Will Smartphones replace cash ?

There was an interesting study reported in Business Insider on July 14 wherein more than 40% of Americans say that smartphones will never replace cash. About 37% felt that they will never replace cards. See link below

http://www.businessinsider.in/More-than-40-percent-of-Americans-say-smartphones-will-never-replace-cash/articleshow/48075756.cms

The result is not surprising, considering that the smartphone as an option has come about only recently. Cash has been around for years. Security is top of everyone's minds. If the same study were to be conducted after 5 years, this percentage will be drastically different. However, given how fast technology changes, the question will need to be rephrased to ask whether non cash/card systems will replace cash/card.

I think that the premise of the study is a little flawed, in the sense that smartphones are essentially another form of card without a physical card. It can be a prepaid instrument or a credit instrument. The real question to ask is whether cashless systems will replace cash. Cashless systems will change in form and in terms of security features over the years, and with appropriate regulatory and political support, will increase adoption. Some governments are working to push it further looking at current penetration (see my recent post on Denmark)

However, I also believe that it is unrealistic to expect cash to go away. Cash serves multiple purposes in the economy, with "anonymity" and "ownership on possession" being something that cashless instruments cannot hope to achieve. Transaction charges and speed of settlements is what technology, market forces, and regulatory intervention can solve. PoS adoption comes with a cost, but cash is king ! (more in "About")

Less cash = less crime ?

A paper by the National Bureau of Economic Research in Mar 2014 shows results of a study on crime rates after states in the US began providing benefits electronically instead of paper checks (cheques in India).

Paper checks were quickly converted to cash, typically at check cashing stations, and then the availability of cash had a positive correlation with the crime levels in the area. One downside however, was that some of the government benefits were transferred to fee-ridden cards, effectively reducing the amount of available "money" to the beneficiaries. Additionally, the beneficiaries of the government benefits were normally denied access to banking channels, resulting in them having to transact in cash.

In the Indian scenario, this problem of accessibility to banking channels is partially being mitigated by financial inclusion schemes like Pradhan Mantri Jan Dhan Yojana.  Thus access to a bank account and a Rupay debit card is commonplace. However, since the acceptance (PoS infrastructure)  has not reached grassroots levels, the need to convert the balance in the bank account to physical cash continues to exist.

From the summary extract of the paper titled "Less Cash, Less Crime: Evidence from the Electronic Benefit Transfer Program":

It has been long recognized that cash plays a critical role in fueling street crime due to its liquidity and transactional anonymity. In poor neighborhoods where street offenses are concentrated, a significant source of circulating cash stems from public assistance or welfare payments.  

Read the full paper here. 

Denmark proposes going cashless

There has been news around Denmark going cashless. The important decision taken by Denmark is that businesses such as clothing retailers, restaurants and petrol stations should no longer be legally bound to accept cash payments. This increases operational convenience - increasing security of transactions, creating a proof of payment, increased tax compliance, no price gouging, reduced infrastructure for managing the cash, need to keep cash in form of smaller notes and coins to be able to make change etc.

It is important to note the conceptual distinction between cash and currency as legal tender. A legal tender, most simply, is a medium of payment recognized by a legal system to be valid for meeting a financial obligation. (More details at Wikipedia link). Cash in form of currency notes and coins are commonly accepted as legal tender.

In many geographies, there is no "financial obligation" in a shop before a purchase is made (unless of course you break something and are responsible to pay for it). So they are not legally mandated to accept all forms of legal tender. Many stores routinely have a policy not to accept cash for large purchases, or against accepting high value banknotes.  It also protects the right of a shopkeeper to refuse service to anyone, in the sense that the buyer may not insist on buying something if the seller is unwilling to sell.

In India it is common for smaller stores to not have change for a high value banknote like a Rs 1000 note. In many cases, for small change the buyer will be handed over candy for the value of small change instead of the legal tender itself.

The measure in Denmark will have to be approved by the Danish parliament before implemented.

It would be interesting to see how restaurants deal with this measure. In case of a sit down restaurant, after the meal the "financial obligation" is already existent. If cash as the legal tender is not accepted, it goes to the heart of the definition of legal tender. It appears that hospitals, pharmacies, and such essential services will still have to accept cash if tendered.

Interestingly, how do we deal with a "run on the bank" when there is no physical cash. The basic requirement for a cashless society is that entity issuing or backing the cashless medium needs to be probably a central bank. The cashless medium is a form of debt borne by the issuer of the instrument, while the cash is debt borne by the currency issuing bank.

