Payments Innovation Not Killing Cash

New Methodology for Measuring Cash Usage by Consumers Shows Growth in Cash Use in Developed and Developing Countries

Significant Impacts to Cash by Payments Innovation Will Take a Decade or More to be Felt

Boston, MA  (Profitable.com)  In spite of the many payments innovations coming to market around the world, and efforts on the part of many, including banks and card networks, to shift consumers away from cash, a new study released today by Market Platform Dynamics (MPD) shows that the total use of cash is increasing in many developed and developing countries. The study findings were the subject of a keynote presentation made by MPD CEO Karen Webster at the ESTA World Congress and Convening in Marseilles, France. The study findings conclude that although payments innovation will eventually impact the consumers’ use of cash, significant impacts will take at least a decade to be felt. The study was sponsored by Loomis AB, one of the world’s leading cash processing and delivery organizations in an effort to understand the impact between cash usage by consumers and the payment innovations coming to market.

“Cash isn’t going to die – or not at least any time soon, in spite of the explosive growth of electronic payments, in spite of the bulls eye that it has on its back from players who want to see it dead and buried, and in spite of the convincing narrative that electronic payments pundits deliver, “ remarked Webster during her presentation. “Pundits have been predicting the death of cash for as long as the plastic card has been in existence – more than 60 years now but the existing ways of measuring cash tell us nothing about how consumers actually use it. We’ve developed a new methodology that provides a much more accurate understanding how much cash is used by consumers to pay for things at merchants in different countries over time.”

Lars Blecko, ESTA Conference Chair and CEO of Loomis AB stated that “it’s easy to lose perspective about the relevance of cash in society given the wave of news reports on payments innovation. The ability to have a more robust methodology for understanding how much cash is really used by consumers to pay for things at merchants is extraordinarily valuable and why we felt very strongly that this piece of work be done for the benefit of the entire cash ecosystem. It turns perceptions about cash into a set of tangible and actionable metrics that help the industry understand how cash will evolve alongside mobile and the other payments innovation that will certainly come our way over the years.”

Ten specific markets were examined in detail to calculate the growth or decline in cash over the next decade. The ten markets include the US, UK, France, Spain, Sweden, Portugal, Turkey, Poland, Germany, and Italy. In all but one market, Sweden where the percentage of spending done in cash by consumers is expected to decline, all study countries are projected to show an increase in total cash usage.

Webster’s presentation also outlined six new observations related to cash and the impact of payments innovation to the consumers’ use of it as a result of the 10-country study.

1. No one accurately measures how people use cash to pay for things. Cash in circulation is the proxy frequently used for assessing cash usage but only measures the stock of cash available for people to use or hoard. Measuring the flow of cash which is essential for understanding how cash is accessed and used and how quickly requires looking at the places where consumers can get cash: ATMs, banks, and at merchants’ Point of Sale in some countries.

2. Overall Cash Usage Can Grow Even if the Share of Spending in Cash by Consumers is Declining. Most analysts and pundits who look at cash only look at the “slice” of the total spending pie that represents how much of overall consumer spending is made with cash – which is being impacted by electronic payments methods. But that is only one half of understanding the total growth in cash usage. The other relates to growth in the total size of the spending “pie” which is driven by GDP. “Cash use as a percentage of overall spending may be declining in many countries because of innovation, but as a result of economic growth, real spending in cash still increases,” remarked Webster during her session. “This a seemingly obvious but often overlooked insight.”

3. The future of cash will be determined by seven influencers that have the potential to put cash at risk in any given country. Governments, the Economy, Payments Networks, Innovators, Financial Institutions, Merchants and Consumers all determine how the course of cash and payments innovations will evolve in any given country. In order to thoroughly assess the degree to which each influencer could drive interest for or against cash usage in each country, MPD identified some 35 factors across all seven influencers. These factors and influencers were used to create a Cash at Risk Score (CaRS) score for each country. A higher CaRS™ means a higher likelihood that cash will be at risk – or the propensity of consumers to use cash for payment will decline.

4. The future of cash is highly correlated to the speed at which payments innovation is adopted in any given country by those with spending power.Payments innovation takes a long time to really work its way through the economy and to be adopted by enough people with enough spending power to make it a standard. “The implications to cash are quite significant,” Webster also emphasized. “Of course, younger people will more readily adopt payments innovations but they don’t control enough of the spend to move the needle, and won’t for a while. Those who do, their parents, aren’t racing to ditch their plastic cards for mobile phones.” MPD’s Payments Innovation Diffusion model (PID™) simulates this behavior using demographic forecasts of population and spending. For the ten countries they studied, and the hypothetical example of payments innovation used, it would take 30 years for enough young people to develop enough spending power to force a wholesale shift away from cash to electronic methods.

5. It isn’t enough to measure the future use of cash by simply basing future use on the historical use of cash. MPD’s cash methodology uses three approaches to accurately measure the future of cash usage by consumers: (a) the historical trend in the propensity of consumers to use cash, (b) the cash is at risk given the impact of influencers in each country and (c) the rate of adoption of new technologies using the Payments Innovation Diffusion model (PIDTM) to determine how long it would take before the adoption of new technologies in payments would reduce cash usage. This is the methodological framework devised by MPD and applied to the ten countries that were the subject of the research, and that can be applied to any other country in which there is a need to assess the timeframe for the impact to cash usage by payments innovation.

6. Innovations Around Mobile and Payments will Impact the Use of Cash but it Will Take a Long Time for Major Impacts to be Felt. Changing anything in payments takes time, even if the change is for the better and more value is created for everyone – it has taken 25 years for the debit card to ignite as the card of preference for most consumers. Further, innovation doesn’t always cannibalize cash. In places like Kenya and Japan and China and India where mobile phones are well-penetrated and innovations in mobile money schemes, like m-Pesa, have launched, cash is used more than ever. Webster concluded her talk by saying, “Cash has survived for thousands of years because it is an exceptional innovation – easy to use, almost all merchants accept it and people like it. But, it’s inevitable that as innovations around mobile and payments mature, the use of cash will be impacted – it will just take a lot longer than a lot of people would like you to believe.”

The 16-page paper that is the basis for Webster’s presentation can be found here. The full technical paper, which includes a detailed discussion of the cash usage methodology and country cash usage projections, can be found here.  MPD Paper authors include David Evans, economist and Founder, Karen Webster, CEO; Gloria Colgan, Managing Director; and Scott Murray, Director.