FEATURE: Banking on the end of cash
By Karl Wilson
13 December 2016

HONG KONG (China Daily/ANN) - One reason for the quick transition away from cash has been Asia’s rapid urbanisation, especially in China.

'Cash is king' was once a popular saying, and it may have been true in the 20th century. However, today, technology is rapidly making cash-filled wallets — and traditional banks — redundant.

Since 2011, digital banking has soared across Asia. More and more people are turning their backs on long-established forms of banking and using their smartphones as wallets.

A study by global consultancy firm McKinsey & Company found that more consumers of financial services are now using computers and mobile devices to do business rather than banks.

McKinsey has been tracking the banking habits of 16,000 consumers since 1998 and found that in developed Asia-Pacific markets, such as Singapore, Australia, South Korea and Japan, Internet banking is now near universal, while smartphone banking has grown more than threefold since 2011.

In the region’s emerging markets, the trend is equally dynamic, with about a quarter of consumers banking online.

McKinsey estimates that more than 700 million consumers use digital banking regularly, with a significant number in China and India.

In China, non-cash payments have been growing by around 40 per cent a year. Last year, China moved into fourth place in the world for non-cash payments, after the United States, Europe and Brazil.

“The move to a cashless society is happening faster in more advanced economies, where there is greater infrastructure to support electronic payments,” according to Peter Morgan, senior consultant for research with the Asian Development Bank Institute in Tokyo.

The main benefits for the poor are safety and security from theft — as opposed to keeping wads of cash under the pillow — and reliable investment returns, he told China Daily Asia Weekly.

“However, they would only benefit to the extent that they can access bank deposits and other payment media in an affordable and convenient way, which is still very much a work in progress,” Morgan said.

Mark Young, head of Asia-Pacific financial institutions at Fitch Ratings, said non-cash payment systems and financial technology (fintech) start-ups have “significant potential” in Asia.

Markets with unbanked populations, and those with a large, emerging tech-savvy middle class, offer the biggest potential for growth, he said.

“These would allow firms to gain substantial scale and potentially change the status quo.”

One reason for the quick transition away from cash has been Asia’s rapid urbanisation, especially in China.

In China, the move toward non-cash payments has taken off in top-tier cities, such as Shanghai, Shenzhen and Beijing, where it is both trendy and convenient to pay without using cash.

China’s UnionPay has helped to encourage this, particularly in the case of debit cards, which outnumber credit cards 10 to one. China has more than 4 billion cards issued — almost enough for every adult to have three each.

Mobile payments have also taken off in China, where the proportion of people using smartphones to make payments is the largest in the world.

In order to accelerate the use of non-cash payments, the Chinese government has increased the availability of point-of-sale machines and opened up the market for domestic card payments to competition.

Competition is intense, as prepaid cards and electronic wallets, such as WeChat and Alipay, have become extremely popular, especially with young people.

In South Korea, the central bank has declared the country will go cashless by 2020.

A report on digital payments by consultancy Frost & Sullivan earlier this year said: “Countries are making a conscious shift toward cashless societies, with South Korea and Australia leading the way.”

“By going cashless, they will essentially also be going ‘cardless’ and onto mobile phones for payments,” it said. 

“Within Asia Pacific, smartphone penetration is the highest in the world and mainstream integration of mobile payments into everyday life is already under way,” it added.

According to a central bank survey, South Koreans carry on average 1.91 credit cards, 2.03 mobile cards and 1.26 check or debit cards, The Korea Times reported.

Four out of 10 picked credit cards as the means of payment they use most, up from three out of 10 the previous year. The ratio of those picking cash, meanwhile, continues to fall, the report said.

As South Koreans are now carrying less cash, the central bank is also issuing less. It released 12.3 per cent fewer 10,000 won ($8.50) banknotes in 2015 compared to the previous year, while the issuance of 5,000 won notes dipped 5.9 per cent, and 1,000 won bills, 3.7 per cent.

“A number of developed countries are turning to non-cash policies to enhance the effectiveness of their economic systems,” Lee Hyo-chan, head of research at the Credit Finance Institute in Seoul, told The Korea Times.

Sweden, which is one of the pioneers in this move, has a cash payment ratio of around 20 per cent, much lower than the global average of 75 per cent. It restricts using cash for public transportation, and many banks do not handle cash. Some countries, mostly in Europe, ban cash for large transactions, according to the institute.

A report by McKinsey estimates that a cashless society will cut costs equivalent to between 0.1 and 1.1 per cent of the gross domestic product (GDP).

According to the consulting firm, countries where the ratio of payment in cash is below 50 per cent are relatively transparent, with the shadow economy amounting to 12 per cent of GDP. However, in countries where cash is used for more than 80 per cent of the payments, the shadow economy surges to 32 per cent of GDP.

“Ten years from now, most developed societies will be heavily cashless,” said Zennon Kapron, founder of Kapronasia, an Asia-focused consultancy that gives strategic advice to fintech firms.

“Consumer usage models (show) that consumers are now pulling for a cashless society," Kapron said.

“When you look at e-payments across Asia, certainly Asia is ahead in digital payments. Many countries are shifting beyond the internet. By and large, people shift to mobile payments quite quickly,” Kapron said. 

However, Joydeep Sengupta, senior partner and leader of McKinsey’s Asia-Pacific banking practice, believes most advanced countries are at least 15 years away from being completely cashless.

“So there is still a long way to go globally,” he said.

“A cashless society could bring many benefits. Governments, for example, will be able to distribute benefits much more effectively, which can help individuals, truly in need of welfare, receive help in a targeted manner, with fewer incidences of fraud,” he added.

Sengupta added that a broader range of services could also be provided, particularly in hard-to-reach areas, such as providing farmers access to microinsurance.

“In addition, remittances could also become more cost effective by utilizing payment technology as overseas workers often have to pay fees ranging from 9-10 per cent of the amount remitted,” Sengupta noted.

In the Philippines, the government, the US Agency for International Development and private banks last year launched a $25 million initiative to create a single electronic payments platform for all transactions in the country.

“The overarching goal really is simple: To eliminate, if not substantially reduce, the use of cash in financial transactions — turning the Philippines into a ‘cash-lite’ economy within 20 years,” according to the website Tech in Asia.

Fintech investments more than doubled in 2015, according to a report in September by DBS Bank on digital banking.

It said that more than $13.8 billion in venture capital was invested in a range of fintech companies globally in 2015, which was more than twice the amount invested in 2014. Deal volumes also jumped, from 587 in 2014 to 653 in 2015.

Payments and lending have attracted the greatest number of investments, DBS said.

“As investors grew more cautious, there was a slowdown in the fourth quarter of 2015, but we expect corporate investments to pick up as fintech brings long-term benefits to their organisations,” the report said.

“In developing countries, fintech firms are helping to reach the under-banked population, and hopefully, the unbanked population in the long term," according to the report.

“Mobile applications are able to provide a wide array of services that may not be available in nearby bank branches,” it noted.

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