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The Goldman Sachs Group, Inc. Goldman Sachs Global Investment Research
Fortnightly Thoughts Issue 118
store of value, which has become increasingly important; cash Italy Portugal
Australia
Germany
in circulation as a percentage of GDP continues to rise in most 10% India
Japan
parts of the world, as very low inflation has reduced the
Non-cash transactions % of total transactions
opportunity cost of holding cash. This paradox of cash means 0% Kenya
0% 10% 20% 30% 40% 50% 60% 70% 80% 90%
that the opportunity for cash handlers e.g. ATMs and security Note: Size of bubble represents volume of total transactions in 2016.
providers remains relatively resilient from disruptive Source: Euromonitor.
technologies.
Its not just about tech
In this essay, we explore the changes in the drivers of these
two uses of cash (government policy, technology and consumer Japan is a striking example of this; lots of tech and lots of cash.
choices etc.) to understand if some economies could become Its high share of cash transactions and cash in circulation as a
cash-less or, at the very least, less-cash societies in an percentage of GDP is unusual for an economy at its per capita
accelerated fashion. We begin with a tour around the world, to GDP level and technology penetration; e.g., as long ago as
identify where the role of cash may be diminishing and where it 2004, Japanese mobile wallet solutions had adopted electronic
remains dominant. We then ask why cash, at least so far, has money cards that were powered by near-field communications
been very difficult to disrupt. Finally, we argue that supportive technology.
policy is key to accelerating the shift away from cash, and More recently, NTT Docomo led the drive to develop a
explain why governments may be increasingly motivated to standardised mobile payments platform by making strategic
implement it. investments in players across the value chain. But despite this,
Have we reached peak cash? cash remains dominant in Japan.
Technology has been an important catalyst for shrinking cash The US also stands out, and this could at least partly be
usage, but it is by no means a new phenomenon. As we wrote attributed to the fact that regulators in the US have explicitly
in 2012 (see Issue 42, Fortnightly Thoughts: Money, money, stated that the market should manage the shift to digital
money in a mobile world, October 2012), the first technological payments by itself. For instance, despite disproportionately high
step-change in the payments arena was the shift from cash to levels of card fraud, especially fraud owing to counterfeit cards,
plastic money, i.e. credit and debit cards, which happened in the US has been slow to adopt EMV (named after the founding
the 1960s. companies Europay, MasterCard, and Visa) technology,
relative to the rest of the world.
There are many parallels to be drawn between that period and
the ongoing shift to digital money: an initial period of an This is not due to technological constraints. Parts of Europe first
increasing number of providers was followed by a consolidation began to implement chip cards in the 1990s, with 99.9% of
stage that established a few players (Visa and MasterCard European terminals now chip-enabled. Contrast this to the US,
primarily) as the industry standards, eventually accelerating the where in the absence of regulatory intervention, EMV adoption
adoption of plastic money. has only taken hold over the last year. Our analysts cautious
view on Ingenico (Sell, last close 87.8) and Gemalto (Sell, last
However, the availability of technology alone has not ensured close 52.4) can be at least partly attributed to the uncertainty
the demise of cash. As the following chart shows, there are surrounding US EMV adoption.
several advanced economies in which it is still the dominant
mode of payment in volume terms (surprisingly quite a few
European countries are in the bottom left quadrant).
UK
France
China
India
Japan
Italy
Sweden
Norway
Denmark
Around the world in 80 clicks
Source: Euromonitor. In EMs too, we see the outsized impact of government
initiatives and reform on the payments landscape. Nowhere is
On the other hand, Scandinavian countries are on the cusp of
this more evident than in Indias demonetisation measures in
becoming some of the first cashless societies, as a result of
November, when it was announced overnight that
industry-co-ordinated steps and government initiatives. Swish, a
approximately 85% of currency in circulation was no longer to
payment app developed jointly by the major Swedish banks,
be considered legal tender. But that is only part of the story. On
has been adopted by nearly half the Swedish population, and is
page 7, we interview Nandan Nilekani, a proponent of Indias
now used to make over nine million payments a month. About
Unique Identification (UID) number program (roughly the
900 of Swedens 1,600 bank branches no longer keep cash
equivalent of the Social Security number in the US) on how
on hand or take cash deposits and many, especially in rural
creating digital identities for more than a billion Indians could
areas, no longer have ATMs. In conjunction with that, cash
accelerate the growth in non-cash payments, the availability of
transactions were just c.2% of the value and 20% of the volume
credit, and improve the ease of doing business. Wherever we
of all payments made last year (down from 40% five years ago).
look in the world, the shift to a cash-less economy boils down to
Denmarks move to a cashless society is a deliberate result this: while the availability of technology and the willingness of
of policy, with the government removing the obligation for consumers to use less cash are important, whats critical, the
some retailers to accept payment in cash. (MobilePay, a Danish sine qua non, is supportive regulation from policy makers, often
app, was used by half the population to make 90 million a necessary catalyst to accelerate the shift.
transactions in 2015).
The million dollar question
Ill swish you for it Without this legislative push, we believe cash is very
Sweden: When asked how did you pay last time you made a difficult to disrupt and substitute. After all, it is a free and
payment? convenient mode of transacting. So far, the selling point of the
70% most broadly used alternatives to cash (cheques and cards) is
2012 2014 2016 greater convenience. But that hasnt been sufficient to
60% meaningfully reduce the market share of cash in countries
outside Scandinavia and Canada. 44% of all transactions
50% globally are still carried out with cash (vs. 52% in 2002), while in
volume terms, card payments are estimated to have overtaken
40% cash payments only last year. Mobile wallets and NFC-enabled
devices certainly allow for even greater ease of payment,
30%
especially for low value transactions, as Jim Schneider writes
on page 19. But it is yet to be seen if they contribute to a faster
20%
share loss for cash.
