Innovation

A cashless world: utopia or reality?

With the progress of new technologies and hyperconnectivity, the question as to whether bank notes and coins will soon become obsolete is increasingly topical. Mirabaud addressed this question during a panel discussion held in Geneva on 27 April 2017 together with its guests Thierry Kneissler, CEO of TWINT, Switzerland's leading mobile transaction provider, Nicole Leyre, financial director of KBA-NotaSys, a global security printing specialist, and Gero Jung, chief economist at Mirabaud.

Since the steep structural decline witnessed in the aftermath of World War II, the volume of cash in circulation has remained relatively stable, except during periods of great crisis, such as those in 2008 and 2013, when demand soared. This constancy of supply highlights just how important psychological considerations are in finance.

"Cash, that is physical money, has a reassuring effect in times of insecurity," explains Gero Jung. "We know how much we have in our pockets, and we instinctively attribute a kind of reliability to that which is tangible." Technological advances and the new possibilities afforded by magnetic-strip and chip and pin cards, and by phone technology have nevertheless succeeded in changing our habits. Cash, on the other hand, continues to be used as ever before. Those who predicted that new payment technologies would soon replace cash are still waiting – and may well have to wait several more years until hard cash is well and truly eclipsed.

Are you paying cash or by card?

The status quo, argues Nicole Leyre, is that a number of different means of payment coexist. "Since the introduction of debit and credit cards, we have been facilitating a situation where the option to pay cash and other available methods coexist. However, this does vary from country to country. The preference for cash or card payments is predominantly a cultural one, as well as depending on the infrastructure available. People in a poorly equipped country will favour cash, even if payment systems using mobile phones could present a viable alternative here. The kind of purchase being made also comes into play; you don't pay the same way in a supermarket as you would at a farmers' market."

Thierry Kneissler adds: "The payment-via-smartphone solution that we offer with our TWINT mobile app appeals to parts of society. Others simply do not use it. If you happen to go to the post office every so often, you will see that many still pay their bills in cash." One primary consideration in this regard is the sense of control people want to retain. The digitisation of payment transactions may make life easier, but it does cause people to feel like they aren't in full control of their spending. For some, this constitutes a reason not to use digital payment solutions.

A lingering attachment to cash

"To change people's behaviour, we have to develop the infrastructure," explains Thierry Kneissler. Both take time. The fact of the matter is, though, that we still have a strong attachment to cash, particularly in Switzerland where cash has a special place.

"In Sweden, 80% of transactions are processed electronically. In Switzerland, cash remains a very common method of payment," adds Gero Jung. "Again, this is explained by cultural preferences. In Japan, for example, the ratio of bank notes in circulation to gross domestic product is 30%; in Sweden, it is only 2%. Switzerland, true to its love of compromise, keeps it somewhere between the two."

Why this love of cash?

"A bank note is a fascinating product," asserts Nicole Leyre. "It is a combination of art and technology. It also plays a part in representing a country, and so it has great symbolic value."

What if politicians decided to get rid of cash tomorrow?

"Singapore had a negative experience with this, and in the end, the government was forced into making a U-turn. From one day to the next, people effectively started to use different currencies for certain transactions. The lesson is clear," explains Nicole Leyre. Proof if ever it were needed that nature abhors a vacuum – take something away, and that void will soon be filled with something else.

Which is safer: hard cash or digital money?

It's tempting to believe that getting rid of physical money would also eliminate the issue of counterfeit money and all other types of fraud linked to cash. But the reasons behind such crimes do not disappear with the death of a system, quite the contrary. Offenders simply adapt their tactics: phishing, hacking, credit card fraud – the imagination of those with ill intentions is endless. "Getting rid of cash will not eliminate fraud," confirms Nicole Leyre.

Digital payment systems are not the exception to the rule and are subjected to attacks of all kinds. "In the digital world, the trust between service providers and consumers is crucial," according to Thierry Kneissler. "In TWINT's case, a large proportion of our costs are related to security. The risks to our reputation are immense, so we have to deliver impeccable service quality. Otherwise, we will lose our customers, and a company without customers does not tend to survive for very long. We are also subject to supervision by FINMA, which has granted us a payment licence, but remain totally independent from operators and service providers."

Which costs more?

While a cash transaction, strictly speaking, costs the consumer no more than the price of the product purchased, the same cannot be said for the merchant selling the product. Counting and transporting the cash to the bank takes time – and, as is well known, time is money. Add to that the cost of printing cash – i.e. buying the ink, depreciation of the machines, technological advances to counter counterfeiting – and "the price of a cash transaction is likely to be around 30 cents", according to Nicole Leyre. "The production costs for a batch of 1,000 bank notes is between 40 and 60 euros on average, with some notes more complicated to produce than others due to the integrated security features."

A card transaction, on the other hand, is always subject to a fee, which is generally passed on to the consumer via the price of a product or service. This "invisible tax" can amount to between 3% and 7%. Although these fees tend to be lower for debit than for credit cards, the costs remain the same at about 3 Swiss francs per transaction. This is why going from physical to purely digital is not necessarily cheaper.

Will mobile payment solutions not put paid to all other means of payment?

"I don't think so," says Thierry Kneissler. "Paying via your smartphone will just become just another way of executing transactions. However, if people use the app simply as a substitute for e-banking or their wallets, its only added value is to make payments easier. So we need to offer additional services, which is something we are working on all the time. This is why innovation is a priority for us."

"Don't forget that in Switzerland, more than 99% of people have a bank account. Half the world's population doesn't," adds Nicole Leyre. "This is why cash will remain one of several payment methods, as will mobile payment."

Moreover, the multitude of players in the mobile payment market – mostly network operators – entails certain risks since they provide financial services outside the banking sector. "While transactions linked to a bank account can be retraced, those executed via other channels cannot be monitored, namely by central banks. They can also be discriminatory. In Africa, for instance, where the mobile payment market is developing rapidly, sellers and buyers can only complete transactions if they are with the same network operator." This is limiting the possibilities rather than expanding them.

And the winner is...

"Hard currency has been around for more than 2,500 years. It will without a doubt continue to exist, albeit in other shapes or forms," concludes Gero Jung. In this merciless war between physical and digital money, we can see a certain degree of rivalry between traditional banks and the fintech sector. However, both sides would no doubt have more to gain from collaborating peacefully than from competing. Physical and digital money are therefore likely to continue to coexist for a long time to come.

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2020 – A cashless world: utopia or reality? (in French)