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Unprecedented technological change is transforming the world we live in, and digital innovation is creating new opportunities for businesses in a wide range of industries. As such we are living a significant transformation in the payments ecosystem. Funds transfers, cheques and credit cards are no longer the only alternative to cash. Digital wallets and mobile payments are growing in popularity. At the same time, contactless payments are becoming more prevalent, and biometric solutions that use fingerprints or even retinal scanning are increasingly viable. Globally, the Federal Reserve estimates that there was US$616.9 billion in cashless transactions in 2016. That’s up from around US$60 billion in 2010.
As a very practical example of trending towards cashless economy, India's shock demonetisation move last November, aimed at tackling counterfeit notes as well as unreported and untaxed wealth, helped boost the adoption of digital payment solutions. The government also introduced innovative new payment channels, such as the Unified Payments Interface (UPI), a set of standard Application Programming Interfaces (APIs) to facilitate the next generation of online immediate payments. In another example, Vietnam has also announced a new initiative to become cashless by 2020; the latest statistics show that modern infrastructure and technology has decreased cash usage from 14% to 12% over the past 6 years.
Despite the magnitude of this overall shift, what is happening from country to country varies quite considerably. In a bid to evolve toward a cashless society, many central banks around the globe including Australia, China, India, Canada, England, Singapore, Sweden and the Netherlands have started exploring digitizing their currency, and many more are converging to the idea. Singapore is one of the first major countries to work on a proof-of-concept to conduct interbank payments using blockchain technology together with a consortium of banks. Such open-loop systems can decrease costs from the economies of scale from a centralized payments system, encourage real-time payments adoptability and drive better interoperability between different service providers. Progress in the legal framework and supervision will also help peer-to-peer (P2P) networks gain trust and a higher market share among consumers and businesses, although it is still a long way to go as there are uncertainties on how existing laws can be enforced (e.g. tax evasion, anti-money laundering, sanctions and how to combat the financing of terrorism).
In many ways, trending towards a cashless society is great news for consumers and corporates alike. The rise of mobile and new channels of electronic payments mean faster, convenient, and more efficient purchases in most instances. New technologies are being built and improved to facilitate these transactions, and improving security is also a priority for many payment providers.
It is also important to note that the payments landscape across APAC is highly diversified, with developing Asian markets embracing transaction and credit card-based models, while developed Asia markets stick to account-based models and more traditional funds transfers. Other factors such as internet penetration and the proportion of the unbanked population in rural areas also impact how much cash can be eliminated. This has attracted the attention of new players, from gateway providers and software integrators to P2P and remittance firms to act as new intermediaries in addition to traditional banks. In the long run, a transfer system is only useful if a critical mass of potential payers and payees participate, and a true cashless society needs to have either a major system or interoperability among these various systems.
In addition, when companies consider corporate B2B flows, the trust effect in the payment provider is also key. Corporates still needs to manage counterparty and operational risks, to ensure the funds will be delivered or settled as expected. To that extent, banks bring that counterparty trust level that is very valuable to corporates and their shareholders, limiting the adoption of new gateway providers to transfer corporate flows. This is why moving towards cashless has seen a much higher uptake among consumers and C2C flows than the corporate B2B flows today.
There is also a darker side in the shift to a cashless society. Governments and central banks have a different rationale behind the elimination of cash transactions, and as a result, the so-called war on cash is on. Governments have been increasingly pushing for a cashless society. Ostensibly, by having a trail for all transactions, such a move would decrease crime, money laundering and tax evasion.
A cashless society also means more data to manage. Treasurers will need to ensure that their Treasury Management system can capture and leverage the data in an intelligent manner. For better financial decision and for reporting purposes it is important for both corporates and the financial industry to be aware of the sensitivities surrounding data collection and ensure that privacy is always respected.
Corporate treasurers play an important role in ensuring that a company meets the evolving payment demands of its customers. Yet many treasuries are still focused on the traditional definition of corporate treasury activities, such as risk and liquidity management. Banks must play an important role of trusted advisor and keep treasurers aware and ready for the change, and the potential benefits they will gain.
Suman Chaki is head of cash management corporates, Asia-Pacific, at Deutsche Bank.
24 Mar 2017