A library of snippets
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For Bump ’n Grind, an independent coffee and vinyl record shop, that is a growing burden. The shop, which roasts its own coffee beans, spent less on green beans last year ($12,827) than on the card-processing fees ($18,645) it pays to the financial institutions that enable cashless payments.
From The Credit-Card Fees Merchants Hate, Banks Love and Consumers Pay – WSJ:
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All of this is why when people talk about “challengers”, I think they should be talking about MicrosoftMSFT not Monzo. The challenger banks are, well, banks. Neither fintechs nor incumbent banks have truly transformed the finance industry. They have simply adapted the traditional banking model to a digital model.
This is hardly a radical perspective, by the way — the World Economic Forum were pointing out that Big Tech would be a greater threat to banks than fintechs years ago — but I think it deserves strategic focus as banks and fintech plan their way out of the current situation and look at their longer term directions again.
BCG say that BigTech is coming to the wealth management sector as well and will pose “a serious threat” to incumbents by offering bespoke new services to investors.
Speaking at this year’s World Economic Forum in Davos, John Cryan (the co-CEO of Deutsche Bank AG), said that cash could become history “
within a decade ”, going on to note that it is terribly inefficient. Mr. Cryan also focused on the way in which cash supports the underground economy , saying that cash should be dematerialised and that governments should be interested in this process because it would make transitions more traceable and would help to combat crime. I agree. Hence it seems to reasonable to ask, and were I to have been present in Davos I would certainly have asked, why it is that central banks keep pumping the stuff out? On Deutsche Bank’s home turf, for example, cash is already undermining the law-abiding majority. The Bundesbank estimate that only 10-15% of the cash in Germany is used to support the needs of commerce and this tallies with the Bank of England’s estimates of the cash used for what they call “transactional purposes”.
So in two of the world’s largest economies, at most a quarter of the cash out there is actually used as a medium of exchange. And this fraction is, as you might imagine, steadily falling as cash is replaced at POS and, increasingly, in inter-personal transactions.
If we look around the world, we can see that some countries are on the verge of cashlessness, others are a long way from it. In Europe, we should make it a goal! We must aim to be effectively cashless in the timescale he discusses. By cashless, incidentally, I do not mean that every single banknote and every single coin has been ritually cursed and then hurled into Mount Doom. By cashlessness, I mean that cash has ceased to be relevant to monetary policy, become irrelevant to most individuals and vanished from most businesses.
As we look to the future, we can begin to ask, quite reasonably, whether developments in digital payment technology and changes in payments and banking regulation will bring us to the point of this kind of cashlessness within, say, a generation (as Mr. Cryan and I expect)? The answer is probably yes, but that doesn’t mean we can’t take action to make sure! Assuming there still is a European Union in a decade then there will still be Euro banknotes and there will still be Euro coins. But they won’t matter for business or for the economy. Without policy changes, however, this will leave us with a
cashlessness that is too conservative to reap the benefits of a truly cashless economy, too disorganised to reign in the criminal exploitation of cash and too wedded to the symbolism of physical money to switch it off (just as we switched off analogue TV not that long ago).
That “
rump cash ” (and I exclude various categories of post-functional cash from this definition) should be actively managed out of existence .
Europe needs politicians to take this seriously and put forward concrete and reasonable plans to achieve effective cashlessness. This is hardly a new thought! Returning to Davos, two decades ago at the 1997 World Economic Forum there was a discussion about the electronic cash that attempted to cover all of the relevant topics and I think it provides a useful starting point. I’ve updated that list of issues and brought them together in a structure that I think rather helpfully identifies four key policy areas for European governments to focus on.
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Identifying practical actions to take in each of these policy areas gives us a “
manifesto for cashlessness ” that policy makers can add to their agendas across the continent. There are immediate and significant benefits to countries, companies and citizens.
Money supply
Governments are responsible for managing the money supply, but they presumably want to the system to deliver an efficient money supply for the modern age. But right now, European money is really, really inefficient. Jack Dorsey of Twitter and Square fame once tweeted that “In general, the shift toward a cashless society appears to improve economic welfare.” He is, of course, correct and we must “nudge” consumers toward this future.