10% Part of the reason is that convenience for customers has come
at a cost to merchants (i.e. investments in technology and
0%
Swish Credit card Cash Debit Card
interchange fees). In other words, cash is still an integral part of
Source: The Riksbank. commerce in many economies because a non-trivial proportion
of merchants do not accept plastic or digital money. This is not
In the Euro area too, policy makers have taken steps to counter just an EM phenomenon; in London for instance, cabs have
cash, both in terms of circulation and transactions. The ECB only been legally obligated to be equipped with card machines
has stated that it will phase out the 500 note from 2018, with a since November last year, with taxi drivers citing the added
view to making it more expensive or inconvenient to hold on to transaction cost as the main deterrent. When considering
vast reserves of cash. More interestingly, Europe has also whether to introduce this regulation, Transport for London cited
the experience of New York, where taxi drivers are already amounts of money (the US Federal Reserve stopped printing
required to accept debit/credit cards. The chart below, from our the $500 bill in 1945). Limiting the supply of smaller currency
GS Data Works team, shows the cash share of taxi fares, which notes and coins can similarly limit the divisibility of money.
has been declining steadily in NYC, perhaps providing a
prologue for the role of cash in London cabs. Cash-and-carry
Weight of US$1 mn by different denomination bills
Cash on wheels
$ Weight(pounds) Weight(kg)
Breakdown of NYC taxi fares by method of payment
1 2205 1000
5 441 200
10 220 100
20 110 50
50 44 20
100 22 10
Source: US Department of the Treasury.
10/2011
07/2012
04/2013
01/2014
10/2014
07/2015
04/2016
01/2017
current average tax rate of 29%, overall tax revenues could
increase by 0.35% of GDP. The following chart shows the share
Source: Bloomberg.
of cash transactions vs. the Corruption Perception Index, which
makes a similar case for moving away from cash. The paradox of cash
Dirty cash Stack up the advantages for the different stakeholders and it is
Share of non-cash transactions by value (x-axis) vs. Corruption evident that governments benefit most from lowering cash
Perception Index (y-axis; 0=highly corrupt, 100=very clean) usage. This is why we believe that they will be the biggest
100
catalyst to the shift away from cash. Regulatory intervention will
Denmark Finland
be needed more if the current low nominal interest environment
90
Singapore Sweden
Norway
persists. This is because cash in circulation as a percentage of
Germany Australia
80
Japan USA
UK
Canada GDP is negatively correlated with inflation. High inflation erodes
70 France
the value of currency and increases the opportunity cost of
Spain holding cash.
60
50
Malaysia A good case in point is the UK, where the decline in notes in
Italy
Greece
circulation relative to nominal GDP occurred during the high
40 India Philippines
Thailand
China inflation period of the 1970s and early 1980s; the ratio fell from
Indonesia
30 c.6% in 1970 to c.4% in 1980 as inflation rose from c.6% to
20
Kenya Russia
c.18% over the same period.
This apparent paradox of cash falling cash transactions but To conclude, we would argue that as a medium of exchange,
increasing cash in circulation presents a different set of cash has peaked. Why is this? We see three key reasons: (1)
opportunities for players in the cash value chain. On page 13, increasing ubiquity of technology; (2) the willingness of
our Business Services analysts highlight Loomis, the leader in consumers to use less cash and most importantly (3) policy
the global cash handling industry, as a potential beneficiary of action. We believe recent government action (for example in
resilient cash circulation. India and Europe) demonstrates the rising importance of
supportive policy in accelerating the shift away from cash. The
Up, up and away benefits for policy makers are clear electronic transactions
Banknotes and coins as a percentage of GDP, 2005 vs. 2015 allow for greater transparency and better control over monetary
25%
policy transmission mechanisms. But the paradox of banknotes
2005 2015
means that the decline in cash payments does not imply the
death of cash. Cashs other primary function as a store of value
20%
implies that the future path of inflation, interest rates and trust in
the banking system will continue to be vital in determining the
15%
future of cash. What does this mean for profit pools? Falling
cash transactions, and the resulting increase in digital
10% payments volumes, present an opportunity for certain players in
the payments value chain: card providers, software and
5% processors, payment hardware and incumbents. But the
paradox of cash means that the opportunity for cash handlers
e.g. ATMs and security providers remains relatively resilient
0%
from disruptive technologies. We highlight some of these
Brazil
Sweden
Canada
Australia
Turkey
Korea
Mexico
Russia
Euro area
Switzerland
India
Japan
UK
USA
Increased scale in the European issuer processing market via M&A should enable it to participate
WLN.PA Worldline Buy 4,036 28.22 33 17% in growth and consolidation as banks outsource. Set to benefit from positive market dynamics due
to regulatory changes like PSD2 in Europe and the shift from cash to digital in EMs like India.
Worldpays tech platform, encompassing offline/online merchant processing and value added
Worldpay
WPG.L Buy 7,211 289p 400p 38% services, should enable it to benefit from structural growth in the attractive and rapidly changing
Group
payments arena
Industry leader in the global cash handling industry, with a consistent delivery track record. Our
LOOMb.ST Loomis AB Buy* 2,368 Skr277 Skr371 34% analysts believe consensus continues to overestimate medium-term cash risks while circulation
dynamics remain supportive.
