Cash is going away. It is going away faster than anyone thinks and will stick around just longer than checks (and all other paper items), but that is not too distant in the future. Checks will eventually go away because it is the will of the people. Cash, on the other hand, will be relegated to history because banks will stop being the enablers and hasten its demise quicker by charging for the service of dealing with cash. Cash has about another five years of glory and a total of about ten years of useful life. The question is, what is your bank planning to do about it?
A Cashless Strategy
While checks are annoying for the average customer, banks put up with it since it is a tradition like bad coffee in the break room. Since Check 21, paper checks are just theater, as we digitize them right away. Because of this, checks will hang around as long as households put up with them. However, cash banks will have to help hasten its demise as coin and currency cannot be digitized.
Consider that for an average bank like CenterState, the dealing, storing, accounting and movement of coin/currency take about 10% to 15% of a bank’s expense structure to include labor, insurance, reserves, branch space, Fed fees and security. Think of all the vaults we have and all the cash in ATMs alone. Tufts University added up the cost of managing cash by individuals, financial institutions, businesses and governments and it came to about $200B. While cash is expensive, the phasing out of cash will not occur because banks realize cash is too costly to handle, the phasing out of cash will occur indirectly driven by the businesses.
While banks might put up with the direct expense in dealing with cash for another 10 years, it will be the competitiveness of banks that want to capture commercial business that will drive the movement. For Danish retailers and restaurants, owners will be allowed to refuse or charge extra for cash and force customers to pay by electronic means.
Africa, in particular, has been a huge successful global experiment of how if you eliminate the transaction cost for people of having to go into a bank or government office to collect a payment, the economy becomes more efficient. In India, the change is occurring as the Modi government has skipped over 50 years of banking and is moving the system more towards electronic payments because they figured out that the cost of cash detracts about 12% from their GDP. Not only is cash expensive, but as Africa and India found, if you move to digital payments, transactions occur easier and there is a 1% increase to GDP in addition to the cost savings and better allocation of resources.
In addition to efficiency, there is the equality issue. The physically challenged, the economically constrained and the parent that needs to watch their kids instead of travelling an hour or more to a town center now has one less thing to worry about when currency is transmitted digitally. The Dutch regulation mentioned above is supported by the United Nations as they realize the easiest way to help financial equality is through digital payments. While the US is a little more progressive that sub-Sahara Africa when it comes to cash availability, there are still whole sections of our society that are disenfranchised because of lack of safe cash access. Banks will need to support the social and economic aspects of a cashless infrastructure and will move to support it.
Then there is the issue of security. The general population will push back and fear doing away with the American Greenback. Until, that is, they realize how truly insecure cash is. With no registration or paper trail, cash is hundreds of times less secure than electronic payment. Over this last 4th of July, more than 500 businesses were robbed of their cash in America not to mention the countless crimes against individuals involving cash. As thieves become smarter, society can increase its security around electronic payments much easier and faster than it can to protect coin and currency.
How Banks Need To Plan
Planning begins now as every bank should have a set strategy to help their business customers become more digital. Almost every bank has online banking and bill pay and now about 40% of the industry has to push towards mobile. In addition, banks need to make a push to expand their cash management offerings to allow digital disbursements and collections for their customers (Our roadmap can be found HERE). By helping the small and medium business move away from cash, we can reduce the cost for ourselves and our customers while enabling better service. Doing away with cash drawers, reconciliation time, armored carriers and trips to the branch are all an immediate advantage. Gaining the data around the digital transaction has already proven to be a huge plus for businesses and moving away from cash will allow a more robust data set.
To transition, one day banks will charge to have “cash access.” Just as banks have successfully transitioned customers to electronic statements, so too will they transition customers to electronic payments. At some point in the cycle, banks will shift to charging customers for cash access - a figure of approximately $170 per year if they were to do so today.
Changing over to a cashless society will not be easy in the short run. We still have a ways to go on security, but if it is Blockchain technology or additional authentication, we will figure it out in the next three years. We also have to deal with the “no connection” problem to think about and processors and businesses either need to live with situations when power/internet connection goes down or have a contingency system. Either way, that cost is much less than the cost of dealing with cash. Like driverless cars, the technology won’t please everyone, particularly the hardcore traditionalist’s. However, like the printed airline ticket and the paper book, preferences will shift and economics will win out.
Submitted by Chris Nichols on July 06, 2015