The European Central Bank has published a detailed analysis of the costs of retail payments instruments (Occasional Paper no. 137, September 2012) with the participation of 13 national central banks in the European System of Central Banks (ESCB). It showed that the costs to society of providing
retail payments are substantial, amounting to almost 1% of GDP for the sample of participating EU countries. Half of the social costs are incurred by banks and infrastructures, while the other half of all costs are incurred by retailers.
My friend Professor Leo van Hove, Europe’s foremost expert on such matters has long held that cross-subsidising cash is not a welfare-maximising strategy. The social costs of
cash payments represent nearly half of the total social costs and as the proportion of retail payments made in cash falls, so in some countries cash already does not have the lower cost per transaction. These social costs of payments systems have only recently been studied to any degree of accuracy by, for example, the Dutch and Belgian central banks (who found the social cost to be .65% and .74% of GDP respectively). In both of these countries, which have well-developed debit infrastructures, cash accounts for three quarters of the total social cost. ( In other words , each family in the Netherlands pays about 300 Euros per annum to use cash .)
Dr Laura Rinaldi from the Centre for Economic Studies at Leuven University,
carried out some research which confirmed that customers see cash as being “almost free” despite the costs. She concluded that proper cost-based pricing would shift debit cards from being 4% of retail transactions in Europe to a quarter, a change that would add 19 basis points to the European economy .
Manifesto Commitment 1 : we will halve the total social cost of the payment system in the next decade, starting by allowing retailers to surcharge for all forms of payment including cash, except for “card present / cardholder present” debit.
Criminal activity
The
high-value notes account for more than half the outstanding currency in many OECD nations, are mainly held for stashing, hoarding and exporting. The non-utility of these notes was highlighted in a 2011 ECB survey among households and companies that estimated that only around one-third of the €500 notes in circulation were used for transaction purposes and that the remainder were hoarded as store-of-value in the euro area or held abroad. Recent figures from the Bank of England show a similar pattern, with about a quarter of the cash in circulation used for transactions. High-value notes no longer support trade and industry. Dr. Rinaldi’s research mentioned above further concluded that shifting European economy away from cash would grow it an additional nine basis points because moving to electronic money would shrink the cash-based “shadow economy”.
The European Commission has already said that it wants to investigate the connection between cash (specifically €500 notes) and terrorism. Cash, however, is desirable for all sorts of criminal purposes, not merely terrorism. Now, clearly, removing cash won’t end crime. The reason to make electronic money a firm policy goal is to
raise the cost of criminal activity . Whether that crime is drug dealing or money laundering, bribing politicians or evading tax, cash makes it easy and cost-effective.
Manifesto Commitment 2 : We will remove €100, €200 and €500 notes from circulation within five years and €50 (and £50) notes from circulation in a decade.
Social policy
UK research indicates that
families who use cash are around hundreds of pounds per annum worse off than families who don’t . The reasons are multiple: the cost of cash acquisition, the inability to pay utilities through direct debit, exclusion from online deals and a variety of losses. There’s something unfair about this. People who choose to exist in a cash economy to avoid taxes (e.g., gangsters) are cross-subsidised by the rest of us. People who have no choice but to exist in a cash economy are not cross-subsidised at all.
Those Europeans
trapped in the cash economy are the ones who are most vulnerable to theft and extortion, most likely to lose their hard-earned notes and coins or have them destroyed by monetary policies, paying the highest transaction costs, lacking credit ratings or references and (in an example I once heard from Elizabeth Berthe of Grameen at the Consult Hyperion Forum back in 2011) most likely to have their life savings eaten by rats. So what should be done?
Well, the answer is clear. Make
electronic payment accounts , capable of supporting account-to-account push payments available to every European citizen at no cost . Notice that I do not say “bank accounts”. Bank accounts are an expensive route to inclusion. Now, financial exclusion is often associated with an inability to provide a proof of identity or address (e.g. immigrants, homeless people), unemployment or financial distress in general and low educational attainment. Electronic money itself does not attack any of these issues hence we must have relaxed KYC for low-maximum balance accounts.
Manifesto Commitment 3 : We will regulate for an on-demand electronic payment account capable of holding a maximum of €1,000 without further KYC other than unique recognition (e.g., a mobile phone number).