Tenpays WeChat Payment and QQ Wallet have been gaining market share in Chinas mobile
Tencent
0700.HK Buy 275,482 HK$225.2 HK$248 10% payment market, with market share increasing from 23% in
Holdings
1Q16 to 38% in 3Q16.
Faster volume growth and market share gains driven by EU payment regulation as fee reductions
V Visa Inc. Buy* 214,307 $88.52 $99 12% cut the cost of card acceptance and as fee unbundling makes Visa more competitive. Our analysts
expect upside in credit volume from latest client wins at Costco and Fidelity.
Multiple long-term drivers, particularly in Europe, where share gains from local competitors are
MasterCard
MA Buy 121,481 $111.45 $122 9% expected to continue post the implementation of EU payment regulations. Should also benefit from
Inc.
expanding opportunities in the B2B and P2P payments space.
Naver Pay is the number one mobile payment operator in South Korea with 21mn users vs. the
035420.KS Naver Corp. Buy* 22,070 W849000 W1070000 26% runner-up Kakao Pays 13mn (3Q16). Able to leverage its advantages in data and technology to
monetise consumer services such as Naver Pay.
Source: Goldman Sachs Global Investment Research.
*On the relevant regional Conviction List; Prices as of the close of March 22, 2017. All price targets have 12-month horizons
What steps are being taken to make payment protocol (UPI). Therefore, the 250 million smartphone
India cashless? users and 350 million feature phone users are now on the same
payment system i.e. the 600 million people who have phones
To move to a cashless economy, the
in India can now use them to make mobile payments.
underlying infrastructure for digital
payments must be cheap, convenient and Apart from them, we estimate there are approximately 350
ubiquitous, otherwise people will continue million people, including young adults, who do not have access
to use cash. In advanced economies, this to a mobile phone. However, they now have an Aadhaar
role was performed by debit and credit number which they can use to open an account at any bank
cards from companies such as Visa, MasterCard, and American using Aadhaar eKYC (electronic Know Your Customer). For
Express. Similarly, in emerging markets, China implemented a them, the government has launched Aadhaar Pay, where
card system named ChinaPay and India has something called independent and registered merchants (e.g. small store owners
RuPay. In other EMs, a different digital transaction system was in towns) have biometric devices which can be used for
introduced when mobile operators, especially in Africa, customer authentication. And the customer can pay for goods
developed mobile money the most famous example being M- and services by debiting their bank account, and crediting the
Pesa in Kenya. Most recently, large internet companies, merchants account, despite not owning a device of their own.
especially in China, have been able to enable smartphone- Think of this as a variant of MicroATMs that can be used for
based payment solutions. Examples include Alipay from cashless merchant payments.
Alibaba and WeChat from Tencent, which together dominate
Taken together, India now has the infrastructure to enable
the internet-based payment business in China.
digital payments for smartphones, feature phones and those
The digital payment infrastructure now being developed in India who do not have access to a phone at all. This is a completely
is unique because it is a completely interoperable system, and new payment backbone, which unlike the systems in many
is designed to serve a billion people. The first component to this countries, is not reliant on cards. It enables a billion people to
system is Aadhaar , which is essentially a 12-digit unique transact digitally and now allows the government and markets
identity number given to every Indian resident. Currently 1.1 to focus on increasing the penetration of this payment system.
billion Indian residents have an Aadhaar number, making it the
What are the benefits of digitising payments and reducing
only billion-user platform outside of the US. The first shift to
the amount of cash in the system?
cashless payments within the Indian economy was the use of
Aadhaar to dispense government benefit payments. This is The benefit of reducing the level of cash in the system is
possible as the system allows a bank account to be linked to threefold convenience for consumers, lower friction costs for
the unique ID. Today, there are c.400 million Indians whose businesses and greater transparency for governments. From
Aadhaar numbers are linked to their bank accounts. the governments perspective, greater transparency comes with
lower tax evasion, higher revenues and faster formalisation of
The second constituent of the digital payment landscape is the
the economy. It also reduces cash handling costs, which is a
Immediate Payment Service (IMPS), which facilitates the
very large implicit cost on the economy, retail banks, the
remittance of money home. This system alone facilitates c.$7
Reserve Bank and the wider government. Consumers currently
bn transfers per month. The final component of Indias digital
find cash very convenient because there is no transaction cost.
payment system is a new mobile-to-mobile solution called UPI
Therefore, one of the goals of the new payments interface is to
or Unified Payments Interface, which allows peer-to-peer
reduce transaction costs for digital as much as possible so that
transfer of money in real time from bank account to bank
people do not hesitate to change the way they transact. It's only
account. This provides the same benefits as the closed loop
when digital transactions are very low cost that it will be
digital wallet system, plus the added advantage of
adopted in large numbers both by merchants and by
interoperability.
consumers.
What systems are in place for those who do not have a
However, I think the greatest consumer benefit will be the ability
smartphone?
to build a digital footprint. This can be shared with lenders to
India has 250 million smartphone users who can now make increase the accessibility of credit to the wider economy.
payments to any merchant or any person who also has the Currently only 3% of Indian businesses receive loans from the
payment app on their phones. However, there are 350 million formal economy. In general, India is a very informal economy
people who have older feature phones, rather than there are approximately 60-70 million businesses, but less than
smartphones. USSD was an existing data channel that existed a million incorporated companies. I believe that the informal
pre-internet. In response to demonetisation, a UPI based economy will start entering the formal economy because digital
application was written using this channel that allows feature footprints will improve the availability of loans. This is going to
phone users to also make payments via the same underlying be the economic driver for encouraging consumers and small
businesses to join the digital payment system.
