CashLess –OR– LessCash

CashLess –OR– LessCash – Journey from a cash-only transactional economy to a cashless economy without a full plan, education, and strategy look only a talk show. From cash only to less cash is even much more difficult and complex task without some drastic measures and radical actions. Moving to cashless or digital money society takes a lot then just talks. This journey looks very simple in textbooks or written on blogs or papers but the ground reality is super complex and very different. On a cashless journey, almost every citizen suffers tremendous setbacks, difficulties, mental pressure, harassment, starving nights (In-spite of having lots of money in hand).

So our question here is “For all those hassles/efforts what is needed “Case against Cash or Cash against Case”

Payment Systems & Digital Economy

Thanks to many data science and advanced statistical techniques were its now a proven fact that “Digital Payment Systems” are pivotal in any economy. Given their role to ease the intermediation process, which is key to make financial stability. So, in short, we get a more proper economy when money changes its form from being tangible item i.e. paper or metal to intangible i.e in bits and bytes. 

But will it eventually lead to a world of cash-free transactions where coins and notes are replaced by bits and bytes? Spending, earning, investing gets updated in real-time via smart devices, etc.. Regulators need to make sure that payment systems are operated safely, with lots of confidentiality, efficiently and soundly with effective consumer protection.

Using digital money by choice for convenience versus forced to make a digital transaction to meet basic needs are two different aspects with different impacts. The between mindset is huge and that’s what is called a gap between less-cash to cashless. Banking inclusion or Finclusion is the starting point for this journey. The need of the hour is an enabling ecosystem and change in consumer habits in a way, which is acceptable. As of now, cash is still The King of the World.

While moving to electronic there is a strong need to create a robust electronic payments platform, which is not vulnerable to fraud. How many people in a country have access to the bank versus how many are bank-less and how many have access to the bank but don’t use it for any reason? Gaps of such issues impact any economy at large. What happened in India on 8th Nov 2016 is a remarkable achievement for digital money and overnight moves towards cashless (though very inefficient and impractical).

Interestingly the 8Nov Shock (as it’s known as) was not the first time in Indian history. The first instance was in 1946 (Saturday, 12th January 1946) and the second in 1978 (Monday, 16th January 1978) when an ordinance was promulgated to phase out notes with a denomination of Rs 1,000, Rs 5,000 and Rs 10,000. Because the media, money in circulation and real hands with paper money in terms of numbers were much less and limited in 1946 and 1978 when compared to 2016 which triggered blasting atomic fumes, the importance of the decisions and size of coverage is triggered.

First Instance — 12 Jan 1946 (Source: RBI History 1935-51, pg 706)

There is hardly any data on this. So, one is overly reliant on RBI’s first history volume. The idea seems to have come from the colonial master Britain where 10 Pound notes were called back. Soon after the war, while Government was giving attention to means of averting the expected slump, thought was also given to check deals on the side operations and tax evasion, which were known to have occurred on a considerable scale.

Following the action in several foreign countries, including France, Belgium, and the U.K., the Government of India decided on demonetization of high denomination notes, in January 1946. 

It is interesting that as early as April 7, 1945, in an editorial on the tasks before the new Finance Member, Archibald Rowlands, the Indian Finance referred to the action of the Bank of England in calling in notes of ₤ 10 and higher denominations and suggested similar action in India as ‘one more concrete example for the Indian Government to follow in its fight against black-market money and tax evasions which have now assumed enormous proportions.

Second Instance — 16 Jan 1978

Source: RBI History 1967-81, RBI Balance Sheet, RBI Currency and Finance Report

The Finance Minister Sir H.M. Patel in his budget speech on 28 Feb 1978 remarked – The demonetization of high denomination banknotes was a step primarily for controlling illegal transactions. It is a part of a series of measures that the Government has taken and is determined to take against anti-social elements. As the FM did not say anything about the success of the exercise, one can almost guess that it did not create much impact like in 1946.

The story of the second exercise starts with a telephone call made to Mr. R Janakiraman, a senior official in the chief accountant’s office in the Reserve Bank on 14 January 1978. He was asked to come to Delhi for urgent work about exchange control. On reaching Delhi, he was asked to write the demon ordinance within 24 hours. He asked for the previous ordinance as guidance. All communications with RBI were shut to ward off any speculation.

Then on 16 Jan 1978, the ordinance was announced via All India Radio at 9 AM – The Ordinance provided that all banks and government treasuries would be closed on 17 January 1978 for transaction of ‘all business except the preparation and presentation or the receipt of returns’ that was needed to be completed in the context of demonetization. For purposes of the Negotiable Instruments Act, 1881, 17 January 1978 was deemed to be a public holiday notified under the Act.

