Who wins when cash payments disappear?

The banking industry has long reassured itself that even if customers don’t always like banks, they trust them. And trust is the over-riding base of a financial relationship.

"Customers everywhere – not just Australia – are more prepared to try other new technology payments once they have used one."
Andrew Cornell, Managing Editor, BlueNotes

Yet according to a fascinating new book, thanks to the reputational damage of the financial crisis, at a time when new technological developments are occurring rapidly, the next generation of bank customers may trust technology more than banks. (Bearing in mind a certain insensitivity to privacy and security issues in this generation.)

The book, “A New Era in Banking: The Landscape After the Battle” is by Angel Berges, Mauro Guillén, Juan Pedro Moreno and Emilio Ontiveros, who are financial academics and management consultants.

It is, unsurprisingly, skewed towards the dire northern hemisphere experience, making little particular reference to the Asia Pacific, but its themes are undoubtedly universal. The particular argument that banking growth in emerging markets is now being driven by young customers who trust banks less and technology more is worth considering deeply.

And not just in the “digital disruption threatens traditional bank” vein tapped so often.

In the book the authors say customer loyalty, especially by the young, was scant even before the financial crisis. Technology will make competition more flexible and will make switching between banks easier. “Relationship” banking, the traditional form of banking, will increasingly give way to data-driven information about customers, they argue.

That may be so but before that seismic upheaval there will be plenty of interesting tremors.

At last week’s RFi Australian Payments Innovation Forum, co-sponsored by BlueNotes, RFi Consulting managing director Lance Blockley made the point that customers who have tried one new technology and more likely to try another.

He was referring specifically to “tap-and-go” cards, but the insight has much broader implications. Blockley said that most people are “locked in” to their payments behaviour by the age of 30 – they use cash for the newspaper on the way to work, the credit card for school fees, debit card for groceries, BPAY for the electricity bill and so on.

To change these habits requires not just another choice but a stronger value proposition – something cheaper or more convenient. Even then, change takes a long time.

Except in the case of “tap and go” cards in Australia, where the take-up has been astronomical, particularly since the technology was adopted by major supermarkets.

Australians are making more such contactless transactions in a month than the much larger British population is in a year. Within 18 months of installing touchpads, over 70 per cent of all MasterCard and Visa transactions in Coles supermarkets were contactless. Visa had 40 million payWave transactions in January 2014, compared with 28 million in September 2013 –  43 per cent growth in four months.

There are implications here about the declining use of cash – although cash won’t disappear any time soon (see: Where is all the cash?). Contactless directly replaces existing cash transactions, but also lifts the number of transactions where a customer will use a card, encroaching down the cash scale.

But it is the other insight from RFi’s research that is significant: customers everywhere – not just Australia – are more prepared to try other new technology payments once they have used one. So those who have used a “tap-and-go” card are more likely to try a “tap-and-go” smart phone. Those with a smart phone are more likely to try its banking features (reasonably enough).

This adds another dimension to the thesis in “A New Era in Banking”: not only is the next generation more likely to 'trust' banking technology, they more they use it the more new technologies they will try.

In a presentation by RFi Advisory, managing director Alan Shields presented a chart showing the propensity of consumers who had tried a contactless payment to try another new form.

Asked to agree strongly with the statement 'I am interested in new ways to pay', more than two and half times as many people said yes if they had already used contactless, than those who hadn’t. That’s not unreasonable: early adopters are more likely to be adventurous.

In the US, consumers were more than three times as likely; in Australia one and half; in Singapore 77 per cent more likely and in Indonesia 38 per cent.

The most dramatic implication will be new players in payments who are not traditional financial services institutions.

In a new report by the Bank for International Settlement’s Committee on Payments and Market Infrastructures (CPMI), central bankers examine the role of non-banks in retail payment services and analyse the implications of the growing importance of these entities in retail payments.

The main issues identified relate to the potential impact of non-banks on operational risk, a level playing field, consumer protection and the risks that might emerge if outsourcing of payment services is concentrated in a single or a few non-banks.

Such issues didn’t arise when the payments system was the exclusive preserve of the banks – for better or worse.

While the banking system long held payments exclusively, the implicit contract was they protected both ends of the transaction, carrying the clearing and settlement risk (or at least their agents did).

While the latest launch of a payments gizmo (Apple announced a contactless payment capability using near-field communication last week) doesn’t actually disenfranchise the banking system, what it does do is continue to insert other brands into the chain, disguising how a payment is moving from one account to another.

At present, because the accounts at either end typically belong to authorised deposit-taking institutions or their like, consumers using a tap’n’go card or NFC phone perceive bank involvement.

But – as indeed with PayPal – the technology is becoming more prominent than the transaction enablers.

The implications of all this insight, in a world that is rapidly evolving, are pretty clear. Payments are already being disrupted, dramatically. Cash is rapidly diminishing as a payment vehicle even for low-value transactions.

In the two years to September 2013, RFi (in work for the Australian Payments Clearing Association) found a decline of 16 per cent in the propensity to use cash. Blockley said the use of cash “is expected to follow an ‘S-bend’, decreasing quickly in the near term due to contactless, eTicketing and other efforts to promote electronic payments” before levelling off at a lower rate.

Couple that with an increase in technologically modified payments offered through non-bank providers like Apple, and it’s easy to see why there are many bankers worried about a business which is linked to between a third and a half of all revenues.

There is one positive note for traditional institutions: the less cash people use in their transactions, the more they keep in their deposit accounts.