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Cashless transactions are not always cheaper: Guillaume Lepecq

Interview with Global expert in payment systems

Guillaume Lepecq

Kanika Datta
In recent years, a debate has been taking place in the developed world about the utility of bank notes and coins, with several commentators suggesting that cash will disappear in about ten years. Research by international payments industry expert Guillaume Lepecq, however, shows that the demand for bank notes and coins has continued to grow at a significant pace around the world, in parallel with electronic payments. What explains this durability and why should the use of cash be encouraged when alternative payment systems are gaining currency? Lepecq discusses these issues with Kanika Datta

The thrust of your research suggests that several developed countries that are aiming to becoming relatively cash-less are moving in the wrong direction. Could you explain why?

The process is driven by commercial banks and payment service providers rather than governments or central banks. In Sweden, for example, the exercise is being driven by the two major commercial banks, which are closing down ATMs and denying cash services at branches, making it more expensive and burdensome to get hold of cash. But recently the central bank has declared that these banks have gone too far and is calling for a debate in Parliament on the minimum level of cash services banks should offer.

Our research shows that cash is more than just a payment instrument - it is a store of value; it also plays a critical role in emergencies and when technology breaks down. For instance, on January 1 this year, the electronic payment system of the London Underground - what is popularly known as the Oyster Card - broke down and they had to let people use the Underground for free. But, what happens when a whole economy is on a cashless system? In Belgium, the entire card payment system broke down the day before Christmas, so those doing their last-minute Christmas shopping had to rely on cash payments exclusively. In fact, if you want examples of cash-less economies, you have Panama, which has no central bank and uses the US dollar as a currency. Or Zimbabwe, which ceased printing banknotes in 2009 because they had lost value following an extended period of hyperinflation!

Some argue there is war on cash. I'm not sure we should call it a war. But, on the one hand we have cash that is a public good, owned by society as a whole. On the other hand, we have private business interests that are promoting alternatives to cash. They have an interest in shrinking the market share for cash and are promoting themselves aggressively. If there is a war, it is an assymetrical one. To give you an idea: In 2011, Mastercard and Visa spent $841 million and $873 million on marketing (according to their annual reports). PayPal is currently running a large advertising campaign, which included broadcasting a television spot during the Super Bowl. (I don't know how much they're spending, but the cost of a single, 30-second Superbowl commercial is in excess of €5 million.) Because cash is owned by everyone, no one is marketing or promoting the use of cash. And even though it's not being marketed, cash usage is growing worldwide - alongside other means of payment. Don't get me wrong: There's nothing wrong with alternatives to cash. But we should ensure fair competition between all means of payment so that everyone has access to affordable, safe and efficient payment systems. The first step is to better understand why cash is being used and why it remains such a prominent payment instrument. That's the purpose of my report.

But aren't cashless transactions more efficient?

There is the issue of accessibility and cost. Paying with an iPhone is fantastic but an iPhone costs $900, so I do not see how it makes payments more efficient or affordable. But it should be noted that we also need electronic payments as a means to transfer cash - the MPesa system in Kenya has become an efficient system to transfer cash. The question is not electronic payments versus cash. What we've been seeing for the past 10 to 20 years is a huge diversification in terms of payment systems that people hold - credit cards, debit cards, pre-paid cards, e-wallets, apps…With this comes increasing specialisation. For instance, today, you will use the Oyster Card to access the London Underground and then another card from Starbucks to buy coffee. All this ultimately limits competition, especially for small businesses which do not have the ability to offer specialised cards. Cash is universal and that is essential to business.

Your research referred to the increasing risks of payment systems like PayPal and so on. What kind of risks?

PayPal is undeniably a proven success. But what we are seeing is a huge increase in cyber-criminality, which is often associated with electronic payment. According to the Gemalto Breach Level Index, over one billion personal records were compromised in 2014. That is a 78 per cent increase over the previous year. Secondly, there is also the issue of privacy -information can be leaked online, as we are seeing with the Panama Papers now.

The counter-factual argument is that the proliferation of cash transaction does not preclude or reduce crime, whether it is terror financing, drug trafficking or money laundering.

First, cash is subject to increasing regulation, nationally and internationally, for example on the amount of cash that can actually be carried across borders. Second, technology plays an important role in monitoring this. Bank notes are issued by regulated authorities and are traceable. For instance, inks that are being used today can be detected by sniffer dogs. Besides, cash is not easy to transport. $1 million in Euros would weigh about two kg. Imagine the weight of the kind of money they are talking about in the Panama Papers!

In economies like India , where black money is a big issue, it is suggested that the cash economy fuels the shadow economy and, for instance, there is a move to ensure transactions above a certain limit be conducted only through credit cards so that the money trail is visible. Isn't this a big advantage?

Several countries have imposed these types of limits but my personal view is that they don't serve a purpose. Either the transaction is legitimate or it isn't. And if it is, then so is the use of cash. Cash isn't the cause of criminal behaviour. Criminals use mobile phones and cars, but no one pretends they are a cause of crime. In reality, cash has many drawbacks as a means to fund terror, launder criminal proceeds or avoid paying taxes. Money launderers and tax evaders use sophisticated legal constructions, shell companies and complacent legal systems to launder dirty money as demonstrated by the Panama Papers. Serious criminals avoid cash. This is why terrorists such as the Islamic State attackers last November in Paris used prepaid bank cards to cover their tracks while preparing the attacks. Cash provides a certain level of anonymity. But that anonymity is more limited than with gold, diamonds, Bitcoins or even prepaid cards.
Your views on the future of Bitcoin?

We are seeing great innovation in terms of new payment instruments: cards, contactless, mobile payment and crypto currencies. Digital currencies may have a future but they also face several significant challenges. They are unregulated in some cases, depend on infrastructure and are complex to use and consume considerable amounts of energy. In any case, I do not believe digital currencies will replace cash.

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First Published: Apr 16 2016 | 9:52 PM IST

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