Regular readers will be fully up to speed on the Reserve Bank of India’s botched attempt at a handbrake turn style demonetisation thanks to Jerri-Lynn Scofield’s thorough coverage (see here, here and here for more background on this sorry tale). But the Indian government’s attempt at implementing a strategy of moving an economy away from physical cash (notes and coins) is only the latest — although the most aggressive seen to date — in a global battle to make cash obsolete. What’s new in India is that users of the payment system are being made to demonetise by coercion. But in every major economy, physical cash is under siege.
In this article I will show how central banks, the commercial banks (especially the Too Big to Fails), governments and technology companies have been waging a war on cash for decades. Inspired by the seminal work of Langdon Winner, who made the bold claim that technology has politics, I will also argue that drive to “reform” and “modernise” the payments systems we use, with its incessant focus on technology, has camouflaged the disproportionate power of some of the agents seeking to force this change.
Before diving in to the historical examples, it is worth considering in the context of the payments systems we use what, exactly, is physical cash? Leaving aside the obvious stores-of-value and means-of-exchange descriptions — and looking at cash as a payments system — it has some unique and rather special characteristics. Firstly, as a service, it is free at the point of use. When I pay you in cash, neither of us incur a fee for my settling my account with you by handing over notes or coins. Secondly, while the provision of cash as a service definitely does have costs associated with providing that service to us, the cost of that service is progressive. To put that another way, if your liquid net worth is $10,000, then it costs you little or nothing to store that wealth in cash. If, however, your liquid net worth is $1,000,000,000, it costs you an awful lot to store that wealth in physical banknotes.
Keep these characteristics in mind as you read the remainder of this piece.
Softening Up Society for the Decommissioning of Cash
In case you hadn’t noticed, we’re all being hit upon by some pretty powerful institutions who are trying their best to convince us that it is an inevitability that physical cash will go the way of the dodo. As just a couple of examples, firstly here is a TV commercial which is currently being run in the UK by state-owned RBS subsidiary Nat West Bank:
For those who don’t want to or are unable to view the clip (its worth watching just for the sheer creepiness of it, reminiscent of the scene from Frankenstein where the monster encountered the girl and the pond) the key message from the commercial is encapsulated by the line:
“… then we thought, in a time when the next generation may not even use pennies, isn’t it up to us to educate them for their financial future?”
As always with the invisible hand’s invisible little helper — often referred to as advertising — you know something is up when we’re told things will happen but how those things come to happen lacks any agency. Just who, exactly, is responsible for the next generation not using pennies? What has happened to them? Why?
Secondly, this is typical of the nudge-theory messaging which however well-intentioned it might be nevertheless contributed to the generation of a low-level anxiety about the “dangers” of carrying physical cash:
This poster was in the storefront of a bank. Of course, thieves will steal cash. But crime statistics show (Table 6 pg. 26 refers, UK data) that there is little difference in the rates of crime for thefts of cash as opposed to thefts of vehicle parts, mobile phones or bicycles. But never have I seen similar warning posters displayed on car dealerships, mobile phone companies retail outlets or bike shops.
Consumer Behaviour — Economic Democracy or Coercion ?
Why are users of physical cash being targeted in this way by governments and banks? The simple answer is to dissuade us from using cash and to encourage us to use as little of it as is possible or to create a perception that if we do use cash, we’re behaving like some outmoded throwbacks and the kids will look on us as — horror of horrors — in danger of becoming obsolete.
But there’s a more complex question behind that rather obvious response. Are powerful actors like governments and banks suspecting that they may not be the most influential determiners of technology and that payment systems users have a great deal of bargaining power too?
Consumer behaviour has always been thought of as an essential element of Adam Smith’s “invisible hand” that creates markets. They are, after all, 50% of the supply and demand equation. But I have never liked that reductionist argument which forms the basis of neoliberalism’s central tenet that we’re all mere rational actors registering purchasing votes with our dollars. Yes, we can either buy or not buy, use or not use. But we are more than just that. We can sabotage, regulate, protest and demand. We can also practice a pattern of usage that is completely at odds with that which has been determined by those who “supply” what they think we have, or should have, “demanded”.
I would suggest that it is this fear of consumers which is prompting those who want to supply alternatives to the services we use (like cash) to consider the district possibility that, as Lambert would put it, the dogs won’t eat their new dog food. Or we won’t eat all of it, all the time.
Surely that is ridiculous though. In a market, suppliers create a product or service and if customers demand it, they will produce more of it, if customers don’t want it and don’t buy it, they’ll stop producing it and that will be the end of the matter. That is certainly what the economic textbooks tell us should happen. But if, within the context of a particular industry, suppliers keep trying to supply the same product or service, those products or services keep being met with the same level of consumer indifference yet the suppliers insist on trying to foist the service on us, it is suggestive that some other force may be at work rather than market discipline.