Third Instance – 8th November 2016

If we took this idea from removing back money prospective then again not a good idea as black money hoarders (20% out of 100% of the Indian population) are not at all fearful. Let me give you my reasons for it with my own calculations. An official figure of cash currency discontinued (As technically this can’t be called as demonetization because INR 2000 (USD $29.4) currency paper came out against previous high-value INR 1000 (USD $14.7) is 86% of cash in circulation in the Indian economy.

In 6 months if all 100% of 86% of the money comes back to the bank then only 10% get penalized with 50% tax which means only 50% of 10% of 86% cash profit for RBI or government and only that much as the loss to black money mafia. I am far from accepting and taking this as a fact that this is a net long-term positive. The economy will be more formalized but that does not guarantee that there will be higher spending or better spending.

It has equal impact negative and positive both in the long run and short-term. Middle-level business is dead or will be dead. Demonetization handles the stock problem. Once the short-term logistics around cash replacement are fixed, expect new restrictions on the use of cash and continued curbs on cash withdrawals. These steps will continue to force behavioral change. Which means demonetization combined with GST (Indian Tax) will kill small and medium-sized enterprise.

Many markets and products will see big brothers eating or sweeping away their business which is more organized and small players will almost out of business if not adopted the change. So it has a mixed impact for short-term and long-term. This is just start and anticipation out of this action this can’t be completed without many more complimentary actions attached to this in future so this whole thing will continue to next 5 to 7 years with different measures. Interest rates on FD and deposits will fall south with 90 degrees. The dollar will overshoot in the short term. Inflation will go down from short to long-term.

The best time to introduce a demonetization game is when either the investment cycle or the export cycle is in the boom. This game i.e demonetization inevitably hits consumption in the first instance. As of neither of favorable conditions for demonetization were in place; indeed the capital goods cycle, judging from industrial production and GDP number, is particularly weak. That will now be joined by declining consumption spending for a few months and very likely to go over a few quarters at least until the fourth quarter(2017).

In the long run, the Indian idea of currency discontinuation (old INR 500 and INR 1000) might seem like revenue loss if calculating end-to-end cost starting from strategy to execution, CapEx investment, Opex, etc. At the same time, other very strong motives about country security and national interest are met and I salute and respect the Indian government and Indian people for the same. Feel very proud to be an Indian for this big step ever in history across the globe. Again I am not expert by any means in the Indian financial market.

I am more into African markets but with little experience, data and various reports on the Internet helped me to write what I have written here. Our hard-earned money and investments disappear into a labyrinth of financial instruments so mysterious that “money” almost becomes more of an idea than a tangible reality. On outside node or from another angle the Government of India gave trouble to 80% of Indians to kill 20% bad minds. This is, in my view, taking a good thing too far.

A country in which every wish of the bureaucracy was fully imposed upon the populace would not in my mind be a good, liberal nor happy one. In comparison looking at Venezuela President Nicolás Madura on Sunday (11-Dec-2016) made the announcement that the 100-bolivar note, which is now worth only two US cents (1.6p) on the black market, will be withdrawn on Wednesday (14-Dec-2016). Venezuelans will then have 10 days to exchange the notes at the central bank may be required and long-pending items.

Demonetization has forced those who to date had no bank account to immediately open an account and those who were already banked to increase the digital part of their financial exchange. Millions have lined up in front of banks. On 24 November, cash exchange became banned and people had only one option to get rid of old notes – to deposit them in banks. Already within ten days of Indian demonetization, more than 5 trillion rupees had been deposited as per rough calculations.

Easy availability of cash leads to corruption, which in turn hurts any economy around the globe and attractiveness for investors and businesses goes down. In today’s world FDI (Foreign direct investments) is a major key or a golden key to boosting the economy. A world without physical cash wallets will kill all hopes for black money or opportunity of a bribe on spot. So the question of billion dollars is; can we really be a cashless society?

A report produced by MasterCard advisors tracks how “33 major economies are progressing from cash-based to a less-cash society. With 80% of consumer spending now cashless, the US is approaching the tipping point, where it would join Belgium (93%), France (92%), Canada (90%) and other countries in the less-cash club. By contrast, what do cash economies look like? Indonesia and Russia both check-in at 31%, with Egypt at 7%, but all are working hard to catch up.”

The new research crunches and compares data on payment choices in Australia, Austria, Canada, France, Germany, the Netherlands, and the U.S. The study shows notable differences among these countries: Germans and Austrians carry around and use the most cash; the Dutch love debit cards; paper checks are still relatively common in France and the U.S. Digital transactions are a parallel mechanism, not a substitute, for cash transactions, and cashless economy is actually a less-cash economy, as no economy can be fully cashless or no cashless economy as on date across the globe. Though some of the economies are close enough.