What are the implications of a long-run shift to digital supply-side infrastructure necessary for digital payments. For
systems for the banking sector? instance, immediately after the demonetisation action, the
government developed an app (BHIM) that could be built on top
Currently, India is an underserved market for credit. However
of the mobile-to-mobile infrastructure already in place. BHIM
over the next ten years, it has been estimated that c.$500 bn of
was launched by the government on December 30, 2016, and
incremental market capitalisation will be created because of the
has already been downloaded 18 million times. Anyone with
expansion of credit. The question is this: how will this new
access to a smartphone who wishes to make a cashless
revenue pool be distributed? And the answer relies on the
payment can do so via the governments app (BHIM), any of the
response of the incumbents. Although incumbent banks are
alternatives offered by banks like HDFC, ICICI, Axis or
currently well positioned, the intensity of competition within the
PhonePe (launched by Flipkart and Yes Bank). Private
banking system has increased as a function of lower switching
companies mobile wallet solutions also experienced a rapid
costs. In other words, consumers and businesses can move
rise in users and transaction value. Now that the supply-side
from one bank to a competitor very easily, thanks to the digital
infrastructure is in place, the system is ready to move to a less-
payment systems being introduced. As these switching costs
cash economy when demand does pick up gradually, whether
fall, churn goes up, and new players can enter with superior
that is because of market competition, further government
technology and aggressive pricing. Although the size of the
initiatives or a more gradual shift in consumer attitudes.
overall pie is increasing, the incumbent share will depend solely
on their response to increased competition. How do you see consumer attitudes to credit changing?
Apart from banks, the implications are interesting for the rest of One metric on which India stands out relative to other countries
the payment value chain as well. For example, in most is that Indian consumers have a very low credit penetration.
advanced economies, companies that provide credit cards and This constrains the ability of the Indian economy to grow
payment processing services are listed, for profit companies. because consumers do not have credit to buy and businesses
However, as an Indian alternative, the government created the do not have access to the credit necessary for investment.
National Payment Corporation of India (NPCI), which plays the Therefore we face a situation where both buyers and sellers are
same switching and clearing roles as payment processors do in constrained to grow. Digital footprints can unlock credit for
traditional payment systems. The key difference is that NPCI is consumers and bring forward consumption as they can now buy
a non-profit company that is designed to be a utility that is with credit rather than just from savings, with similar
owned collectively by all the banks. So the payments value implications for business investment. Therefore the
chain can look dramatically different in a place like India. macroeconomic implication of moving from cash to digital
payments, if implemented correctly, is a boost to consumer
Does India have a relative advantage in developing this
expenditure and businesses growth.
payment infrastructure because, compared to DMs, India
banks do not have expensive legacy systems to update? What are the current and future use cases of the digital
identity card infrastructure?
Banks in India do have legacy IT systems, but they do not face
the same challenges as their counterparts in developed There are a lot of use cases for the digital ID and payments
markets. In Europe and the US, a great deal of banking system. It is already used to issue passports, government
technology was implemented in the 1960s and 1970s using benefit payments and in the insurance industry. It is meant to
mainframe systems; the legacy systems are 40-50 years old. In be used as a platform, within the financial and non-financial
contrast, the Indian banking system was mostly implemented in sectors. A good example of a company that has benefitted from
the 1990s. So although Indian banks have old IT systems, they this is Reliance Jio, a new entrant in the Indian Telco market. It
are much younger than in DMs. Therefore, although there are was able to expand to 100 million customers in six months
some challenges to integrate these new payment technologies, mainly because the company used the Aadhaar eKYC to issue
the banks have mostly been able to integrate their technology a SIM collection within two minutes. This was only possible
infrastructure with this next generation payment interface. because the electronic infrastructure was in place.
How do you think the demonetisation actions have altered What are the security concerns around a system like
consumer perception of cash? Aadhaar, given that so many details, including biometrics,
are linked to one unique ID card?
I do not believe demonetisation has significantly shifted the
share of digital versus cash transactions. Nevertheless, what The biometric details are purely taken to eliminate duplicate
demonetisation did achieve was giving many people the users, and are not included in any transaction. By providing
awareness of paying via digital channels. To that end, in terms every resident with a unique identity number, this $1 bn
of behaviour, a lot more people started using digital wallets and investment has saved the government roughly $7 bn in
debit cards. But while there was a big rush towards digital in the duplicated payments. Nevertheless, the biometric data is only
month of December, evidence shows that by January, it started used for authentication matching, and is not part of payments.
tapering off as more physical cash entered the economy. Additional measures have also been taken to increase security,
People went back to using cash when they could. such as two factor authentication. Therefore, unlike in the US,
where a credit card number is sufficient to make payment, in
Rather than consumer attitudes, which tend to be slower to
India you need two factors such as a phone number plus the
change, I believe that the principal goal achieved by
PIN. This system results in much lower levels of fraud.
demonetisation was that it accelerated the development of the
12
80
10
60 8
6
40
20
2
0
0 2013 2014 2015 2016 2017
12-Sep 12-Oct 11-Nov 11-Dec 10-Jan
Note: Shaded area denotes period post-demonetisation.
Note: Shaded area denotes period post-demonetisation. Numbers represent Source: Haver Analytics, Goldman Sachs Global Investment Research.
search interest relative to the highest point for given region and time.
Source: Google Trends.