Demonetisation — the 20 Years War
Mondex — Here’s One We Made Earlier
I am so old, I was involved with the original “Mondex” development in 1990. Now consigned to history, this was the first serious attempt at demonetisation using stored-value cards.
Mondex (this was the name given to the service in Europe, the Visa Cash brand was deployed in the rest of the world, we’ll refer to the underlying platform as Mondex from here for the sake of brevity as they were essentially the same) was designed as a cash replacement.
A transition phase was envisaged whereby the public would migrate their physical cash by “charging up” their Mondex (or Visa Cash) cards either by feeding their existing notes and coins into automated deposit taking machines or directly at their banks where tellers would dispense Mondex recharges rather than cash. At the merchant, you’d make your purchase in the same way that Chip and PIN debit or credit cards are used today — you insert your card into a reader and it would have the balance on the card reduced. PIN verification was optional — the trigger point for PIN entry could be set according to the transaction value.
Eventually, so the scheme promoters hoped, Mondex would become universal and cash would disappear from circulation. Several large scale pilot schemes were started. A few years later, they were quietly wound down, in the face of public apathy.
The reasons it failed, as per conventional finance industry wisdom, dwelt less on the ho-hum public ambivalence and were around the need for point-of-sale infrastructure installation and maintenance. Stored-value transactions need a different software stack than those generated by the conventional card schemes, such as VISA, MasterCard or AmEx so even if you’ve got EPoS devices in the store (merchant) already, they have to have additional code and physical properties in the card reader, and someone has to pay for the development and support of that.
The existing card schemes won’t because stored-value cards are a revenue stealer for them, so most likely you’ve got to have another device in your store. You also have a dependency on being near a power supply wherever you take payments and a telecoms backhaul at the devices where you “charge up” your stored-value card to check for cards reported as lost or stolen or have been tampered with — plus physical hardening, secure locations and cash-handling overheads for where you want users to be able to “feed in” notes and coins to transfer to their stored-value card and, finally, major increases in customer average handling time at the merchant when compared with cash (at least 25%, often 50% lengthier). So-called “contactless” cards reduce average customer handling time but trade reductions in transaction speed for increased risk of loss — to both the card user and the merchant.
There’s also lack of flexibility — if I have cash, if I’m grabbing a coffee on the way to catch my train which is about to depart, when I know the coffee is £1.85 I can just throw a £2 coin down and say “thanks, keep the change” and make a run for it. You cannot do that with stored value cards, you have to go through the palaver of putting your card in the reader, the merchant has to register the sale, process the debiting of the card, I have to wait for the card’s balance to be updated and so on. Similar situations happen all the time to real people in real life (i.e. not things that tech consultants preaching by PowerPoint would consider).
But there’s another reason which isn’t so widely quoted. That is the cost of the card. Early implementations of stored-value cards were, by today’s standards, appalling crude. They were cheap and cheerful in terms of on-card security and easily hackable at the card-reader end too. Later generations improved but even later card chip cryptograms were jailbroken — cards that are 10-year old specification can be compromised, it isn’t easy to do but they are now considered insecure. So, fine, the industry upped its game and developed more secure card solutions.
The snag is, these are not cheap. The current “gold standard”, MasterCard’s M/Chip Advance specification, requires long-winded and costly certification for cards and readers. The real pain though is in the cost of the card. M/Chip Advance cards cost $5 to $10 in white plastic (depending on quantity), embossing and logo’ing adds another $2 – $3, card carrier and distribution another $2 to $3 and, finally, PIN generation, mailing and PIN services for the user at activation up to $5. That’s potentially over 20 bucks to get a single operational stored value card — to a robust security specifications — in the hands of one user. Trying to roll that out to a user base of 10 or 20 million gets expensive, perhaps prohibitively so for a low income country.
With cash, the government pays for the cost of issuing and maintaining physical cash. It’s a universal “free at the point of use” service and will need to maintained for backwards compatibility for decades, even if a country went “cashless”. But rolling out a stored-value system would add to a country’s cost base.
Who pays? If governments and the big banks are so confident they could, like the capitalists the claim to be, roll out the stored-value cards and the merchant infrastructure as a start-up venture. If — and as I’ve already suggested, it is a very big “if” — users of cash could be persuaded to migrate away from physical cash then cash could indeed be decommissioned.
The very notion of governments acting like they know better than the market is an anathema to the neoliberal thinking which has most of the US and European governments still held firmly in it thrall. So that forces the big banks to foot the bill and take the investment risk. But as has been documented many times here at Naked Capitalism, business really isn’t that interested in investing in anything, unless it can be guaranteed outsized returns.