Some links below:

http://money.cnn.com/2015/06/02/technology/cashless-society-denmark/
http://www.independent.co.uk/news/world/europe/denmark-moves-closer-to-a-cashless-society-10231995.html
http://fortune.com/2015/05/22/denmark-paper-money/

Prepaid Payment Instruments for Mass Transit System (PPI-MTS)

The Reserve Bank of India (RBI) released final guidelines on semi-closed PPI for Mass transit systems. It is a new category of semi closed systems, allowing balances upto Rs 2000. More importantly, it allows the PPI to be used at other merchants where activities are in the premises of the MTS.

What this means is, that an Indian Railway, or a Delhi Metro can issue prepaid cards that can be used not just for their own tickets, but also at IRCTC canteens, other food and drink vendors, licensed bookshops etc that operate within the premises. Since these are major users of micro-payments, it will increase convenience if linked to the people's ability to buy tickets online using their mobile phones etc. 

As a public good, if MTS do not charge an MDR on the transactions, it would lead to better adoption across all types of vendors. Cheaper contactless PoS will drive better and faster adoption. 

A side benefit of this, as adoption and usage is increased, is that 

• unlicensed operators in the MTS premises will not be able to accept this PPI, and accordingly be exposed that they are unlicensed. 
• Railways and other MTS operators will get a better understanding of how much business is done by the licensees, and can accordingly make changes to the licensing norms. 
• The cash float available to MTS can add up to a material amount. 
• Reduction of cash handling expenses and infrastructure is an expected outcome out of such actions. 

Till now, prepaid cards were issued in conjunction with banks, or as smart cards that could be used only for fares. This is a radically new move that will get duplicated hopefully in other emerging economies. 

From the RBI Press Release dated July 9, 2015:

The Reserve Bank of India (RBI) today placed on its website the final guidelines on Prepaid Payment Instruments for Mass Transit System (PPI-MTS) enabling the issuance of a separate category of semi-closed prepaid payment instruments for mass transit systems. The PPI-MTS will enhance commuter convenience and will also facilitate the migration to electronic payments in line with the country’s vision of moving to a less-cash society.

The PPI-MTS can be used within the mass transit systems and will have a minimum validity of six months from date of issue. Such PPIs will be reloadable instruments subject to an outstanding limit of ₹ 2,000/- at any point of time. Apart from the mass transit system, such PPI-MTS can be used at other merchants whose activities are allied to or are carried on within the premises of the transit system.

It may be recalled that the Reserve Bank had placed on its website the draft circular on “Prepaid Payment Instruments (PPI) for Mass Transit System (PPI-MTS)” on May 28, 2015 for public comments till June 15, 2015. This new category of semi-closed PPIs has been introduced taking into account the requests received from various segments, including providers of mass transit services, such as, metro train and road transport services, indicating the need for PPIs catering to the requirements of this segment to enhance commuter convenience.

Cash-less Nigeria

In 2012, Central Bank of Nigeria began a program called "Cash-less Nigeria" to promote electronic payment mechanisms, and reduce (NOT ELIMINATE) the amount of physical cash in the economy. This approach is what will work, wherein the Central Bank recognizes that cash solves an inherent need in the system, and can probably never be eliminated. However, countries need to invest into the payments infrastructure to the extent it can reduce cash by facilitating cash less transactions. 

In the bank's own words:

The Central Bank of Nigeria (CBN) has introduced a new policy on cash-based transactions which stipulates a cash handling charge on daily cash withdrawals that exceed N500,000 for Individuals and N3,000,000 for Corporate bodies. The new policy on cash-based transactions (withdrawals) in banks, aims at reducing (NOT ELIMINATING) the amount of physical cash (coins and notes) circulating in the economy, and encouraging more electronic-based transactions (payments for goods, services, transfers, etc.)

Follow the link for complete guidelines. 

It also issued detailed guidelines around PoS devices. 

RBI - Account Aggregator NBFC

An interesting development, which will certainly be useful for the common man.

(Sourced from RBI's Press release of July 2, 2015 regards its Board meeting in Chennai)

"The Governor also announced that the Reserve Bank will put in place a regulatory framework to allow a new kind of Non-Banking Finance Company (NBFC), which could act as an account aggregator to enable the common man to see all his accounts across financial institutions in a common format. The idea of such an NBFC had emanated from the Financial Stability and Development Council (FSDC). "

Also RBI is seized of the need to improve acceptance infrastructure.

