Digital Banking and Payments – The quest to drive out cash
Growing up in New Zealand in the 80s I watched CDs replace vinyl, PCs replace mainframes and EFTPOS replace cash. That’s a long time ago aye bro?! I had been writing software for 7 years when I sold my post graduate thesis as a software program and headed off to the UK to commence my PhD in 1990.
When I got to London it was like taking a step back in time – a long time. There was cash everywhere – big fat notes that didn’t fit in my sleek and narrow kiwi wallet built for cards and no coins. My kiwi card worked with magnetic strip and PIN. In the UK it was mag stripe and signature – it felt like the Stone Age.
Fast forward 25 years, CDs have gone, my entire collection is now in the iCloud. My iPhone has more than 1000 times the power of the PCs I wrote my thesis software on and the compute power of my 64GB SSD iPhone will be embedded into a blood cell within 25 years. And while all of that happened, the way we pay for stuff, has hardly budged an inch. This is particularly surprising given the fact that the banking system is the most digital industry on the planet; nowhere else do the products and services exist as predominantly as a bunch of digits, zeros and ones on a ledger.
Cash accounts for about 85% of global consumer transactions with countries like China (68%), Russia (95%), Brazil (85%) and India (74%) providing a lot of resilience. Cash usage is often held up by STDs; Sex, Tax and Drugs and pervades a number of very real social and economic challenges. It’s anonymous and convenient nature mean that it’s ideal for participating in fraudulent or criminal activities. That may be as severe as international drug, human and weapon trafficking or as innocuous as tax dodging, but it’s all very real and impactful. For example, I had a conversation with a restaurant owner in Sydney recently who regularly has business owners turning up with bags of cash, up to $25,000 worth, to pre pay for meals. He gladly accepts to pervade the cash cycle and invisibility of it all to the treasurer.
In the developing world things get a little more serious. For many, the only dependable source of support is through government food and health subsidies often delivered in analogue form: vouchers, cheques or cash. This opens the economy to corruption, crime and abuse. It’s not unusual to see the impoverished line up for days, only to find the cash has gone. This can spell disaster for the most vulnerable, particularly young children and the elderly. The reason m-Pesa, in Kenya, is the world’s most successful mobile payments platform, accounting for over 30% of the country’s GDP, is that moving cash around the country was a quite literally a deadly business. Jonah works in the city and gives the courier his weekly wages to take home to the village. The courier charges a premium to cover the very real risk that he and his donkey get taken out along the way. It’s a loose, loose.
Against this background, a trip to Hong Kong last week astonished me when I learnt how two governments are taking very different approaches to cash: The Hong Kong “Oyster” mass transport card and the Korean tax regime.
The Oyster card in Hong Kong is just like its name sake in London, OPAL in Sydney or Myki in Melbourne: A top up, stored value card that has an NFC/RFID chip to pay for public transport. It is based on some great R&D HSBC did, called Mondex and largely gifted to the world. It’s a great platform. It’s so good in Hong Kong that it’s not only used for transport but is used more prevalently than debt and credit cards instore. The reason on first glance for its prevalence would appear to be that it’s free. But that would be just like debit or EFTPOS. What’s peculiar about Oyster is that the only way to get money onto the card is cash!. They have one of the most sophisticated and successful payment systems in the world but its all predicated on cash in which helps people wash away lots of GDP. The treasurer must fix this and at least ensure people can get cash in digitally if not mandate.
This was in contrast to another learning. For some time now in Korea citizens can get a tax deductibility for using credit and debit cards to the tune of 20% and 25% respectively. On top of that they can also record their cash transactions at the point of sale and also get a 20% deductibility. That means that at the end of each tax year, Kim can package up his card statements and get a tax deduction of between 20 and 25% of all his spend; that’s enormous! Why would the treasurer do that? To stop the money laundering and tax dodging. The Korean treasurer believes that the problem is so large that they are prepared to incentivise and fuel the drive to electronic payments. They have done the maths and determined that the reduction in tax revenue brought about by the tax deductibility is less than the loss in revenue brought about by people using cash and not declaring it, coupled with all of the criminal activities that it supports.
The last 24 months has seen a tidal wave of digital creativity come to bear. We have mobile wallets, crypto currency, Peer to Peer payments, mobile POS, bumping, frictionless account origination, QR codes, PayWave everywhere to name but a few. Yet 85% of all transactions are still with bits of paper. It’s enough to make Tutankhamen roll around in his golden cask. Federal treasurers around the word must adopt aggressive innovation support and tax laws to incent the usage and drive the implementation of electronic payments across the value chain. They must do this if for no other reason than to protect the vulnerable.
Moroku is a banking and payments digital innovation company, based in Sydney Australia, which helps banks help their customers win financially through digital whilst improving the efficiency and effectiveness of the global payments system.