As the world goes digital, is cash still king?

Anyone who has visited Dubai would agree that it is an amazing city. Who would have thought that in Dubai last week for SIBOS, the annual SWIFT (Society for Worldwide Interbank Financial Telecommunication) International Banking Operations Seminar, there were over 7,000 bank and payment specialists gathered to exchange the latest information over global payments and technology?    

Most people who use banking services never think twice about how the basic financial infrastructure (the plumbing) actually works. But SWIFT was established as a cooperative society of its member financial institutions in 1973 to operate a messaging network that enables members to send information about financial transactions securely and reliably to each other.  

Not having attended SIBOS for quite a number of years, I had forgotten how important it is to update oneself on the tremendous progress that has been made in banking technology, payments and settlements and funds transfers. Of course, SWIFT does not do the actual transfers, but it sends the payment instructions that enables the correspondent banks to debit or credit their accounts with each other.  

Browsing through the stands, I came across some excellent research by Mastercard on cash and electronic payments. Did you know that 85 per cent of all retail payment transactions are done with cash, equivalent to 60 per cent of retail transaction value? In fact, Mastercard estimated that in 2011, the total amount of global spending was $592 trillion, involving 2.8 trillion transactions. That is nearly nine times global GDP. Of this, 89 per cent involved spending by government and business, and only 11 per cent, or $63 trillion, was by the consumer.

Out of total consumer spending, 34 per cent by value was done using cash, but 85 per cent by the number of transactions. In other words, more than two-thirds of consumer payments by value are in the form of cheques and non-cash instruments.  

In fact, the world is fast moving towards cashless or electronic payments.  Seven countries, mostly in Europe, have already moved to an almost cashless society (over 80 per cent non-cash). Four countries – the US, Germany, South Korea and Singapore – are on the tipping point of becoming cashless societies (69 per cent to 80 per cent non-cash usage). Within Asia, Indonesia and India are still high cash users, with 69 per cent and 68 per cent respectively, whereas China is in the mid-category (55 per cent). 

We all know that the higher the level of cash usage, the larger the informal or grey economy. Mastercard estimated that out of the global cash usage, US$8.3 trillion of consumer purchases annually are made in the informal economy, of which as much as $1.5 trillion is in illegal purchases. Indeed, the study suggested that high cash usage is correlated with corruption and also difficulties in doing business, but cash business is not necessarily correlated with tax avoidance.  

The cost of using cash can be very high indeed, estimated at roughly 1.5 per cent of GDP, so it is not surprising that banks and governments are encouraging the move to cashless electronic payments.  

Kenya, for example, was one of the first countries to use mobile payments to replace cash. Working with Vodaphone, Kenya introduced M-Pesa, a remittance and payment scheme using mobile phones, which enabled rural Kenyans to pay each other without using cash. Many countries have not been able to do this because bank regulations do not yet allow mobile telephone companies to use their deposits as cash equivalents. But it is already coming, because there are more people worldwide with mobile phones than those with bank accounts.  

Indeed, a Bank of Finland research paper actually studied electronic payment usage in 27 European countries and concluded that the higher usage was positive for economic growth. So innovation in cashless payments cannot be stopped.

Indeed, the traditional world of central bank control of money is being challenged by the arrival of Bitcoin and mobile payments.  

Bitcoin is an electronic currency that enables the user to transfer value via computer or smartphone without going through an authorised or regulated financial institution. Currently, payments through the banking system are settled using central bank money, meaning that if you pay me through your bank by cheque or bank transfer, your bank and my bank will clear the payment through their accounts with the central bank. This is legal and final payment and settlement.  

However, if mobile phone companies or electronic technology platforms like Alipay use deposits with them to enable mobile-to-mobile payments, should these deposits and credit created through mobile debt be counted as official money supply?

Consequently, one of the most interesting innovations coming out of mobile payments is whether mobile money should be controlled by central banks and therefore regulated. Throughout the world, central banks have woken up to the fact that their wholesale interbank clearing and settlement systems can be bypassed by mobile-to-mobile payments. If that is the case, Bitcoin and the electronic platforms that effect the payments and have a float (the amount that sits with the holder on an interest-free basis) will have the capacity to print money.  

Indeed, who will get the seigniorage or the right to interest on the monetary creation, which traditionally has belonged to the state and delegated to the central bank?  

Of course, we used to believe that central banks can only print money when it is backed by gold or promises to pay by the government. Today, advanced central banks are printing money faster than ever, so should we trust these central banks as much as the electronic geeks who create cyber-secure Bitcoins?

After all, when the US Fed hinted that it was going to withdraw quantitative easing in May, and then did nothing in September, causing financial markets to go up and down like a yo-yo, the credibility of printed money was dented somewhat.  

Central bankers are supposed to take away the punchbowl when the party gets interesting. Not only has the punchbowl not been taken away, they are still adding to the punch. No wonder 69 per cent of bankers at the seminar I attended think another financial crisis is in the offing. Ouch.

 

Andrew Sheng is president of the Fung Global Institute.