If this looks like a catch-22 situation, that’s because that’s exactly what it is. Governments cannot press too hard on decommissioning physical cash (unless they’re willing to throw their economies under a bus, like India) unless and until the demonetisation has been delivered by “the market”. But “the market” isn’t remotely interested in making the necessary investment while it is “threatened” by the competition from the established market player, namely physical cash.
Rest in peace, then, stored value cards as an alternative to cash. But don’t we have an app for that, now?
Gadgetry Has its Limits — Even in Gadget-Loving Japan
We’re well-accustomed nowadays to the cliché that, faced with such a knotty problem, “disruptive” technological innovation is precisely the sort of thing that comes along and displaces inconvenient realities like physical cash. FinTech PR hacks like to present gewgaws such as ApplePay or Android Pay as the futures of payment systems. While Apple, Google and all the usual suspects might like to think so, history suggests otherwise.
In Japan there have been attempts to introduce a similar service and those attempts have been going on for twenty years plus. The big push came from NTT’s mobile division DoCoMo. For the time, in the late 1990’s, the technology was incredibly advanced. It was based in DoCoMo’s proprietary iMode protocol and hardware specification. In effect, it was ApplePay — Near Field Communications (NFC) exchange of payment credentials.
But it ran into the same problem that afflicts ApplePay: where are the funds for the transaction held and on whose ledger is the accounting done? If it’s not yours, you, like ApplePay (and like DoCoMo’s effort in Japan in the 90’s) end up being merely a dumb pipe. And that’s a tough business model to make work for you. DoCoMo used the metro system’s stored value card products (Tokyo metro’s Suica being the biggest and most widely accepted — lots of retail outlets in the stations and also the huge footfall “駅前” (“around the station”) convenience and department stores accept Suica cards) to try to get round this problem.
But from a customer proposition perspective, once the novelty had worn off, NTT got the “what, really, is the point?” usage decay. You have to transfer your funding into bank where you can get your income credited e.g. your salary. You then have to transfer that to your NTT DoCoMo account. You then have to ring-fence some of the balance on your DoCoMo account to the Suica pool. NTT DoCoMo tried to push the line that customers could, in effect, go overdrawn on their DoCoMo account then settle up when they got their monthly billing. But that put NTT in the position of needing credit decisioning expertise — they didn’t have this. They also needed capability and a system to handle standardized disputes resolution. They didn’t have this either. If you’re in the business of lending, you also need capital.
NTT finally decided that they didn’t want to be a bank, after all. DoCoMo still market the smartphones and the Suica capability but it isn’t actively promoted to any great degree. They’ve decided to let Apple and ApplePay find out the hard way the same lessons they learned a long time ago.
Outside Japan, the failure to propagate iMode and thus the potential to use its payment system was blamed on it being an example of the Galapagos phenomena. But I never bought that. My thinking was always that it was a solution in search of a problem. I think the same about ApplePay — and the various smartphone app “cash replacements”. If they don’t offer something that makes users of the existing payments systems see that it is such an overwhelmingly and consistently convincing proposition that they would willingly and irrevocably forsake cash — forever — they are always going to be at-best just another offer in the marketplace for payments and at-worst a niche product.
If payments systems users were that eager to adopt non-physical cash, they would have done so by now. Attempts to provide alternatives date back 25 years or more. Yet physical notes and coins remain in circulation and are the only legal tender in most jurisdictions.
Physical cash’s variable unit costs are progressive — the less wealth you have, the less of the systemic costs is passed onto you as a currency user. Stored-value card systems impose a cost on users and that cost is regressive — the less wealth you have, the higher the unit cost becomes.
Smartphone, “app” and NFC/virtualisation based systems impose an even bigger cost on users due to the high up-front purchase price of a smartphone. Even in cultures which have exhibited a fondness for novelty, technological advances and gadgetry like Japan, a payment system based on smartphones, apps and NFC technology have not proved to be transformative to the payments systems in that country.
As market participants — users of physical cash — have baulked at accepting governments’, banks’ and technology companies attempts to achieve voluntary demonetisation for a generation, government and industry actors now seem intent on subtle approaches to dissuade people from using cash, such as via media messaging. This is increasingly being combined with more coercive strategies like restricting access to higher denomination banknotes. India has been in the vanguard of this move, but other central banks have indicated they are to pursue similar initiatives.
But the interests of governments, banks and the technology companies do not align with those of us who stand to gain little or nothing, should those agents get their wishes fulfilled and decommission physical cash.
We are, however, in an especially privileged position. Caught in a free-market-fundamentalist dogma, those who are in positions of power are having to rely on us to change our behaviours and eschew using cash. We merely need to resist that call. It’s as easy as spending some money.