The impact of demonetization beyond the near-term
While the urban economy was swift in adapting to the low-cash consumption recovery is less clear at this stage. On the one
situation and switched purchases to hypermarkets and hand, the delayed economic recovery could lead to some
supermarkets that accepted credit and debit cards, rural negative second-round effects; while on the other, greater
households found it much more difficult. The barter system re- formalization of the economy and increased digitization could
emerged in certain rural villages, and small vendors began to lead to efficiency gains over the longer term. In our base case,
educate themselves on digital payments gradually. Our Current any meaningful acceleration in private investment growth over
Activity Indicator suggested that rural economic activity the coming year is likely to remain elusive. Demonetization and
contracted by 3.5% quarter-on-quarter annualized in the month the consequent delay in economic activity recovery may
following demonetization, mainly due to a significant decline in increase the probability of NPL creation, weaken financial
consumption. Urban economic activity was relatively less linkages particularly in the informal sector, generate greater
affected, with most of the impact felt on consumer discretionary business uncertainty and lead to negative feedback effects due
products rather than basic purchases. to falling real estate sales and prices (See Vishal Vaibhaw and
-0.50
consuming goods today versus saving or investing today in
order to consume goods tomorrow. When real rates are low or -0.75
Implied cash yield curve
negative, it is better to consume now rather than consume w. half the fixed cost of
ware-housing
tomorrow since the real return to delaying consumption is poor. -1.00
Implied cash yield
w. base-case fixed
Spending is brought forward. Demand in the broader economy cost of ware-housing
cash
is stimulated. Such intertemporal substitution represents an -1.25
-1
switch from financial assets bearing this negative nominal rate
into banknotes that offer a zero return. Zero might not be much.
-1.5
But it is better than paying to hold a financial instrument, as a
negative rate implies. -2
and cuts tax avoidance and crime in the black economy production of 500 banknotes, the largest available
denomination (see exhibit). Although these remain legal tender
One distinctive characteristic of banknotes is that they are
and continue to circulate for now, the expectation is that over
bearer securities: their holders are not registered or recorded,
time they will slowly fall out of circulation as, once existing
and thus retain their anonymity. This feature has made
stocks are exhausted, 500 notes are not replaced when they
banknotes attractive ways of financing transactions or holding
wear out. The Swedish Riksbank has recently discussed
wealth below the radar of the authorities. Banknotes are an
whether to issue e-Krona.
important vehicle for tax evasion, criminal behaviour, terrorism
and other illegitimate activities. Banknotes are thus central to Despite being publicly motivated as a means to hinder criminal
the financing of the so-called black economy. Whether paying activities, this announcement was nonetheless met with
a tradesman in cash to avoid VAT or running an organised concern by some constituencies (particularly in Germany),
crime syndicate or terrorist cell, the use of banknotes facilities which saw it as a step towards creating the environment where
the avoidance of regulations and/or taxes in a way that distorts ECB policy rates could be pushed further into negative territory.
economic incentives and creates welfare costs aside from the This reaction illustrates the interplay among the various pros
obvious adverse broader moral and legal implications of such and cons of banknotes discussed above.
behaviour.
To avoid these distortions, some economists have advocated A licence to print
500 banknotes were the ECBs best seller from the outset of
the abolition of banknotes to reduce the size of the black
monetary union
economy and hinder criminal activities. Recently, Harvard
professor and former IMF chief economist, Kenneth Rogoff, 13.5%
Average 5-50 (lhs) Average 100-200 note (lhs) EUR 500 note (rhs)
38%
published an influential book titled (tellingly) The Curse of Cash
that analysed this approach. To illustrate his concerns, in an 13.0% 36%
Yet banknotes serve a useful function for many people 11.5% 30%
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
60%
50%
CAGR : +9%
40%
30%
20%
0%
0 20 40 60 80 100
Corruption Perception Index
Source: Transparency International, Euromonitor
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
Governments earn from printing money when cash volume started to decline. This was achieved
through improvement in broadband access among enterprises,
Away from concerns over privacy and the inability to track
levels that many emerging markets will reach only in 2030
sources of cash, governments actually generate profit by
according to Euromonitor.
issuing currency, through the difference between the face value
of coins and notes and their production costs. Additionally, the
stock of paper money (which is currently c.10% of GDP in the Younger population is still using cash
Payment instrument use by age, 2015, US
Euro area) is not included in the calculation of national debt,
which generates an interest saving for the government. Cash Check Credit Debit Electronic Other
100%
Mobile phone-based money services so far did not affect 90%
cash volumes and preferences for payment methods
80%
Since M-Pesa (mobile phone-based money transfer, financing 70%
and microfinancing service) was launched in 2007 by
60%
Safaricom, emerging markets (primarily in Africa) saw a great
50%
demand for the service, as the population that lacked access to
bank accounts was now able to use mobile phones to do 40%
used for moving money rather than for payment. More Source: Federal Reserve.
How far along are emerging markets in where small retailers can sell their products. Additionally, the
adopting digital payments? emergence of marketplace businesses across EMs is providing
distributional capabilities to small and medium-sized retailers
From a broad perspective, cash usage in
which are located in one city but wish to access a consumer in
emerging markets is still very high overall,
another. Given the infrastructure bottlenecks that exist in many
although we are seeing a trend towards a
of these locations, marketplace models can overcome these
higher percentage of transactions moving
distributional challenges and create an ecosystem which is
towards digital payments. This is a result of
supported by a broader payments ecosystem.
the growth in e-commerce, which as an industry is growing
much faster than GDP in these countries, propelling digital How different are EMs in their stages of digital payment
payments. adoption?
