Is a cashless society on the cards?
Telegraph UK (Link) - Philip Aldrick (January 11, 2010)
Steve Perry, executive vice president of Visa Europe, has a different take on the folding stuff packed in our wallets that most of us take for granted. “Cash is expensive,” he says. “We need to be using it less.”
Expensive? Vintage wines, maybe. Designer clothes, yes. Modern art, almost certainly. But cash? “Why do you think supermarkets introduced cashback?” Perry asks rhetorically.
He has me stumped there. I tell him I always thought of it as a service for overdrawn students to drive a few more sales through the tills.
“No,” he responds politely. “It’s because they want cash out of the system so there is less to manage. Processing a transaction on a card can be cheaper than handling cash.”
Perry is a leading cheerleader for the cashless society. It’s hardly a surprising role, but its an argument he is finding increasingly easy to make. Last month, for example, the Payments Council announced to anguished outrage that in 2018 the cheque would be dead.
“There are many more efficient ways of making payments than by paper in the 21st century, and the time is ripe for the economy as a whole to reap the benefits of its replacement,” Paul Smee, chief executive of the Payments Council, said.
Perry extends the same argument to cash. Notes and coins are never going to be fully replaced, he accepts. Currency has, after all, been around in some form or another since 3,000 BC. But now that we’re in the electronic age, payments could do with a little catching up, he reckons.
Visa has recently published an extensive report on the cost of cash to society. Citing numerous independent papers by consultants and national governments, the payments company constructs a compelling case.
“The European Commission has calculated that the total cost to society of all payment methods including cash, cheques and payment cards equates to 2pc-3pc of GDP,” the report states. “To put this figure into context, it should be remembered that the entire EU agricultural sector equates to 2.1pc of GDP, which means we spend more on payment than we produce on food.”
The EC estimates that cash accounts for more than two-thirds of the total cost. McKinsey, the consultants, have estimated that “society spends about €200 (£180) a year per person to cover the cost of cash” and the “real” cost of cash to a retailer is 1.3pc of the purchase price – no less than the transaction fee on a card. The Dutch central bank has published a similar study, estimating the annual cost of cash at €300 per family.
Because cards are less risky (the associated cost is estimated at 0.02pc-0.1pc per transaction on cards compared with 0.1pc-0.2pc with cash) and encourage spending, they are more efficient and better value, Visa argues. Furthermore, card transaction fees are expected to fall, with some countries in Europe such as Denmark already offering free debit card services to retailers.
In the UK, Perry estimates, £1 in every £2.50 is spent on cards. He hopes to see the ratio reversed, with £2 in every £3 on cards by 2015. Of course, that would mean more business for Visa but, he claims, it would also mean less waste through cash security and cash handling costs.
A few years ago, changing consumer behaviour to such a degree would have been unthinkable. Perry says the internet and “chip and pin” have changed all that. Online retailers have helped the public grow familiar with card purchases, while chip and pin has reduced the incidence of fraud from 0.07pc to 0.05pc.
In the EU, according to the European Central Bank, €1.68 trillion was spent on cards in 2008 and use has been growing at 12pc a year for the past five years. Debit card spending this year in the UK is expected to overtake cash spending by value for the first time.
Perry believes the UK consumer is ready, citing the massive increase in the use of debit cards. Visa, best known for credit cards, now generates 70pc of its European business through debit cards.
Other countries are not so enlightened, he notes. Germany is still so nervous about card payments that some online retailers offer a service where they collect the cash at the customer’s door on delivery. Others are more technologically savvy. South Korea introduced a preferential VAT treatment for consumers paying with cards to encourage the move to cheaper, cashless payments. Subsequently, the share of cash payments fell from 40pc in 2002 to 25pc in 2006.
For Visa, the challenge now is the 80pc of all transactions that are still made in cash – largely small ticket items such as newspapers and snacks. Visa has been pioneering contactless payments, that allow swift purchases by waving the card over a reader and dispensing with a pin – making buying with a card even more effortless than with cash.
Perry believes 2010 will be the year contactless takes off, with the total number of cards in use rising from 5m to 15m. Barclaycard has already 1m customers on its “onepulse” card.
Visa’s new vision is to insert chips into mobile phones and do away with cards altogether. Antony Jenkins, chief executive of Barclays’ global retail bank, already has a “onepulse” enabled phone and more prototypes are being trialled at Visa’s innovations suite. The difficulty is persuading mobile phone manufacturers to build a handset that can store a chip and antennae.
Jenkins believes contactless mobile phones are the future and will open the door to fully mobile banking. Soon enough, people will be receiving, making and managing their payments on mobile phones, he reckons. In Africa, six million people are already paying for goods on their mobiles, proving that electronic payment systems can be more reliable and secure than cash.
Of course, cash will never be fully replaced. It’s the currency of the black economy for a start, which is one reason why the authorities would like it used less and less. In Italy, for example, the black economy is estimated to be 40pc of GDP and 12pc in the UK. It’s also proved remarkably adaptable over the past five millenia. For Visa, though, there is still ample room for cards.