In this retrospective article, Ed Naef recounts the last 25 years of inventions, institutions, and motivations behind the move towards new payment systems and increasingly towards a cashless world. As we ease away from cash to digital, and become used to online and mobile modes of payment, who has gained and what is the potential for our quality of life?
Over the last 25 years, the financial systems for payments and credit have moved from the analog into a digital world. Increasingly, mobile is at the heart of retail payments in both emerging and developed markets. Looking forward to the next 25 years one can expect a move to a completely cashless society with entire alternative financial structures growing up around alternative currencies and next-gen mobile payments systems.
This innovation will lower transaction costs and bring billions of emerging consumers across the world into the formal financial system for the first time.
In developed markets, this will allow both more efficient transaction of commerce and more effective targeting of promotions and advertising. In developing markets, people entering the electronic financial system for the first time will materially improve their quality of life, helping to bring many out of poverty.
Looking back over the last 25 years of payments, it is clear how dynamic and changing this market has been. In 1991, ATM and credit cards were in wide use, but the significant majority of payments in the US were still by check or cash[ii]. Despite the wide adoption of credit cards and ATMs, it is striking just how new these technologies were at that time. In the mid-1960s the world’s financial system was almost completely cash based. The first credit cards had just begun to emerge in 1965 with Barclaycard in the United Kingdom and Diners Club and American Express in the United States. These latter examples were the first ‘open loop’ systems where sponsoring banks transacted with each other vs. providing end-to-end closed systems. Credit cards were initially primarily used by business people and high income consumers. In fact, at this time, women were often unable to get credit cards themselves, requiring a male cosigner until non-discrimination legislation was passed in 1974[iii]. The first ATM in the US did not appear until the end of 1969.
In the late 1990s, the early growth of the web and, in particular, the emergence of e-commerce over new platforms such as eBay forced both consumers, merchants and financial institutions to become comfortable with conducting commerce more or less anonymously over the internet. Buyers on these platforms did not necessarily have credit cards or if they had cards, did not feel comfortable providing these details electronically. Similarly, small scale sellers and individuals in many cases did not have the ability to process credit cards or indeed have any desire to develop this capability. Into this gap entered PayPal, which allowed money transfer from bank accounts and credits cards to a broad range of sellers without directly disclosing bank and credit card information. Before eBay acquired PayPal in 2002, 70% of eBay auctions accepted PayPal and 25% used it as the transaction method for sales[iv].
Of course, today, electronic payments of all sorts (including mobile payments) are far more prevalent. In the US only 32% of US transactions are cash according to 2015 Federal Reserve Data, and 9% by value[v]. Cash dominates small value payments but all other payments have become electronic (excepting checks which are still 19% of payments by volume in the US). In part, this shift away from cash has been driven by steady inflation over that time period. From personal example, the original Bill of Sale for a 1966 Ford Mustang that I once owned was under $2000, in a time when $100 bills were already circulating. One could hypothetically put the cash for a new car into one’s wallet!
The most exciting changes of the last few years has been the evolution of mobile payments. Since Square launched its service in 2010 (allowing mobile phones to process credit cards) and since Google’s initial foray into mobile payment via Google Wallet in 2011, there have been a wide range of market entrants driven by banks, startups, mobile carriers and retailers including Isis/Softcard, Levelup, CurrentC, ChasePay, and eventually Apple Pay in 2014 (just to name a few). Mobile payments and banking are today mainstream and Apple Pay, Android Pay and Samsung Pay are increasingly being used to conduct retail transactions. These new platforms provide a more attractive retail experience for the consumer and provide a compelling platform for promotion and consumer engagement. These platforms allow consumers to bypass long lines to purchase coffees through app-based purchasing and can shave precious seconds from the retail purchase through NFC contactless payments. The NFC technology enabling many of these payment schemes was based on early RFID technology from NXP semiconductors developed initially almost 25 years ago and developed since by Sony (FeliCa) and the NFC forum, among others.
While mobile payments drive evolution in developed markets, they are already creating financial revolution in developing markets. The impact of mobile payments in the developing world will be profound and life changing for many of the world’s poorest who will in many cases enter the formal financial system for the first time. The World Bank estimates that less than 41% of adults in developing countries have a formal bank account and only 20% of adults living in extreme poverty[vi]. Most of these low income consumers are active economically but conduct transactions purely in cash and have little means to build savings and less access to credit. Many in the development community believe that getting access to income smoothing mechanisms such as microcredit loans and small saving products can help customers avoid the access barriers, high transactions costs and occasional illiquidity of the formal electronic and cash-based financial systems in these countries.
