but can hurt business that are forbidden from passing along the fee charged for card use. Regardless, some towns have stopped taking cash altogether.
Here in the US, almost 80% of adults hold a credit card, with an average of 7.7 cards each. While we trail behind Sweden with cash use at 7%, it is rare to find any cash-only businesses. Though smaller businesses may still prefer cash, mobile card readers, like those offered by Square, are becoming increasingly present even at the local farmers market. And of course we cannot forget the mobile wallet battle that continues today. Google Wallet continues to make strides toward offering an enticing product.
It is clear that developed markets are making significant headway towards dethroning cash. Mobile is definitely playing a role in this. However, there is still a long way to go before any country would stop printing physical currency. I like to think of it as that last 5 lbs. While it took hard work and time to lose those first 15 lbs of extra body weight, it is always those last 5 that are the hardest to shake.
Both developed and developing markets appear to be moving in the general direction of digital payments. As they do so, I am curious to see who the winners will be at the end of the day. Will it be a card-based society, with Visa and MasterCard as winners? Will mobile money schemes that bypass major payment providers end up usurping the market? Or will NFC and new switches, like India’s Interbank Mobile Payment Service, have us seamlessly streaming money from one phone to the next?