Is it the end of the line for cash?
Cashless societies could become the norm but much will depend on consumer confidence in the available options and the level of security.
Getting rid of cash has long been on the agenda of credit card providers, which trade on the fact that they can provide transaction data to the retailers they service. But now a new wave of virtual ways to pay means that consumers could soon be using new currencies Bitcoin and Ven to pay for goods too. Meanwhile, the UK’s three largest mobile networks got together earlier this month to work with retailers on consistent technology that will allow people to pay via a mobile ‘wallet’.
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All of these ways to pay will increase the amount of transactional data available to marketers - but how keen are consumers on going cashless?
Visa used the London Olympics as a springboard for contactless payments and looked to promote payments via smartphones, which it predicts will make up 50 per cent of its card volume by 2020.
However, only 15 per cent of those who could have used Visa’s ‘tap and pay’ card technology did so at the Games, which amounted to 150,000 transactions. But the move towards contactless payments continues to develop. For example, MasterCard’s Paypass services allows for faster transactions online and in-store; mobile payment chips, first introduced by Barclaycard in 2011, are regularly being inserted in phones; and contactless payment facilities on cards enabling a tap and pay function without the need for a PIN are being further developed.
Meanwhile, Barclays launched Pingit this year, a mobile payment service that allows customers to send and receive money with a mobile phone number, which has sparked The Payments Council to work on a similar project. And the three leading mobile operators in the UK - EE, Vodafone and O2 - are working on a joint project under the name Weve, one of the aims of which is to develop standardised technology for ‘digital wallets’ on mobile.
These industry innovations reflect the changing attitude and behaviour by consumers to cashless payments. Barry Clark, account director at Future Foundation, which identified the trend towards a cashless society in its recent report into the changing face of payments, explains that this move towards digital is a “banking nirvana” for brands, since replacing cash with electronic payments takes high costs out of the system.
Digital payments are mainly used for lower cost goods, which highlights a greater acceptance of such payments. MasterCard president for UK and Ireland Marion King says: “What we are seeing in the UK is an acceptance that a card, an electronic form or NFC capability can be used for those small value payments. When cards were first introduced it was higher value sums that were being transacted but now it’s a cup of coffee, fast food and tickets.” (See Q&A, below.)
Neil Aitken at The Payments Council agrees that card acceptance has become widespread and claims it has “reached that point of acceptance where people reach for their card in the first instance for lower value payments.”
These digital payments provide a solution for consumers and it is for this reason that a cashless society is developing. Clark says: “It solves problems for people and things that people find tedious or difficult; for example, going to a cash machine and having to queue to pay for goods. It’s not a technology that has been marketed for its own sake, it solves issues and makes people’s lives faster, easier and convenient.”
There have already been changes in the banking industry in regard to the trend. Banks were able to convince people to move from bank branches to call centres, then began to migrate customers to online banking and now the goal is to encourage people to use smartphones. “It’s not a huge jump from this to a cashless system,” says Clark.
The greatest restriction in digital payment at the point of sale is how many retailers have the technology to accept these cashless payments. However, another innovation in this area looks to solve this issue, a particular obstacle for small businesses and merchants.
Digital payment solutions iZettle and credit card payment system Square, created by Twitter co-founder Jack Dorsey, have introduced technology that allows everyone to accept card payments. Small traders, for example taxi-drivers, window cleaners and plumbers, and those retailers that do not have card acceptance in place can attach a dongle to smartphones and tablets to accept payment. This means the barrier for entry into cashless options is lowered and it is possible for those traders that were cash-only to accept cards.
In the US, Starbucks partnered with and invested $25m in Square, which offers a wallet application for consumers to buy straight from their mobile. The partnership allows customers to pay with the application and use a directory in the app to locate the nearest Starbucks outlet.
IZettle launched in the UK at the beginning of November in an exclusive with EE, which sells the plug-in dongles. It can be used with iPhones, iPads and a selection of Android devices. MasterCard invested in the technology for the launch along with other partners including Visa, American Express and Diners Club. And next week, mobile ticketing company Ticketscript will begin using a device, launched by payment solution provider Adyen, which connects to smartphones and allows chip and pin payments.
Virtual currencies are another strand to the development of the cashless society. They are in their infancy compared to contactless payments but are on the rise. Despite the lack of knowledge and uptake around virtual currencies, the European Central Bank (ECB) released a report at the end of October on the schemes.
It defines a virtual currency as “a type of unregulated, digital money, which is issued and usually controlled by its developers, and used and accepted among the members of a specific virtual community”.
The fact that virtual currencies are beginning to affect financial markets and are being used by the Greek government to trade, shows their importance.
Banks are becoming aware of the growing presence of such currencies and this month Citigroup became the first major bank to invest in a virtual currency called Ven.
