Cash – it’s almost become a dirty word – associated with avoiding taxes, reluctantly paying for cabs, and obnoxiously splitting bills 14 ways with you and your college friends at a restaurant.
Who carries it? Who even uses cash anymore? In a world of increased “electronification”, why is cash even needed?
To be fair, there is no doubt electronic payments are growing. 175 Billion – this was a recent number I read on a payments report on the EU, referring to the number of non-cash transactions that Europeans would make by 2020. The number here in North America was likewise comparable, and represented a strong trend towards electronic payments.
But further down in the article was a more subtle, but revealing fact that 60% of all payments in 2020 would still be made in cash. With some simple math, that means that over 200 Billion transactions will be made in cash 7 years from now. And that’s inclusive of 7 more years of smartphone growth, as well as 7 more years “attempting” NFC. And still: 1000 cash payments per person on average in the EU and in North America alone!
So why is this the case? The challenge with cash is not for the person who uses it – the payer – but rather the person who receives it – the merchant or payee. I will make a reasonable assumption that most payers by and large prefer electronic means of payment – credit, debit, ACH – over cash. But I feel we often forget that payments is a two sided ecosystem and, in most cases, the ability to pay electronically is not a choice the payer can make, but rather an ability that is either accepted or rejected by the recipient. And thus, the true growth of electronic payments is not about the person making that payment but the person receiving it. That’s why Square’s approach – arguably almost entirely merchant focused – is successful in pushing cash to electronic, while other approaches focused directly on consumer – Google Wallet, ISIS, any NFC play known to man – have yet to find success. Yes the consumer wants to pay electronically, but the merchant doesn’t; or does so reluctantly. Merchant wins. And cash prevails.
But if moving money to electronic means is mostly about the merchant, how easy will it be to create this “acceptance”? Unfortunately cash still has a strong set of incentives that I believe will be challenging to uproot. For one – cash has the perception of immediacy: its very tangibility (although also a major flaw – expensive, dirty, easy to fake) creates instant trust, a message of “you’ve been paid right now”. The removal of cash also comes with the addition of new costs – systems to take electronic money, software to account for it, and more. Of course, there are many costs to already accepting cash, but convincing someone that they are paying too much for status quo is always tougher than incurring cost for change.
Cash is also a market of its own. Like “technology” itself, eliminating cash means eliminating jobs. Now, of course, we can argue that jobs are also created, but largely creating an efficiency in the system means less processing and less labor required. To be clear, I still feel largely that removing cash is an advantage for consumers – a consumer win, no doubt. But in this instance the removal of labor is not always an easy hurdle to overcome for the recipients (especially in large organizations – think governments and the like).
On the whole, I believe that the incentives of electronic payments, although widely “proven” and backed by “data”, aren’t always strong enough to create behavior change, which, incidentally, doesn’t necessarily have a price.
So when will the reign of cash end? Certainly not anytime soon. But if there is a way to accelerate the growth of electronic payments, it will likely happen where consumer change meets merchant status quo. Put another way: giving consumers the ability to pay electronically without relying on the merchant’s ability to “veto” their choice, will create the biggest growth.