Monday, March 6, 2017

The Better Than Cash Alliance

Recent moves by both India and Europe seem to be suggesting that the global economy is headed toward a cashless future, a future where all transactions will take place using digital currencies.  In this posting, I want to take a look at one of the groups that is promoting the future of a cashless society; the Better Than Cash Alliance

According to its website, the Better Than Cash Alliance is a "...partnership of governments, companies and international organizations that accretes the transition from cash to digital payments in order to reduce poverty and drive inclusive growth".  I'd bet that you never thought that cash was one of the causes of poverty, did you?  The Alliance has over fifty members and is headquartered at the United Nations where it is hosted by the United Nations Capital Development Fund.  The Alliance is doing the following:

1.) Advocating for the transition from cash to digital payments in a way that advances financial inclusion and promotes responsible digital finance.

2.) Conducting research and sharing the experiences of our members to inform strategies for making the transition.

3.) Catalyzing the development of inclusive digital payments ecosystems in member countries to reduce costs, increase transparency, advances financial inclusion and promotes responsible digital finance.

Don’t you just love how many times the Alliance uses the word “inclusion”?

The Alliance notes that there is increasing evidence that a move from a cash-based society to a society where all payments are digital can improve life but that the transition is too complex for a single entity to overcome.  That's just one of the benefits of joining the Better Than Cash Alliance, you can become part of a team that will overcome the logistical, regulatory, economic and financial barriers that face developing and emerging economies in the move to cashlessness.

Let’s look at how the Better Than Cash Alliance defines digital payments.  Digital payments can be grouped in two ways:

1.) Narrow choice - ‘Paper’ vs ‘non-paper’: Instruments which rely on a paper-basis for authorization, such as checks, traveler’s checks, and money orders, are regarded as ‘non-digital’ and all other instruments are regarded as ‘digital’.
           
2.) Broad choice - ‘Cash’ vs ‘non-cash’: Every instrument other than cash is regarded as ‘non-cash’ and therefore digital, since each usually takes a digital form at some stage in the transfer of value.

Transactions between payer and payee can have a range of "digitalness"; when payer and payee initiate and receive payments electronically, the payment is considered fully digital.  There are also other scenarios with varying use of electronic payments/digital cash as follows:

1.) The payer issues a pre-paid cash card to a payee who uses an ATM to cash out the funds on the card. 

2.) An Electronic Funds Transfer starts out with the payer competing a paper form at a bank and the payment is credited digitally to a payee.  

3.) Money is transferred by a payer who hands cash to an intermediate who transfers the cash electronically to another agent's account who pays out the transfer in cash to the payee.

Now, let's go back and look at the members of the Better Than Cash Alliance who are moving the world's developing economies toward a "better future" where cash is redundant:

Government Members: Dominican Republic, Nepal, Jordan, Papua New Guinea, Pakistan, Bangladesh, Afghanistan, Benin, Columbia, Ethiopia, Fiji, Ghana, India, Kenya, Liberia, Malawi, Moldova, Peru, Rwanda, Senegal, Sierra Leone, Philippines, Uruguay, Vietnam, Mexico.

International Organizations: ACGI/VOCA, CARE, Catholic Relief Services, Chemonic International, Clinton Development Initiative, Concern Worldwide, European Bank for Reconstruction and Development, Grameen Foundation, Inter-American Development Bank, International Rescue Committee, MEDA, Mercy Corps, Save the Children, The International Fund for Agricultural Development, United Nations Development Programme, United Nations Population Fund, Universal Postal Union, UN Secretariat, Women's World Banking, World Food Programme, World Savings Bank Institute.

Companies: Grupo Bimbo, The Coca-Cola Company.

Resource Partners: For this group, I'm going to use a screen capture:


Obviously, it is not terribly surprising to see Visa and MasterCard among the companies that are pressing forward with this objective, given that they are both very large (and very profitable) players in the digital commerce sector.  

To get some idea of the real motivation behind this move to a digital payments/cash-free world, let's look at Visa for a moment, particularly the company's analysis of digital payments in the United States.  According to Visa, in the United States, millennials (those between the ages of 19 and 35) will represent 75 percent of the workforce and 46 percent of total U.S. income by 2025, with aggregate income reaching $8.3 trillion as shown on this graphic:


Visa's research shows that millennials use the following means of payment:


In total, millennials use credit and debit cards (i.e. digital payments) for 55 percent of their spending and are more likely to revolve (i.e. not pay off their monthly balance) and pay fees than those cheapskate Baby Boomers as shown here:


Not only are credit and debit cards popular among millennials, this group is more likely to use smartphones and other wearables for payment than Baby Boomers as shown on this table:


Given that this is the case for the United States with a population of only 75.4 million millennials, you can only imagine how anxious companies like Visa and MasterCard are to penetrate large markets like India with its 200 million plus millennials as well as the tens of millions of millennials living in two of the largest Alliance member nations, Mexico and Pakistan.  Interestingly, according to Pew, some of these developing nations already have significant levels of smartphone ownership as shown on this map:


Between 2013 and 2015, smartphone ownership levels in developing economies grew from 21 percent to 37 percent, a 76 percent increase in just two years.

We'll close this section with a look at the profitability of both Visa and MasterCard.  In fiscal year 2016, Visa's profits were $5.991 billion, down from $6.328 billion in 2015.  Mastercard's profits for fiscal 2016 was $4.1 billion, an increase of 7 percent on a year-over-year basis.  Obviously, both companies would love to see the global economy weaned off its cash habit.


It's becoming increasingly apparent that we are moving toward a cashless future, whether we like it or not.  The concept of a cash-free society is being sold to us on the premise of reducing both crime and corruption and, in the case of the Better Than Cash Alliance, to promote economic well-being and inclusiveness, however, if we scratch just below the surface, we can see that major companies like Visa and MasterCard and their digital payments peers have a vested interest in forcing an end to cash.

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