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COMPELLING REASONS FOR THE CONTINUED DOMINANCE OF CASH. Graham Levinsohn Regional President, Group4 Securicor Member of ESTA Cash Forum. Cards: The Pretenders to Cash’s Throne. A CHALLENGE TO THE DOMINANCE OF KING CASH?. Clever…but simply not true.
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COMPELLING REASONS FOR THE CONTINUED DOMINANCE OF CASH Graham Levinsohn Regional President, Group4 Securicor Member of ESTA Cash Forum
Cards: The Pretenders to Cash’s Throne A CHALLENGE TO THE DOMINANCE OF KING CASH?
Clever…but simply not true Although In the UK debit card payments have recently overtaken cash payments in terms of VALUE… this is what APACS the UK Payments Association said in March this year: • “Cash still accounts for more than six in ten (63 per cent) of all day-to-day payments by volume” • “..over 96 per cent of all payments under £5 in value were made with cash in 2006.” • “Acquisition of cash from cash machines has grown dramatically - in 2005 we withdrew £179.8 billion in cash from ATMs compared to just £80.2 billion in 1996” • “APACS figures show that although plastic card payments are increasingly popular, Britons show no signs of abandoning cash any time soon.”
Across Europe Cash is THE Competitor to cards EFMA Paris 2006
Role in Economy Stable Source Data BIS / ECB 2006
Observations • Scale can differ country to country: • New Member States typically ~ 8% • USA & Poland ~ 6% • UK & Scandinavia ~ 4.5% • Very Stable over time • Consumers like cash
Larger Denominations NOT just for Hoarding Seasonal (Christmas) RETAIL Spikes Source ECB
€100 pattern NO DIFFERENT to €50,€20, €10 or €5 • €100 is now primarily a RETAIL denomination • Over 60% of the value of Euro currency in circulation will be affected by retail usage trends
Across Europe Consumers Prefer Cash Eurobarometer Survey Results
Eurobarometer Q5a Which one o f the following means of payment do you prefer to use to pay for a significant purchase of at least 100 Euros? NMS: 69% EU 15: 45% Source Eurobarometer Sept 2005
“Europeans show no signs of reducing their use of cash as their preferred means of payment.” “The aggregate number and value of ATM cash withdrawals grew at an annual rate of 5.9% and 7.1%, respectively, from 2000 to 2004, although the value of each withdrawal grew only about 1.1% a year during that period.”
Consumers Prefer Cash for Good Reasons THE UNIQUE CHARACTERISTICS OF CASH
Attractiveness: Unique Features • Certainty of acceptance Legal Tender • Immediate settlement Fastest Settlement Possible • No infrastructure requirement Key for P2P • Ease of use 8 to 80 year olds • Ease of monitoring Controls indebtedness • Anonymity Not just for Crooks! • State-underpinning Confidence
Cash assists expenditure control • When Dutch consumers wish to limit their expenses they most often make use of cash. Hoofdbedrijfschap Detailhandel study (2002) • “Cash cannot lead to over-indebtedness if the funds are withdrawn from a supply channel which does not authorize debt. On the other hand, the credit facility offered by credit cards can lead to excessive debt for consumers. The borrowing facilities available with a number of current accounts can also lead to this, even though in principle they are limited to a certain sum. “ QUADEN, Governor NBB, December 2005 • “The convenience of the cashless lifestyle has created a group of ‘cavalier cardholders’, who use cards for everyday purchases, but are less in control of their spending as a result. More than a third of the overspenders (37%) go over budget on their debit cards because handing over their cards does not register as overspending.”UK NS&I Study March 2006
Validity “The most secure form of payment”US SECRET SERVICE ICCOS 2006 Current levels of counterfeiting of major currencies very low • 1 in 10,000 ($ internationally) to less than 1 in 20,000 (€) banknotes • Not the case with alternative forms of Money…. 11% of European Adults victim of card fraud!! (SOURCE: TNS Pan European Survey for ESTA 2006)
Eurobarometer 1/3rd of Crime is for > $500
Eurobarometer again… 1/3rd of people get NO REIMBURSEMENT
A New Record! • 45.7 Milliontransactions hacked affecting customers in USA, Canada, UK, Ireland & Puerto Rica • 455,000customers have had personal data stolen - including driver's licence & military ID details “ There is a lot of information we don't know, and may never be able to know ”TJX Spokesperson “ the intruder had access to the decryption tool for the encryption software utilized by TJX"TJX submission to SEC