Control and regulation
With electronic payment accounts available to all and no necessity for cash in day-to-day transactions, we must be sensitive to
privacy of transactions. Regulatory authorities ought to be able to monitor economic activity and the advantages of knowing in near real time what is happening in the real economy ought to be substantial for national economic management. However, there is a world of difference between the Minister of Finance knowing that people spent €1,548,399 in restaurants yesterday and knowing that I spent $8.47 on a burrito in Chipotle.
Most of the concerns that
reasonable people have about moving away from cash are to do with privacy and security . Since we will have to have security in order to have privacy, we should set our goals around privacy as the central narrative to address these concerns. We have all of the technology that we need to deliver payment systems with the appropriate degree of pseudonymity for a democratic and accountable society.
Manifesto Commitment 4 : We will create a privacy-enhancing infrastructure for transactions and for the sharing of transaction data, beginning with a law preventing payment cards from displaying the cardholder name either physically or electronically.
I hope that you will all agree that these deliver a sensible and practical set of steps to improve the lives of European citizens and I look forward to your comments!
In Europe and elsewhere were are in the era of open banking. Third parties can have access to bank customer data — with customer consent, obviously — and there’s nothing that banks do about it. Who will benefit from this? Fintech, as was originally intended, or techfin, as seems likely?After all, requiring Big Banks to open up their customer data to Big Tech seems to create something of an asymmetric completive environment. In fact, a recent report from BBVA calls the development of a suitable regulatory response to this “one of the greatest public policy challenges”. They call on regulators to address the “imbalance on data access” between financial institutions and the S&P5 (Google, Amazon, Microsoft, Apple and Facebook). I wrote back in 2016 that the major beneficiaries of the regulators pressure to open up the banks will be the internet giants who already have the customer relationships.
Of course, when I said it, no-one listened. But when the woman at the top of Europe’s second biggest bank weighed in, people began to sit up and pay attention: Ana Botín, executive chairman of Santander, told the Financial Times that the EU’s Second Payments Services Directive “needs to be reviewed for the digital age. The theory is good but it needs to be fair — at the moment it’s not symmetrical” and Ms. Botin, BBVA and I are not the only ones who think this asymmetry may not deliver the best outcomes.
A recent paper from the European banking industry, produced by the European Banking Federation (EBF), European Association of Co-operative Banks (EACB) and the European Savings and Retail Banking Group (ESBG) sets out the industry’s vision for the EU payments market in detail. There’s lots of interesting stuff in there, but I was particularly interested in their views on the regulatory issue that BBVA raise. Hence I couldn’t help but notice their comment on page six that “from a data privacy perspective, global BigTech’s existing data superiority combined with access to payments data should be concerning and could lead to unintended negative outcomes for EU citizens”. Indeed, and this is hardly a new revelation: It’s been obvious to any observer of the European payments landscape that it has been tilted. The competition to incumbent financial services providers will not be fintechs.
(Note that this is not just about payments. BCG say that BigTech is coming to the wealth management sector as well and will pose “a serious threat” to incumbents by offering bespoke new services to investors.)
Deutsche Bank Research published a report that went into detail about the dynamics of this emerging fintech and techfin battle. They say unequivocally that “competition will hence be distorted”. Their point is that banks will be subject to open banking regulation put into place by well-meaning regulators who want more competition in retail financial services, obliging them to provide customer data to all licensed competitors. BigTechs, on the other hand, have to observe the GDPR only and will de facto retain economic sovereignty over the personal data of their customers.
In short, regulators may well be creating the conditions to replace an uncompetitive oligarchy (as they see it) of banks with an uncontrollable oligarchy of internet giants. An Accenture report on the topic from last year noted (accurately, in my opinion) that “trusted social media companies (Facebook, Twitter, LinkedIn) and tech companies (Google, Apple) will capture a significant slice of the [access to accounts] market”.
What to do? Well, in her FT piece, Ms. Botin suggested that organisations holding the accounts of more than (for example) 50,000 people ought to be subject to some regulation to give API access to the consumer data and it seems to me that this might kill two birds with one stone: it would make it easier for competitors to the internet giants to emerge and might lead to a creative rebalancing of the relationship between the financial sector and the internet sector. This points us towards a sound, global regulatory response to the need to create a level playing field: let us put in place a set of reciprocal rights and responsibilities. My old friend Simon Lelieveldt, who I always listen to on these matters, also suggests this as the way forward. He says that if the European Commission wants a “balanced” market with effective competition then it should “redress the design errors in the PSD-2 and allow banks to ask fees and allow them reciprocal access to the customer data”.