People have already invested their so-called black money in property, real estates, gold, bitcoin (Strange!! as bitcoin cannot be purchased against cash directly), forex and paid back all long outstanding bills and loans. India eliminated 23 billion currency bills from circulation in an effort to fight tax evasion and corruption. November-2016 loan recovery for the entire Indian lending market was the record high in Indian history (91% plus). Some of the people have even paid for many months in advance along with clearing their long-pending dues. Digital money is burdened with risks as well.

Cash – The Economy Killer King

Whereas physical cash leads to vulnerabilities of tax evasion, black money and fake currency; digital money is at risk from data leaks and identity theft online. As per the report from Bloomberg; The value of dollars and euros in circulation has doubled since 2005, to $1.48 trillion and €1.1 trillion, respectively. Some of that growth can be explained by the demand for these currencies in foreign countries, but there’s also plenty of evidence that Europeans and Americans are still carrying around wads of cash.

A study of seven countries shows reports of the death of cash have been greatly exaggerated. To drive development and modernization of payment system in line with the cashless economy informal sector can be the prime target. High cash usage results in a lot of money outside the formal economy, thus limiting the effectiveness of monetary policy in managing inflation and encouraging economic growth. Inefficiency & corruption get nourished; high cash usage enables corruption, leakages, and money laundering, among other cash-related fraudulent activities. The key driver for this is to cut the cost of banking services (including the cost of credit) and drive financial inclusion by providing more efficient transaction options and greater reach.

It won’t trigger finance charges or overdraft fees. Country-specific dream goal of being among the top economies by and an efficient and modern payment system is positively correlated with economic development and is a key enabler for economic growth. To improve the effectiveness of monetary policy in managing inflation and driving economic growth cashless transactions to play a vital role.

In addition, the cash policy aims to curb some of the negative consequences associated with the high usage of physical cash in the economy. Cash cost is generally very high in the value chain for example; from printing to central banks to banks to corporations and traders; everyone bears the high costs associated with volume cash handling. Cash comes with high risk as it encourages robberies and other cash-related crimes. It also can lead to a financial loss in the case of fire and flooding incidents.

Cashless or less-cash is very interesting scenarios and ideas like the value of cash increases in many regions more than GDP and the problem starts. Central bank rules and regulations strive for optimization of the cash value chain provided support is given by each and every citizen to enrich the noble idea. Educating citizens in the market through various channels religiously is a key success factor.

Technology development enables cost reduction efforts within the cash value chain with support from regulators. New trends in cashless payments should not even partially compete with other means of cashless payments rather than with cash otherwise cash remains competitive. Half of the small transactions (less than $50) are made in cash. At the current rate of decline, cash will be a major form of payment for the next 200 years.

As mentioned before in this post about the issue of easy cash availability it’s been said that cash is anonymous and largely invisible to both tax collectors and debt collectors. And perhaps its biggest practical advantage is that it offers a tangible way of keeping track of your spending in real-time, working even when your phone’s battery is dead. That may be why, in all seven countries, the study found low-income people were far more likely to use cash than high-income consumers.

I tried to present the facts with cold, hard numbers above with all my research, experience on India ground and experience from various markets, and leave it up to readers to reach their conclusion. But a word of caution from the authors here to every reader out there; next time you want to enthusiastically say that cash is more expensive to manage than cashless, think again. Next time you get excited about enabling tap-to-pay with NFC phones, be careful what you wish for. A cash payment may well be better for your bottom line.

Points to Note:

All credits if any remains on the original contributor only. We have covered all basics around adapting cashless payment models. The importance of such a quality system with full of big data are the backbone of any digital economy. The next upcoming post will talk about implementation, usage and practice experience for markets.

Books + Other readings Referred

• Research through open internet, news portals, white papers and imparted knowledge via live conferences & lectures.
• Lab and hands-on experience of  @AILabPage (Self-taught learners group) members.

Feedback & Further Question

Do you have any questions about AI, Machine Learning, Telecom billing/charging, Data Science or Big Data Analytics? Leave a question in a comment section or ask via email. Will try best to answer it.

Conclusion – Is Cash Really More Expensive to Manage Than Cashless? If both physical and digital cash has their costs, then what is the point of tackling the costs of cash and advocating for a “less-cash” or a cashless society?. Why do we need cash If not for lemonade stands or small food/drink items from the roadside small tuck shop and baggage handlers, we might go months without actually touching a currency bill. How cashless do we need to be before it’s official?

The loss through tax avoidance is enabled by the primarily a cash economy. A cashless society wouldn’t be an unmitigated blessing, in any case, could lead to an unacceptable degree of government control. Controlling our daily life to the point where you might be rejected or declined to buy what you want to.

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