PROPOSED DIRECTIVE ON PAYMENT SERVICES • LEGAL FRAMEWORK FOR SEPA • CURRENTLY WITH EU PARLIAMENTARY COMMITTEE • Currently EXCLUDES CASH • SEPA SCHEMES • Design & implementation delegated to EPC • Timetable up to 2011 for final phases NOTE Completely separately the DG Competition is conducting an investigation into the European Financial Services Industry on anti-trust grounds. Damning initial report on Payments Industry. Charlie McCreevy Neelie Kroes
What the EU Commission (Internal Markets & Services DG) says… • “The proposal for a Directive focuses on electronic payments, which aremore cost-efficient than cashand which alsostimulate consumer spending and economic growth” PAYMENT SERVICES DIRECTIVE PRESS RELEASE 2005 • “The starting point for the assessment of social and economic impacts of these alternatives was the need to enhance the trust of users in remote or electronic payments in order topush back the use of cashin particular removal of obstacles (caused by mistrust) to the further use of cheap and efficient means of payments” PAYMENT SERVICES DIRECTIVE IMPACT ASSESSMENT 2005 “(55) How can efficient payment instruments be promoted andcash and cheques be repositioned?How can theprice signallingmechanism be improved to promote the use of the most efficient instruments?”... “(58) Are there other rules or market practices that favour the use of cash/cheques? Are there examples ofbest practice to reduce consumer reliance on cash without provoking consumer organisations?” SEPA CONSULTATION QUESTIONS 2006
McKinsey’s Opinion EFMA Paris 2006
What the EPC says… • “The cost of cash is generally ill externalized to actual users, thus burdening the pricing of electronic payment instruments, preventing their competition for acceptance on the basis of genuine customer value, and stalling the banking industry’s aim to contain operational losses in this field”SECA FRAMEWORK 2005 • “The sheer cost of cash to society as a whole. This cost has been estimated at around EUR 50 billion p.a. ….. With the current organizations and cultures, incentives are scarce that would create the actual conditions for key stakeholders to reduce this cost” EXECUTIVE SUMMARY SECA FRAMEWORK 2005 • Therefore it is proposed that the scope of this work encompasses: • not only banking industry initiatives to reduce the cost basis of cash handling (notably wholesale cash) services, • but also concerted actions by the key stakeholders to longer term reduce the proportion of cash in circulation. CWG FINDINGS & RECOMMENDATIONS PAPER 2003
Recent Central Bank Research The Netherlands (DNB) 2004 & Belgium (NBB) 2005 • Central Bank lead • Stakeholder panel • Costs of banks, retailers & Central Bank • Substitution simulations conducted Balance of fixed v variable costs very different for cash v cards 2 different cost drivers identified: • Cost per additional transaction (volume) • Cost of increasing amount spent (value) Interaction of these cost drivers & differing balance of fixed v variable cost has profound effects upon substitution
DNB & NBB Payment Cost Studies • Cost of payments similar 0.65% (NL) 0.74% (BE) • Similar cost of cash 0.48% and 0.58% • Substitution Simulation (2x Debit cards & 6x e_purse gave virtually identical results: Only 0.02% GDP saving of VARIABLE ONLY costs “Such a saving is rather low, even if a comparison is made at overall cost level (0.74% of GDP). Only a shift to a “cashless society” could generate substantial savings. This, however, is a purely hypothetical scenario, given the fact that it is cash that the public most wishes to use.”Quaden 2005
Not all cards are equal! Source Data: NBB Presentation to ESTA 2006
DNB / NBB Simulations are OPTIMISTIC Cases… • …Because the DNB / NBB assumed optimal migration (LV to e_purse, higher value to Debit cards and no credit card substitution) • IF CONSUMERS BEHAVE NON-OPTIMALLY THE COST OF PAYMENTS TO THE BANKING SECTOR CAN ACTUALLY INCREASE e.g. If 30% of the higher value payments went to Credit Cards…. • €1.9Bn INCREASE IN VARIABLE COST OF PAYMENTS • Is a 5 fold increase in e-Purse uptake a credible scenario? • Is NO migration to Credit Cards a credible scenario?