Having discussed this idea with a few people, I’ve begun to think that is a more important, and far more wide-ranging, approach to competition in the new economy than I had originally thought. This thinking goes back to when I had the honour of chairing Scott Galloway, author of “The Four” (a book about the power of Google, Apple, Facebook and Amazon), at the KnowID conference in Washington. Scott is Scott makes a convincing case for government regulation of these global businesses. Just as the government had to step in with anti-trust acts of the early 20th century in recognition of the fascist nature of monopoly capitalism, so Scott argues that they will have to step in a century on and, again, not to subvert capitalism but to save it. His argument centres on the breaking up of the internet giants, but I wonder if the issue of APIs might provide an alternative and eminently practical way forward?
With Scott Galloway at KnowID
In the new economy, where data is the new oil and personal data is the new toxic waste, access to data is the resource that falls prey to monopoly. It is hard for a competitor social network to compete with Facebook because Facebook already has all my pictures. Sure, I can export my Facebook data and then set about re-uploading it somewhere else, but that’s a pretty significant barrier to competition, even though it’s my data.
So, yes, Open Banking. But open everything else as well. Particularly Open Bigtech. This sharing approach creates more of a level playing field by making it possible for banks to access the customers’ social graphs but it would also encourage alternatives to services such as Instagram and Facebook to emerge. If I decide I like another chat service better than WhatApp but all of my friends are on WhatsApp, it will never get off the ground. On the other hand, if I can give it access to my WhatsApp contacts and messages then WhatsApp will have real competition.This is approach would not stop Facebook and Google and the other from storing my data but it would stop them from hoarding it to the exclusion of competitors.
Forcing organisations to make this data accessible via API would be an excellent way to obtain the level playing field that the European banks are calling for. This would kill two birds with one stone, as we say in English: it would make it easier for competitors to the internet giants to emerge and might lead to a creative rebalancing of the relationship between the financial sector and the internet sector. So, if the United States, the European Union and others wants to begin thinking about a global “PSD3″, in my opinion it writes itself.
As I wrote a while ago, the Chinese were first with the great transition from commodity money to paper money. They had the necessary technologies (you can’t have paper money without paper and you can’t do it at scale without printing) and, more importantly, they had the bureaucracy. In 1260, Kublai Khan became Emporer and determined that it was a burden to commerce and taxation to have all sorts of currencies in use, ranging from copper ‘cash’ to iron bars, to pearls to salt to specie, so he decided to implement a new currency. Then, as now, a new and growing economy needed a new kind of money to support trade and therefore prosperity. The Khan decided to replace copper, iron, commodity and specie cash with a paper currency. A paper currency! Imagine how crazy that must have sounded! Replacing physical, valuable stuff with bits of paper!
Just as Marco Polo and other medieval travellers returned along the Silk Road breathless with astonishing tales of paper money, so commentators (e.g., me) began tumbling off of flights from Beijing and Shanghai with equally astonishing tales of a land of mobile payments, where paper money is vanishing and consumers pay for everything with smartphones. China is well on the way to becoming a cashless society, with the end of its thousand year experiment with paper money in sight. Already a significant proportion of the population rely wholly on mobile payments and carry no cash at all, much as I do when heading into London.
The natural step from here is to create digital currency so that settlement is in central bank money and there are no credit risks. Now, the People’s Bank of China (PBoC) is run by smart people and as you might imagine they have been looking at this strategy since back in 2014. It now looks as if Facebook’s Libra initiative has stimulated or accelerated their tactics. I read in Central Banking [PBoC sounds alarm over Facebook’s Libra] that PBoC officials had “voiced worries” that [Libra] could have destabilising effects on the financial system and further stated that the bank would step up its own efforts to create an e-currency.
This is no knee-jerk reaction. Way back in 2016, the then-Governor of PBoC, Zhou Xiaochuan, very clearly set out their thinking about digital currency, saying that “it is an irresistible trend that paper money will be replaced by new products and new technologies”. He went on to say that as a legal tender, digital currency should be issued by the central bank (my emphasis) and after noting that he thought it would take a decade or so for digital currency to completely replace cash in cash went to state clearly that “he has plans how to gradually phase out paper money”.