Emerging markets have seen the most significant adoption of mobile payment and mobile financial services. M-PESA and M-Shwari (launched in 2007 and 2013 respectively), in Kenya are frequently cited examples, allowing both for rapid small value payment and savings and loan products. These services allow consumers across the income strata to quickly pay and receive payment for services in stores and to transfer money to individuals across the country (for example, sending money back to relatives in home villages).
Research suggests that there will be more than 1 billion users of these mobile payment services in 2017 and that users will quickly triple thereafter[vii]. At scale and maturity, mobile payments have shown that they can become almost a parallel monetary system. M-PESA is broadly adopted by Kenyans, and payments over its network are equivalent to 85% of GDP[viii].
Looking forward, we can expect greater and greater adoption of mobile and electronic services. Many, in fact, believe that we will shortly enter a fully cashless financial system in many countries. Ken Rogoff notes in his recent book that there is $4,200 in circulation for every man, woman, and child in the United States, of which 80% is in $100 bills[ix]. Since according to Federal Reserve data, the average American carries around about $60 at a time, one can assume that the majority of this cash is abetting criminal activities and tax evasion around the world (or more positively, providing stability to fragile countries unable to effectively manage the value of their own currencies). While the seigniorage benefit of this to the US Treasury is substantial, a move to cashless society enabled by mobile and electronic payments could create a governance windfall by driving more activity into the formal financial sector, increasing tax compliance and reducing criminal behavior.
In emerging markets, the benefits of moving away from cash to electronic retail payments will be most significant. For example, On November 8th 2016, Modi, the Indian Prime Minister surprised the nation by declaring on TV that 1.25 billion people had two weeks to exchange $200 billion of their high denomination bills for new currency or deposit them into a bank[x]. The rapid nature of this transition has created substantial challenges for many consumers with the objective of forcing large holders of black or gray market cash into the formal sector and reducing cash payments in corrupt activities.
Some Scandinavian and European countries are leading the charge into the completely cashless future. Belgium currently processes 93% of consumer transactions electronically and prohibits cash payments larger than a certain value. In Sweden, many retail establishments no longer accept cash and about half of the countries’ bank branches don’t allow cash deposits or withdrawals[xi].
As cash gives way, in the future we may see the combination of crypto-currencies (such as Bitcoin) and mobile payments to create complete parallel financial systems with lower transaction costs and, if advocates are to be believed, more stable currency values, unshackled from the inflationary bias of government managed fiat currencies. This cashless future of electronic and mobile financial services will be a more controlled, lower cost, lower friction world with more financial inclusion of the world’s global poor.
The payoff from this move to a digital, mobile cashless future will be profound both in quality of life and poverty reduction. However, the transition will not be painless and there are prosaic concerns. The most common payments use case for cash in the US, according to the Federal Reserve, is for “gifts and transfer to other people”. In a cashless world, how will the Tooth Fairy delivery her dental bounties? Will she Venmo children from her account at the Bank of England? Will Grandma transfer Bitcoin to her grandchildren on their birthday? We look forward to building the answer with you over the next 25 years. <>
Author: Ed Naef
To mark Cartesian’s 25 years in the telecoms, media, and technology sector, we asked our consultants to reflect on industry topics and write about how they have changed over the last few decades. Click here to receive your copy of our anniversary eBook: 25 Years – A retrospective on innovation in the telecoms, media, and technology sector
[i] Ovum. “Mobile Payments Forecast: 2014-2019” (Dec. 2015). Subscription required.
[ii] Federal Deposit Insurance Corporation (FDIC) Banking Review. Updated 29 Oct 2004.
[iii] Eveleth, Rose. “Forty Years Ago, Women Had a Hard Time Getting Credit Cards.” Smithsonian.com. 8 Jan 2014.
[iv] Jackson, Eric M. “How eBay’s purchase of PayPal changed Silicon Valley.” Venture Beat. 27 Oct 2012.
[v] CPO Market Analysis Team. “The State of Cash: Preliminary Findings from the 2015 Diary of Consumer Payment Choice.” Federal Reserve Bank of San Francisco. 3 Nov 2016.
[vi] Financial Services for the Poor. Bill & Melinda Gates Foundation. Web page. 13 Dec 2016.
[vii] Mobile Payments Forecasts: Consumer Services. Ovum Knowledge Summary. 2014.
[viii] Genga, Bella. “Safaricom of Kenya Talking to Banks to Grow Mobile Money.” Bloomberg Technology. 11 May 2016.
[ix] ‘The Curse of Cash’ Makes Case for a World Without Paper Money. NPR. 1 Sep 2016.
[x] Shah, Hasit. “India Wants a Cashless Society. But There’s a High Cost.” Slate. 28 Nov 2016.
[xi] Heller, Nathan. “Imagining a Cashless World.” The New Yorker. 10 Oct 2016.