The growth in e-commerce can be attributed to a number of Emerging markets are at very different levels. I think the
structural factors, for example the removal of distribution primary drivers in different levels of adoption are access,
bottlenecks in EMs or the ability of digital transactions to bridge convenience and choice, which differ by country. Levels of
the demand and supply gap. In many of these markets, e- adoption are also a function of where the e-commerce industry
commerce is enabling supply to fulfil the demand requirements is in its evolution both from the penetration of e-commerce
that are present but were historically unmet. Additionally, within and the rate of growth.
e-commerce more broadly, the percentage of cash on delivery
Markets such as India are still witnessing very high double-digit
(COD) transactions has decreased and the percentage of digital
growth in e-commerce. In contrast, many Eastern European
payments has gone up across the board.
economies such as Poland do not have such fragmented
Another driver of digital payments in emerging markets is markets and organised e-commerce penetration is already very
demographics. Younger generations are more willing to use high. I believe India is growing significantly faster in terms of
mobile systems, which in turn is driving the whole digital digital payments because there is greater opportunity for factors
payments ecosystem. such as access, convenience and choice, but also because of
the recent demonetisation reform and macroeconomics. It is
The third driver of digital payments is increasing levels of trust.
this access to the many necessary market ingredients required
In many of these markets, consumers have historically been
for payments innovation which provides India with the
reluctant to trust the online payment system. However, with
opportunity to leapfrog countries with more established
greater emphasis on security, for example through two-factor
infrastructure.
authentication and 3D secure mechanisms, openness to digital
transactions is now much higher. Do you think the demonetisation action was significant
enough to change the attitudes of Indian citizens towards
Trust can also be viewed from a buyer-seller standpoint
cash?
customers are now more and more willing to make a payment
in advance without physically viewing the product beforehand. Empirically, overall offline retail transactions were 10% digital
This is where payment platforms now have an even greater vs. 90% cash pre-demonetisation, rising to 60% digital
responsibility in terms of security as they are the ultimate immediately post-demonetisation before stabilising at 25%-30%
conduit between buyers and sellers, acting as an intermediary four months after the measures were first introduced. At PayU,
and as a source of trust. we saw our daily transaction volume skyrocket by 80%
immediately after the announcement was made. It then settled
What do you believe are the main catalysts behind this
to a 25% increase compared with pre-demonetisation still a
shift towards digital payments in EMs?
significant number. This uptick in the number of digital
I believe there is a combination of factors in play here. Firstly, transactions has been primarily driven by debit cards, as credit
the shift to online of larger, trusted retailers has to some degree card penetration is very low.
solved the chicken and egg situation that previously existed.
Moving forward, I am of the view that the digital medium will see
Previously, it was not feasible for smaller retailers to have e-
a higher share of transactions, or at least remain stable, relative
commerce optionality without demand from customers while
to today, rather than go back to where it was before the action
simultaneously there were not enough options to pay online for
was taken. This is due to measures such as the Payment of
customers who wished to do so. The shift to online of larger
Wages Act, which has allowed states to specify the industries
retailers has broken this existing bottleneck.
that will have to pay wages to workers only through cheques or
I believe another factor is companies such as Facebook crediting it to their bank accounts. As more people have access
integrating payments into their vertical to create a platform to, and make use of, their bank accounts, the higher the
chances that the ecosystem will force more and more digital
payments.
Do you think the shift in e-commerce and digital payments It is also worth noting that Indian consumers and payment
has changed consumer behaviour? providers alike are supported in this digital platform ambition by
a progressive regulator that is open to adopting a legislative
I believe that the shift to online can be partly attributed to new
framework to promote innovation.
incentives, which in turn is impacting consumer behaviour. If
vendors provide offers and discounts for using digital rather How important are privacy concerns to EM consumers?
than physical payment methods, then consumers are more
Unlike security, I think privacy concerns are lower in emerging
likely to try the platform. This could ultimately alter consumer
markets than developed economies, although I believe at some
behaviour if it builds a level of trust in the system.
point it will catch up. Currently, emerging market consumers
I also believe C2C payment platforms can have an impact on want to fulfil the aspirations that they could not previously, and
behaviour, providing solutions to geographical limitations. If therefore privacy is not a large factor. Security on the other
products are available on a platform, with an escrow service in hand is probably better in emerging markets, with the US being
between to provide a guarantee on the payment, this will more prone to credit card fraud than countries such as India
increase transaction velocity on the platform. due to differences in their prevention systems (for example two
factor authentication in India).
What is PSD2?
PSD2 is also aimed at taking into account new types of services
New regulation could further shake up the like payment initiation services (PIS) and account information
payments landscape in Europe, writes services (AIS). These services have brought innovation and
competition, providing more, and often cheaper alternatives for
Mohammed Moawalla, our European internet payments which were previously unregulated. Bringing
software analyst. them within the scope of the PSD has also boosted
transparency, innovation and security in the single market and
The European payments industry landscape is all set for created a level playing field between different payment service
transformation given structural and regulatory changes. providers. In terms of timeline, member states will have to
Historically, industry IT systems have been built on the implement the PSD2 into their national regulations by January
foundation of local payment methods and local currencies. 13, 2018.