"Deputy Governor Shri Harun R Khan highlighted the measures being taken to move towards less-cash less-paper based payment system, with focus on creating more acceptance infrastructure for the huge numbers of plastic cards issued by banks and upscaling mobile banking."

Corporation Bank launches Mudra Card under Pradhan Mantri Mudra Yojana

As Micro units get formal funding under the Mudra yojana, these units will be on their path to "less-cash" and more funds. Also it is interesting to see banks like Corporation Bank go aggressively after the acquiring side, even if with a brown label provider like MRL Posnet. 

Corporation Bank launches Mudra Card under Pradhan Mantri Mudra Yojana

(Source: Times of India, Jul 4, 2015)

MANGALURU: Hasmukh Adhia, secretary, department of financial services, union ministry of finance launched the first MUDRA card under the Pradhan Mantri Mudra Yojana (PMMY) at a function held in the head office of Corporation Bank here on Saturday. S R Bansal, chairman and managing director and Bibhas Kumar Srivastav, executive director were present at the function wherein MUDRA Cards were given away to a few beneficiaries. 

The card facilitates the withdrawal and use of the working capital finance by micro entrepreneurs. Corporation Bank is the first bank to launch the Mudra Card based on the RuPay platform. PMMY aims to fund the unfunded and formalize the informa under non-farm micro units in manufacturing, trading and services with affordable credit up to Rs 10 lakh. Under PMMY, three loan schemes are offered to the entrepreneurs based on their capacity to repay. 

Shishu scheme provides loan up to Rs 50,000. Loan amount up to Rs 5 lakh will be lent under Kishore scheme and under Tarun scheme loan up to Rs.10 lakh will be offered. As part of Digital India programme of the Union Government, Corporation Bank also launched a high-tech paperless point of sales (PoS) terminal in association with M/s MRL Posnet and the 'Remit to India' portal for inward remittance by non-resident Indian at the hands of Hasmukh Adhia.

Unified Payment Interface System (UPI) from NPCI

NPCI has few months back come out with the proposed Unified Payment Interface System (UPI). For those interested in details, the same can be found on the UPI page on NPCI website.

In layman terms, what it means is that NPCI will act as a clearing-house/ exchange for all forms of payments. The payer and payee can be working with any scheduled commercial bank, payment bank, small bank, prepaid issuer etc (Payment Service Providers, or PSPs). Payments can be made (payer initiated, or pushed) or requested (payee initiated, or pulled) using this interface.

NPCI is already the clearing-house for RuPay payments. As standards are put in place, any merchant just needs to be "acquired" once by any PSP, and thus get connected to the UPI switch. They can thereafter accept and request payments using instruments issued by any PSP.

What this means is that the cost of acqusition will go down drastically. Regulatory mechanisms will also cause the cost of transactions and MDR to come down materially. With a central switch and better risk management measures, the time taken for cash to be received by the seller will reduce from current T+2 to T+1 or T. As more businesses get acquired, and hence connected to the payment infrastructure in India, the need for cash will go down, as the basic problems of "at par" and "real time" get addressed substantially.

Also see the note on why cash is used in the About page.

Govt of India - Draft Proposals For Facilitating Electronic Transactions

Government of India had recently unveiled (on Jun 16, 2015) a proposal for facilitating electronic transactions. Reproduced below from original post (pdf link provided, but reproduced below as original may be removed in near future):

Draft Proposals For Facilitating Electronic Transactions 

1. Objectives 

• Improve the ease of conducting transactions for an individual 
• Build a transactions history to enable improved credit access and financial inclusion. 
• Reduce the risks and costs of carrying cash at the individual level. 
• Reduce costs of managing cash in the economy. 
• Reduce tax avoidance 
• Reduce the impact of counterfeit money. 

2. Scope 

• Provide access to financial services to every citizen along with ability to conduct non cash transactions
• Electronification of Government Collections by equipping each collection desk with a method to accept non cash receipts 
• Migrate payment transactions from cash dominated to non-cash through incentivization of electronic and disincentivization of cash based transactions 
• Enhance acceptance infrastructure in the country to promote electronification of transactions 
• Encourage Government, Corporates, Institutions and merchant establishments to facilitate non cash payments 

3. Definition 

E-transactions are defined as transactions in which the customer authorizes the transfer of money through electronic means, and the funds flow directly from one account to another. These accounts could be held in banks, or with prepaid instrument providers. These transfers could be done through means of cards (debit / credit), mobile wallets, mobile apps, net banking, Electronic Clearing Service (ECS), National Electronic Fund Transfer(NEFT), Immediate Payment Service (IMPS), or other similar means.