(As I have written before, I don’t think a “cashless society” means a society in which notes and coins are outlawed, but a society in which they are irrelevant. Under this definition the PBoC could easily achieve this goal for China.)
What would be the impact of phasing out paper money? Yao Qian, from the PBOC technology department wrote on this subject back in 2017, noting (as I have done) that a central bank digital currency (CBDC) would have some consequences for commercial banks, so that it might be better to keep those banks as part of the new monetary arrangement. He described what has been called the “two tier” approach, noting that to offset the shock to the current banking system imposed by an independent digital currency system (and to protect the investment made by commercial banks on infrastructure), it is possible to incorporate digital currency wallet attributes into the existing commercial bank account system “so that electronic currency and digital currency are managed under the same account“.
I understand the rationale completely. The Chinese central bank wants the efficiencies that come from having a digital currency but also understands the implications of removing the exorbitant privilege of money creation from the commercial banks. If the commercial banks cannot create money by creating credit, then they can only provide loans from their deposits. Imagine if Bitcoin were the only currency in the world: I’d still need to borrow a few of them to buy a new car, but since Barclays can’t create Bitcoins they can only lend me Bitcoins that they have taken in deposit from other people. Fair enough. But here, as in so many other things, China is a window into the future.
Whether you think CBDC is a good idea or not, you can see that it’s a big step to take and therefore understand the PBoC position. There is a significant potential problem with digital currency created by the central bank. If commercial banks lose deposits and the privilege of creating money, then their functionality and role in the economy is much reduced. We already see this happening because “Alipay, WeChat Wallet, and other Chinese third party payment platforms use financial incentives to encourage users to take money out of their bank accounts and temporarily store it on the platform itself” [China’s Future is Definitely Cashless].
In summary, then, a couple of years ago I wrote that the PBoC were not going to issue cryptocurrencies and they were not going to issue digital currencies either (at least in the foreseeable future). What I said was that what they might do is to allow commercial banks to create digital currency under central bank control. And this indeed what seems to be happening. According to the South China Morning Post, the new Chinese digital currency “would be centrally controlled by the PBoC, with commercial banks having to hold reserves at the central bank for assets valued in the digital yuan“.
How will this work? Well, you could have the central bank provide commercial banks with some sort of cryptographic doodah that would allow them swap electronic money for digital currency under the control of the central bank. Wait a moment, that reminds me of something…
Yep, that’s how Mondex was structured 25 years ago. (If you don’t know what Mondex was, here’s something I wrote about it 20 years on.) There was one big different between Mondex and other electronic money schemes of the time, which was that Mondex would allow offline transfers, chip to chip, without bank (or central bank) intermediation. Would a central bank go for this today? Some form of digital cash that can be passed directly from person to person like Bitcoin rather than some form of electronic money like M-PESA, using hardware rather than proof of work to prevent double spending? Well, it was being tried in Uruguay, but I’m not sure how that pilot is going, although is was not quite the same thing as Mondex because the phones would not be exchanging fungible value but tokens that could ultimately be traced and tracked and monitored, but it’s interesting nonetheless.
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When I wrote about this back in 2018, I said that I thought it was unlikely that the PBoC would allow anonymous peer-to-peer transfers, so I was very surprised to see a Reuters report [6th September 2019] quoting Mu Changchun, deputy director of the PBoC’s payments department, saying about the proposed Chinese digital currency that “its ability to be used without an internet connection would also allow transactions to continue in situations in which communications have broken down, such as an earthquake”.
This would seem to mean that the system will allow offline transactions, which means that value can be transferred from one phone to another via local interfaces such as NFC or Bluetooth. If so, this would be truly radical. I wondered if something was mistranslated in the Reuter’s piece so I went to the source speech (albeit via Google Translate!) and I discovered that this is in fact precisely what he said. Talking about the project, which is called the DC/EP (digital currency and electronic payment) tool, he said that it is functionally “exactly the same as paper money, but it is just a digital form” and went on to confirm that
DC/EP can realize value transfer without an account. In the specific scenario, as long as there is a DC/EP digital wallet on the mobile phone, no network is needed, and as long as the two mobile phones touch each other, the transfer function can be realized… “Even Libra can’t do this,” Mu Changchun said”.
