Management Strategies

03:26 PM
Arjun Sethi, A.T. Kearney
Arjun Sethi, A.T. Kearney
Commentary
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Banking on the Death of Cash

Virtual currencies and new types of digital payments could reduce consumers’ reliance on cash.

Remember subway tokens? To ride the New York City subway, you needed to use a unique payment format. When the token system was eliminated in 2003, tokens became items of nostalgia. But in terms of everyday use—patrons rummaging through their pockets, and transit employees emptying turnstiles, transporting heavy bags, and counting them out for sale — nobody missed them.

Could coins and bills be headed for the same fate?

Today, digital disruption is fostering the death of cash. New payment technologies can replace cash the same way the MetroCard replaced the token. But the global economy has no equivalent of New York City Transit, a central authority to dictate and manage a smooth transformation. Thus banks need to prepare now, to move toward one or more of several cash alternatives that could become tomorrow’s standards. These paths to victory are outlined in a study called The Future of Payments by a team of my European colleagues led by Andreas Pratz.

Today’s big celebrity in cash alternatives is bitcoin. Its price curve makes bitcoin a darling of speculators and media commentators alike. But when Austin Craig and Beccy Bingham-Craig traveled around the world for three months living on bitcoin alone, they demonstrated one vision of a future cashless society.

Other, less celebrated innovations center on mobile (m-) transactions. With near-field communication (NFC), you could pay for a parking meter or a movie ticket by touching or waving your smartphone. Indeed, the smartphone could replace your wallet, holding payment cards, identifications, and licenses—everything but the now-irrelevant cash.

Globally, non-cash transactions are growing. They take many forms, but contactless, NFC-based m-payments are poised for particular growth in retail settings. And plenty of non-financial companies are taking advantage of banks’ traditionally slow innovation cycles to jump in with m-payment offerings. At Starbucks, for example, you can already pay for a coffee using a proprietary app. Other solutions come from other retailers (such as Walmart and Carrefour), e-commerce companies (such as Square and Google Wallet), and mobile operators (such as T-Mobile and Vodafone). In each case, the innovator’s goal is not merely efficiency in transactions but creating a technology that gets them closer to the customer than anyone else in the ecosystem. However, one of the biggest hurdles these other companies face is that consumers—at least for now—would prefer to use m-payment solutions offered by banks.

Regardless of who eventually wins the m-payment space, note the effects of digital disruption. Although cash won’t entirely go away, the importance of cash-handling in banks will decrease dramatically. Revenues from automated teller machines (ATMs) and wire transfers will decline. And on the flip-side, banks — like New York City Transit — won’t need to exert so much effort emptying machines and securely hauling around and counting out these quaint old-fashioned physical tokens of commerce.

The new currencies will be space-less and formless. Transactions will be easy to consummate, and technology will make the system’s costs easy to see and manage. But they will require banks to change their infrastructures. And to do that, of course, banks must first figure out where the market is headed, and which new forms of transaction will become the heirs to cash.

Arjun Sethi is a partner with A.T. Kearney, where he leads the Strategic IT Practice for the Americas.

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ArjunS642
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ArjunS642,
User Rank: Author
12/16/2013 | 11:50:29 AM
re: Banking on the Death of Cash
Dear All thank for reading the blog - your interest and the reactions. We are in the midst of disruptive and often times mind boggling change and Kathy to your good point below the likes of NCR are seeing the trend very clearly ...they are fortifying their defenses and proactively getting ready for the change. Capt. gogo indeed 3 different parts of the equation and as we triage and try and look into the future the only one constant as we all know is change. Lots of data out there but just to quote a few - based on a tri annual study by the Fed reserve Credit and debit card transactions surpassed more than 50% of all non-cash transactions by 2006, up from 42% in 2003. Cash transactions, at 10 per month in 2010, represented 26% of a customerGÇÖs in-store purchases, down from 39% in 1999 (according to a 2008 study by Hitachi Consulting and BAI). Its a similar story on transactions over the web and the usage of e-commerce and alternate forms of payment.
Capt gogo
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Capt gogo,
User Rank: Apprentice
12/16/2013 | 10:35:56 AM
re: Banking on the Death of Cash
Arjun thank you for your article, you have covered three parts of an equation that are often bundled together as one, and have people conclude this is the beginning of the demise of cash.
Firstly Virtual Currencies provide an interesting bespoke solution to payments for still a very very small percentage of the population and though this will grow it will stay as a niche for sometime to come.
Secondly you and everybody else is getting excited about m- payments and wallets and NFC, these are just a replacement of the plastic card technology and those who are already using credit cards or debit card will migrate to this Techonolgy no real impact on cash usage except the low value transactions can become more convenient but still a drop in the ocean when we talk of total cash volumes in circulation which have not stop growing 8- 15% in most countries.
Your third point around Banks and ATMs seeing transaction reduce which i doubt is happening dramatically (but would love to see the data) is not becuase of less cash in circulation but there are now more ways to get cash out other than at an ATM, not sure about the US but in other countries Retailiers and Hospitality organisations are recycling cash and offering cash out of self Services Checkout and over the counter on purchuses with Debit Cards.
Though these three areas are related there should be caution not treat them as together as evidence of the demise of cash. Best measure is the cash in circulation growth, available through most central banks reports.
Becca L
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Becca L,
User Rank: Author
12/16/2013 | 6:35:23 AM
re: Banking on the Death of Cash
Ha, I foresee that kid racking up quite the bill while the mom is looking the other way.
Becca L
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Becca L,
User Rank: Author
12/16/2013 | 6:34:35 AM
re: Banking on the Death of Cash
I completely agree with you. I don't foresee cash ever going away, and I honestly hope it doesn't, the thought of it is kind of depressing.
ischmerken
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ischmerken,
User Rank: Author
12/13/2013 | 10:04:05 PM
re: Banking on the Death of Cash
Arjun, this is a great piece on digital disruption of cash and the future of Bitcoin vs. bank mobile payments. If mobile payments take off soon, demand for ATMs as cash dispensers is going to plummet. While the banks have been slow to lead in the virtual payments area, non-financial companies like Starbucks getting a head start. This summer I was in line at Starbucks and a mom holding a toddler, perhaps 1 years old, had the child swipe her iPhone so she could pay using the Starbucks app. Not only was this simple for the mom, but the toddler felt empowered. This seems to be an early look at where we're headed.
Yaldez4FSI
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Yaldez4FSI,
User Rank: Apprentice
12/13/2013 | 9:56:00 PM
re: Banking on the Death of Cash
Interesting, but I will not hold my breath on cash going away. It is like multichannel; just because there is a new interesting relevant channel to use, it does not mean that the others go away.
Kelly22
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Kelly22,
User Rank: Author
12/13/2013 | 7:56:54 PM
re: Banking on the Death of Cash
While cash will never go away, this provides good insight on what will be popular in the future. I'm curious to see where Bitcoin will go in coming years. I read the WSJ article you linked to, which was fascinating - I can't believe that couple lived off Bitcoin alone for three months, and that they even found an auto insurer that used Bitcoin. It definitely seems like something to watch.
KBurger
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KBurger,
User Rank: Author
12/13/2013 | 7:33:53 PM
re: Banking on the Death of Cash
Lots to think about here, Arjun. I'd be interested in your insights about exactly what role banks could/should play in this evolution. It's not like they've been leading the way in the mobile payments arena. I just read yesterday that debit card payments have declined in the past year. We see from NCR's recent acquisition of Digital Insight that it does not view its future as based solely on the ATM channel. So, lots of different things happening, are they putting banks at risk?
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