Following the introduction of a single currency (euro in 2002) in Under PSD2 banks will also be required to open up customer
the EU, an additional layer of systems was overlaid on the account data (with consent of the individual) to third parties
legacy. The result has been an infrastructure of systems that (including other banks). These third parties can then provide
are convoluted, antiquated, inflexible and inefficient, and financial services such as payments or other aggregation
expensive to run and operate. products. In our view, this implies that banks will need to
This setup has also resulted in an extremely fragmented significantly upgrade their IT infrastructure, creating a tailwind
landscape of payments technology providers, spanning new for IT suppliers including software, services and payment
disruptive players to recently spun-off bank platforms as well as infrastructure providers.
national bank owned platforms. This, in our view, is set for a It should also facilitate alternative payment highways that
revamp as a more modern infrastructure is required to ensure bypass existing systems such as the four party scheme. For
that the intricate systems specific to various regions in Europe example, a customer who has a payment to a service provider
are harmonized into an integrated system. (e.g. utility bill payment) could now provision the service
These newer systems will have to comply with new regulation provider to deduct the amount directly from their account,
notably PSD2, facilitating real-time electronic payment thereby bypassing the traditional payment rail. This would
acceptance with a variety of payment methods (including local invalidate the need for a card scheme and the payment can be
ones). We believe this will result in continued growth of processed as a direct debit (for a minimal charge).
electronic payments (at the expense of cash), provide greater In our view a good example of such a system that exists today,
security and vastly reduce the cost of processing these but is limited to one country, is IDEAL in the Netherlands. In a
transactions, resulting in lower costs for the consumer and also PSD2 world, consumers using IDEAL would be able to transact
spur further innovation in payments. across EU nations. However, a whole range of new systems
could emerge that cost less and are accepted more widely
Payment regulations like PSD2 are evolving to protect consumers across the EU.
and support growth in electronic payments
Key features of Revised Directive on Payments Services (PSD2) The implication is potentially negative for existing card
networks, merchant acquirers and payment processors, and in
A Lowerentrybarriersforonlinepaymentservice/solutionprovidersby
proliferation establishingregulationsforthem
the long-run could put pressure on take rates. The positive
ofchoices Consumerswillhavecheaperandmorepowerfulsolutions implication is that payment volumes should continue to rise as
more cash is replaced by electronic payments and in the short-
Lower Bansurchargesforcardpaymentsin95%oftransactionsintheEU,saving
term processors may benefit as there is yet another payment
charges 730mnforconsumersannually method to support.
We believe regulatory initiatives like PSD2 and payment
Better
protections Lowerthelossesconsumersincurincaseofunauthorisedtransactions infrastructure transformation projects should be unaffected by
against political events in various European countries, as their
transformative nature would give consumers more choice and
Alegislativebasistotheunconditionalrefundright
Enhanced Betterprotectionwhentransactionamountisnotknowninadvance
innovation and thus lower industry costs. However, our
rights Increasedtransparencyinmoneytransfers/remittancesoutsideEUorinnon research with payment providers suggest banks are not well
EUcurrencies
prepared with only a handful of 6K banks in Europe
Better Paymentserviceproviderswillhavetocarryoutannualassessmentofthe
commencing working groups to be compliant with the January
security operationalandsecurityrisks 2018 deadline.
Source: Goldman Sachs Global Investment Research. As a result, we believe the timeline is likely to pushout as banks
commence projects. Furthermore we believe it will take time for
PSD2 is a proposal by the European commission to revise the customers to be comfortable with security and access issues
Payments Services Directive (PSD - legislation adopted in 2007 around giving 3rd parties access to their bank accounts and
providing the legal foundation for a single EU market for they will also seek assurances and consumer protection around
payments with safer and more innovative payment services. It misuse. Therefore, implementation and activation will likely take
is also the major regulatory initiative in Europe facilitating this longer than the specified time frame of January 2018.
transformation.
While the economics of these new processes are not clear at
The main objectives include contributing to a more integrated the moment as direct bank-to-bank settlement is unlikely to
and efficient European payments market, and ensuring incur a fee, future value-added services could be a pool of new
increased security, consumer protection and lower prices.
Goldman Sachs Global Investment Research 17
Fortnightly Thoughts Issue 118
revenue. Specifically, banks have already been feeling pressure All in, we believe that regulations will play a vital role in shaping
on revenues from interchange reductions and given their high the payments landscape as they ensure that a robust system is
cost bases, the requirements to conform to PSD2 initiatives in place for various payment services to thrive and therefore
such as offering instant payments, opening up bank accounts to move closer to a cashless economy.
competitors and new entrants (Fintechs) - will require additional
work and thus cost. Further, shortages of skilled personnel and
the need to be compliant will likely create a favourable
environment for IT vendors.
2015 2020E
Pre-Paid E-Invoices, Other, 2% Pre-Paid E-Invoices,
PrePay, 3% Card, 3% 0% Other, 1%
Card, 6% 1%
PostPay, 2% PrePay, 4%
PostPay, 1%
eWallet, 30%
Mohammed Moawalla
European Software analyst
email: mohammed.moawalla@gs.com Goldman Sachs International
Tel: +44-20-7774-1726
0 - 15
fiscalization and de-monetization; and (3) increasing the Source: World Bank.
penetration of electronic payments for small-ticket items using
P2P and mobile apps.
In the US, the mix shift in consumer payments has seen Pay in plastic
relatively steady, consistent trends (see exhibit). From 2010 to Transaction by payment type
2015, cash transactions made by consumers declined 7% to Credit Card Transactions Debit Transactions ATM transactions
$47.3 bn, while card payments grew more than 40% to $95.2 100%
Pre-Paid Card Transactions Other
10%
Cash flow 0%
S Korea
Brazil
Canada
Turkey
Australia
Switzerland
Indonesia
France
Spain
India
Netherlands
Italy
Germany
US
Japan
UK
China
Mexico
Russia
Saudi Arabia
Cash penetration by market
Developed markets Emerging markets All markets
100%
Source: Eurostat.