Ven is a global currency used by members of social network Hub Culture, which is made up of more than 25,000 professionals, executives and entrepreneurs, who share and exchange knowledge related to their businesses, to buy, share, sell and trade. Its main use is to send and receive payments online for zero cost.
Stan Stalnaker, founding director of Hub Culture, says: “Virtual currency is one of the steps towards a cashless society and it is part of an eco-system emerging not just around payments but how we value activity. There is a practical level about monetary exchange and a higher level, conceptually, around what we use as markers for value in the economy.”
Ven is the only virtual currency available in the financial markets. It is implemented via a partnership with Thomson Reuters and enables pricing on more than 500,000 Reuters terminals worldwide. The currency uses a ‘basket’ pricing structure based on a mixture of global currencies, commodities and carbon futures.
This could indicate how multinationals and governments develop a cashless society. On an international level, Ven is being used to help kickstart circulation of money in Greece.
“If there is no exchange of money happening, financial circulation slows,” says Stalnaker. “When you can’t move money around, the rest of the economy withers because people don’t have a means of exchange.”
According to Stalnaker, using Ven could encourage Greek banks to start lending - when currently they are not, because they do not want the risk or lack the capital. Hub Culture believes that providing an alternative currency, by transferring euros into Ven-denomination assets, which are said to be more stable because of the basket pricing structure, could help relieve the pressure and get money flowing in the country.
Currency vs contactless
The main difference between the uptake in virtual currency and digital payment is the time and investment in these technologies. According to The Payments Council, there are 25 million contactless cards issued in the UK and there is still a debate as to whether the tipping point for contactless payment has been reached.
The Payments Council’s Aitken argues that because virtual currencies are not in that situation and don’t have the same investment and backing from brands, these types of payments “do not seem like an option at the moment”.
The ECB report outlines the workings of another virtual currency, Bitcoin. It is based on a peer-to-peer network, operates at a global level and can be used as a currency for all kinds of transactions, both virtual and for real goods and services. Bitcoins are not pegged to any real-world currency and the exchange rate is determined by market supply and demand.
Jon Matonis, board adviser to Bitcoin, says: “As digital currency gains momentum, it will unleash a new wave of global productivity and innovation. Primarily, this will be made possible by ‘frictionless’ transacting opportunities and free flow of capital without regard to national borders or national taxation schemes.”
This ‘free flow of capital’ could be why the ECB report also offers a warning by identifying areas of risk around these currencies, focused on credit, liquidity, operational and legal issues. The report suggests that over time the growth of these systems could have an effect on the economy at large, as well as the reputation of central banks around the world.
Despite this warning, Stalnaker sees the report as a positive for virtual currency. “It’s very exciting. The fact that the ECB is issuing a report about virtual currency is huge, not just because it’s happening but because it has the potential to destabilise the monetary system. The reality is that money has been a state-based monopoly system that has not been open to innovation or change. The control of monetary supply is now less important than the means by which we create economic activity.”
Virtual currencies tend to bypass banks to some extent because of their peer to peer function but Stalnaker believes they will not threaten the existence of the banks. In fact, they could stand to benefit; for example, if HSBC was holding Ven it could charge for moving it or using it like any other currency.
However, there are marked differences between how markets adopt cashless technologies. In the UK, Europe and the US, the backing of major brands adds credibility to contactless payment applications. But in the developing world these technologies are readily accepted because the economic structures pose no barrier, claims Clark at The Future Foundation.
“When you don’t have a traditional infrastructure, people are open to solutions,” he says. “In some countries they have not had the same history with banks that the US and Europe have had, and they have come to manage their finances in different ways.
“In those countries they will skip the stages the West has gone through and just move to an electronic, mobile internet-backed form of transactions and banking. In Europe, we are playing catch-up on what is happening in some parts of Africa and Asia.”
MasterCard’s King agrees that “countries like Africa don’t have the legacy systems to get through and can go straight to innovation because smartphone and mobile capability is in place without the existing infrastructure that has to be managed.”
However, cash is still the preferred way to transact globally. Research from Mastercard shows that 85 per cent of transactions are still happening in cash or paper form and 15 per cent electronically. However, markets differ dramatically from this view. The UK, for example, has 49 per cent card transactions with the rest divided between cash, cheques and electronic payments.
The future of payments and the move towards a cashless society will come down to consumer confidence in these digital forms and currencies, the level of trust and ease of use.
Banking brands will need to continue innovating so smaller retailers have the option to accept such technology.
Big names such as Starbucks being involved can help get consumers to have faith in the new technology.
As Clark says: “There are many players in the contactless payments market and consumer trust will be an issue. However, in this market we will be looking out for brands to emerge. Something to keep an eye on will be brands, which have not traditionally been in financial services or transactions, coming in and capitalising on the trend.” So it may be that consumers can be parted with their cash forever.