4. Goal 

The goal of the proposed policy is to provide the necessary incentives to use Etransactions to replace the use of cash - either in government transactions, or in regular commerce over a period of time through policy intervention.

5. Way Forward 

The draft proposals detailed in this section, have been prepared after due deliberations and consultations with various stakeholders which includes RBI, NPCI, NIBM, public and private sector banks, card service providers, mobile service providers, research institutions, organizations working in this area and various government departments. 

5.1 Enabling policy for E-transactions in Government Collections

• At present, Government Departments/Central Public Sector Undertakings/Organizations levy a convenience fee/service charge/surcharge for making E-transactions (card payments) to essential commodities, utility service providers, petrol pumps, gas agencies, railway ticket counter/IRCTC etc. The feasibility of removing the charges will be examined.
• Utility service providers could be advised to give a discount to users for small ticket payments through E-payments, on the lines of BSNL, which provides an incentive of 1 per cent of the billed amount if the payment is done through electronic mode. 
• Government Departments to introduce appropriate acceptance infrastructure or adopt national E-payment gateway ‘PayGov India’ for collection of revenue, fee, penalties etc. 

5.2 Measures to promote wider adoption of E-transactions 

• At present, there is a Merchant Discount Rate (MDR) of 0.75% on Debit Card transactions upto Rs.2000 and 1% on all transactions above Rs.2000. The possibility of reduction in the MDR and the rationalization of the distribution of the MDR across different stakeholders will be examined.
• The existing inter-change fee on Debit/Credit Card transactions are not uniform and need to be standardized/rationalized to encourage both issuing and acquiring banks to establish and utilize acceptance infrastructure. 
• Tax benefits could be provided to merchants for accepting electronic payments, e.g. an appropriate tax rebate can be extended to a merchant if at least say 50% value of the transactions is through electronic means. Alternatively, 1-2% reduction in value added tax could be considered on all electronic transactions by the merchants. 
• Tax benefits in terms of income tax rebates to be considered to consumers for paying a certain proportion of their expenditure through electronic means. 
• The authentication requirements for different classes of transactions could be re-examined based on the risk profile and safety requirements. 
• Consider a levy of a nominal cash handling charge on transactions greater than a specified level. 
• Mandating settling of high value transactions of, say, more than Rs. 1 lakh, only by electronic means. 
• At present, banks have to report the aggregate of all the payments made by a credit cardholder as one transaction, if such an amount is Rs. 2 lakhs in a year. To facilitate high value transactions, the ceiling of Rs. 2 lakhs could be increased to say Rs. 5 lakhs or more. 

5.3 Creating enabling environment / acceptance infrastructure 

• It has been observed that acceptance infrastructure, particularly Point of Sale (PoS) / Mobile PoS terminals as a percentage of the total number of Debit/Credit Cards is very low. Therefore, mandating banks issuing cards to deploy POS terminals in a prescribed ratio could be considered. 
• Like in ATMs, non-banks could be authorized to install white label POS terminals. 
• Improve broad band connectivity to enable mobile based payments on a wider scale. 

5.4 Encouraging mobile banking/payments channels 

• Currently, the telecom companies are levying an Unstructured Supplementary Service Data (USSD) charge of Rs. 1.50 per transaction for mobile banking/payments. To enhance adoption of mobile banking/payment, the USSD charges could be examined and rationalized. 
• Appropriate changes in the regulatory structure, if required, to promote mobile based payment systems. 

5.5 Awareness and grievance redressal 

Assurance mechanisms for fraudulent transactions to be created wherein, in case of a fraudulent transaction, the money will be credited back to customer’s account and blocked and subsequently released after the investigation is complete/ limited to say a maximum of 3 months.

6. Other Issues 

While the Payments and Settlement Systems (PSS) Act, 2007 governs this area, changes in the regulatory mechanisms could be examined to ensure that innovations in the payments ecosystem continue to happen. The linkages with Aadhaar based identification for authentication could also be strengthened.