90%
In general, demand deposit and checking accounts form a basis
for a robust electronic payment system. Ultimately, we believe
80% income dictates consumer payment preference more than other
demographic factors. Most consumers experience an
electronic payment evolution which begins with consumers
70%
opening a bank account to access deposit and checking
services, followed by the periodic use of ATMs for cash
60% withdrawal. Over time, consumers begin to access credit
(including credit cards) to make larger purchases while still
50%
using cash for smaller items. The final step tends to be the use
2006 2007 2008 2009 2010 2011 2012 2013 2014 of debit cards to make frequent, everyday purchases.
Source: MasterCard investor presentation.
Fiscalization policy You cant tax what you cant see
Global penetration of banking systems As mentioned above, shadow economies have become an
increasing focus for governments in emerging economies,
There is high degree of correlation between the use of which are comprised of legal activities including retail sales
electronic payments and the penetration of an economys and employment which are unreported or under-reported for
banking system (see exhibit). As expected, economies with a the purposes of tax avoidance. For example, construction and
high adoption of electronic payments including the US and restaurant workers are often paid in cash, especially in
Europe have a relatively high share of adults who have an developing economies. In Europe alone, the size of the shadow
account with a formal financial institution, while emerging economy was estimated at $2.1 trillion or 18.5% of GDP with
economies in Asia and Africa show meaningfully lower rates of most countries in Eastern and Southern Europe running well
penetration. As nearly half of the world population is without above this average at 19%-31% of GDP. The shadow
access to financial services, sizeable shadow economies exist economy translates to significant lost tax revenue and cannot
which operate entirely in cash and are generally outside of be completely eliminated. In an attempt to boost electronic
government control and taxation. payment volume acceptance and payment convenience,
fiscalization offers governments an opportunity to raise tax expect rapid growth in this segment to continue, helping
revenue and reduce the size of these shadow economies. displace cash usage in every day purchases.
Governments have found success with purpose-built mandates
in converting cash payments to electronic form, including the Splitting the bill
Venmo total payment volume ($mn)
subsidization of point-of-sale terminals. Recently, we have seen
positive action being taken by governments in emerging Venmo TPV ($mn) YoY growth (RHS)
6,000 500%
economies to encourage the adoption of electronic payments.
In November, the Indian government took to an overnight effort
5,000
to demonetize its primarily cash-based economy. The two 400%
and transactions.
0 0%
Increasing electronic payments for small-ticket items
1Q13
2Q13
3Q13
4Q13
1Q14
2Q14
3Q14
4Q14
1Q15
2Q15
3Q15
4Q15
1Q16
2Q16
3Q16
One of the most stubborn and persistent uses of cash, even in
developed economies, remains the purchase of small-ticket Source: Company data.
items. Typically, these purchases are under $20 and tend to be
habitual - which makes the shift to electronic payments in this Ultimately, we are on the path to becoming a cashless society,
category particularly difficult. Payment disruptors like Venmo and wealth and technology will help drive the continued shift to
and mobile wallets including Apple Pay have made active electronic payments as emerging economies develop and
efforts to penetrate this category to displace cash-based consumers look to bank with financial institutions. Although
payments. Convenient and accessible payment options like many regions are still in the very early stages of this transition,
these allow consumers to complete simple transactions using we expect a combination of new technology, global participation
an app with just a few clicks such as paying a babysitter or in the banking system, and government fiscalization policy to
splitting a check. drive this transition in the next decade.
These players continue to gain traction among consumers; James Schneider, Ph.D.
Venmo processed nearly $18 bn in payment transfers during
US Payments & IT Services analyst
2016 which more than doubled from $8 bn in 2015. Given the
convenience and ease of use of many of these methods, we email: james.schneider@gs.com Goldman, Sachs & Co.
Tel: +1-917-343-3149
0 5 10 15 20 25 30 0 10 20 30 40 50 60
Source: The Robot Report. Source: Hurun Research Institute 2017.
7
1,200
200
6.8
1,000 6.6
150
6.4
800
100 6.2
600 6
50 5.8
400
5.6
0
200 5.4
Argentina
Turkey
Australia
S. Africa
USA
EU
Brazil
Mexico
India
Canada
Colombia
Jan-14
May-14
Jan-15
May-15
Jan-16
May-16
Jan-17
Nov-13
Mar-14
Jul-14
Sep-14
Nov-14
Mar-15
Jul-15
Sep-15
Nov-15
Mar-16
Jul-16
Sep-16
Nov-16
Mar-17
60%
Iceland
50%
Sweden
40%
Switzerland
30%
Belgium 20%
10%
Europe
0%
0% 5% 10% 15% 20% 25% 30% 35% 40% Assets Sales Employment
Source: EAFO. Source: UNCTAD.
Disclosure Appendix
Reg AC
We, Sumana Manohar, Hugo Scott-Gall, Navreen Sandhu, Siri Kurada, James Schneider, Mohammed Moawalla, Daria Fomina and Milou
Beunk, hereby certify that all of the views expressed in this report accurately reflect our personal views about the subject company or
companies and its or their securities. We also certify that no part of our compensation was, is, or will be, directly or indirectly, related to the
specific recommendations or views expressed in this report.
We, Nupur Gupta, Andrew Tilton, Lasse Holboell Nielsen and Huw Pill, hereby certify that all of the views expressed in this report
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Unless otherwise stated, the individuals listed on the cover page of this report are analysts in Goldman Sachs' Global Investment Research
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Fortnightly Thoughts Issue 118
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