Wow. That’s huge. Libra can’t do it, and never will be able to. To understand why, note that there are basically two ways to transfer value between devices and keep the system secure against double-spending. You can do it in hardware (ie, Mondex or the Bank of Canada’s Mintchip) or you can do it in software. If you do it in software you either need a central databse (eg DigiCash) or a decentralised alternative (eg, blockchain). But if you use either of these, you need to be online. I don’t see how to get the offline functionality without hardware security.
If you do have hardware security and can go offline, then we are back to the question of fungibility again. Here the PBoCs principle is both clear and very surprising.
Mu Changchun said that the public has the need for anonymous payment, but today’s payment tools are closely tied to the traditional bank account system, can not meet the consumer’s anonymous payment needs, and can not completely replace the cash payment. The central bank’s digital currency can solve these problems. It can maintain the attributes and main value characteristics of cash and meet the demands of portability and anonymity.
Wow. They are serious. He goes on to say DC/EP will work the same way as banknotes.
Commercial banks open accounts at the central bank, paying 100% of the total amount, and individuals and businesses open digital wallets through commercial banks or commercial organizations. DC/EP is still replaced by M0 and is legally compensated. For users, just download an app to register, you can use a digital wallet, and recharge cash withdrawals need to dock traditional bank accounts.
I wonder if this will bring interoperability? If DC/EP is really to work as banknotes do then the e-RMB in my bank app and my Alipay app and my WeChat app much be interoperable. I must be able to transfer value from my Alipay app to your WeChat app. If PBoC crack that they will be on the way to one of the world’s most efficient electronic payment infrastructures.
There was a final part to the speech which I did not understand at all, so perhaps a Chinese correspondent more familiar with DC/EP can clarify the meaning. The speech covers “smart” “contract” by which I assume PBoC means apps that use the DC/EP to execute on the handset (since there is no blockchain), but this is my assumption.
Mu Changchun said on several occasions that the central bank’s digital currency can load smart contracts. However, if a smart contract that exceeds its monetary function is loaded, it will be degraded into a value-for-money ticket, reducing its usable level, which will adversely affect the internationalization of the RMB. Therefore, digital currencies will load smart contracts that favor the monetary function, but remain cautious about smart contracts that exceed the monetary function.
I am baffled by this, which I am sure reflects my ignorace of advanced electronic money technologies, but I don’t think that this deflects from my overall observation that if the PBoC goes ahead and launches a person-to-person offline capable CBDC then that will be not only a nail in the coffin of cash but an event as significant and momentous in monetary history as the paper notes of the Khan a millennium ago.
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Zelle specifies that its network is “intended for personal, not business or commercial use.” This means it’s okay to use Zelle to split up restaurant bills with friends or send $200 to your daughter to buy university books. But it’s prohibited for grocery chains or taxi companies to accept Zelle payments.
From Venezuela Is a Testing Ground For Digital Dollarization (and Zelle Doesn’t Like It) – CoinDesk:
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Ecoanalítica, a macroeconomic analysis company, recently tracked over 15,000 transactions in 10 different Venezuelan cities including Caracas, San Cristóbal and Puerto Ordaz. Around 56% of these transactions were conducted in U.S. dollars. According to Asdrúbal Oliveros, an economist at Ecoanalitica, 12% of all transactions were processed by Zelle.
From Venezuela Is a Testing Ground For Digital Dollarization (and Zelle Doesn’t Like It) – CoinDesk:
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Although Zelle is meant for U.S. usage only, Venezuelans have repurposed the network as a way to make dollar payments among each other. Large Venezuelan supermarket chains including Excelsior Gama, Automercados Plaza’s, Unicasa and Central Madeirense have enabled Zelle as a form of payment. Cafes and restaurants accept it. So do taxis.
From Venezuela Is a Testing Ground For Digital Dollarization (and Zelle Doesn’t Like It) – CoinDesk:
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“As soon as we see someone (using the Bitcoin machine) and they’re on their cell phone, we always sort of interject just to make sure they’re not on the phone with (the scammers),” Morissette added. “Usually they are.”
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