The Concept of Seignorage • Seignorage = The value the State receives by issuing token money (banknotes and coin). The difference between the intrinsic (cost to produce and circulate) and representational (face value) value of the token. • Seignorage is NOT a windfall to the State… “Seignorage revenue thus allows the federal government to finance a portion of its expenditures without having to collect taxes.” Source: Bank of Canada • Seignorage is the ultimate “Stealth Tax” Because it represents the interest lost to the general public by holding state issued I.O.U.s (cash). The State generates a return upon this “interest-free loan” unwittingly granted by the public – seignorage.
Public (State) v Private Money • Cash & cards are both forms of money • Cash is State issued & generates a revenue stream for the State • Cards are privately issued and generate a revenue stream for their issuers • Must consider Seignorage when evaluating Public Money (Cash) compared to Private Money (cards). 2005 EU estimated seignorage revenues: over €23 Bn
Revenue v Costs • Payment Cards are highly profitable to their issuers • Cash is primarily a cost to commercial banks “ The implications can be quite dramatic in terms of cash. In the current system, cash just generates cost to banks while other payment instruments do not lower banks’ deposits which still represent the major source of revenue to them. The situation is quite schizophrenic in the sense that banks are responsible for ‘selling’ central banks products without getting direct revenue or premium. This paper shows that under these circumstances it may well happen that in the future banks organize the distribution of cash in such a way that it becomes too costly for customers and they may switch to other means of payment (in the first place, to various payment cards). This may not be socially optimal. ” “…. An interesting issue is also the question: what will happen to seigniorage revenues and to the money aggregates? Thus, does this possible course of development have any macroeconomic implications? Here we cannot answer to these questions but they surely deserve further analysis. ” from ATM Networks & Cash Usage, Snellman, Bank of Finland Discussion Paper, 2006
ECB Intervention in the European “War on Cash” Argument • “ These discussions may have contributed to a somewhat distorted perception of the merits of cash, which is by far the most widely used payment instrument in the euro area. “ • “ECB’s position vis-à-vis the different payment instruments is neutral” • “…it is also important to underline the contingency function of cash for the economy. Cash has also proven more secure in terms of fraud/counterfeiting resistance than electronic payments instruments.” • “ECB has evaluated existing studies… • “ CONCLUSIONS Only moderate potential savings can be achieved from a substitution of cash by electronic means of payments. Most probably, much greater cost savings could result from optimising the cash handling process, in particular the lodgement processes. The Eurosystem is committed to contributing in this context together with all relevant stakeholders in the cash cycle. “
STOP PRESS:Single European Payments Area (SEPA) PRICES • The ECB has publicly expressed the Eurosystem’s concerns: “Moreover, the Eurosystem is concerned that the implementation of a SEPA for cards may lead to increases in card fees and could thus be paradoxically detrimental to European citizens and merchants”ECB November 2006 • Such concerns are not without foundation • Belgium move from local debit card schemes in favour of SEPA-compliant international schemes would result in merchants bearing cost INCREASES of some €105M. • “It is in the interest of the merchants that they prepare to accept Maestro. Otherwise, they will not be able to continue to accept debit cards.” Belgian SEPA Migration Plan V3.0 Jan 2007 By APRIL…… “ Banks and other stakeholders in payments, have decided that Maestro will not replace the national scheme by 2008 ”
ESTA’s Vision Cash can be made cheaper by re-engineering the cash cycle
INFLOW COST is 2x > OUTFLOW COST…. • IF INFLOW COST = OUTFLOW COST THEN… €10Bn OPPORTUNITY FOR THE INDUSTRY
The “Lean Cash Cycle” • We are convinced the “inflow cash cycle” can be re-engineered to substantially reduce costs • EVERY study concurs upon high cost of branch payments • ECB appears to agree • Requires commitment from ALL stakeholders • Central Banks • Commercial Banks • CIT Companies • Equipment Manufacturers • Electronic Payments may be new, but… Cash can be Sexy!
Thank You Graham Levinsohn Regional President, Group4 Securicor Member of ESTA Cash Forum