If Cash Isn’t Dying, Can Electronic Payments Grow?

Let’s start the first week of summer by turning the discussion of cash as a viable payment method on its head. Here’s the many-multi-trillion dollar question up for grabs: if cash remains alive and kicking as a payment method over the next decade, then how fast will electronic payments grow, particularly those driven by mobile, over that same period?

In the words of that classic Sly and the Family Stone summer anthem, I think it’s time for a little hot fun in the summertime!

Just to level set a bit, I gave a presentation about the future of cash to the annual meeting of the global cash ecosystem about two weeks ago in France. The presentation was based on a paper that my colleagues and I at Market Platform Dynamics published outlining a new methodology and framework for projecting how much total cash usage will grow on a country basis over the next decade. We applied our methodology to 10 diverse developed and developing countries, including the U.S., the top five EU countries – UK, France, Germany, Italy, Spain – as well as Sweden, Poland, Turkey, and Portugal. The results started an interesting conversation about what impacts the consumer use and overall growth of the largest and oldest payments system on the planet.

The flip side of this conversation, of course, is the extent to which the growth (or lack thereof) of cash impacts the growth of electronic payments, since of course, any decline in a consumer’s use of cash is directly correlated to their substitution of some form of electronic payments for cash. Based on the analysis we’ve done in the 10 countries we examined – which are a pretty good cross section of developed and developing countries – electronic payments will take about a 14 percent bite out cash spending by 2022. In other words if you forecasted cash spending based on it having the same slice of personal consumption expenditure as it does today, the growth of electronic payments, spurred by innovation in mobile payments and so forth, will be about 14 percent of that. That figure is based on the GDP-weighted average across all the countries. The U.S. as it turns out is about average – electronic methods will take an additional 13 percent bite out of cash spending by 2022.

After spinning the data we’ve projected that in those 10 countries the total amount of spending that will shift to electronic payments by 2022 is about $908 billion in current dollars.  Visa, MasterCard, Discover, Amex, and lots of other payment players—including GIRO systems, ACH, direct debit, and so forth—will fight over that money. Not to mention all the innovators that come along. The figure for the U.S. is $421 billion in current dollars. These figures don’t factor in economic growth and are based on current personal consumption; rising personal consumption from economic growth will lift all boats—including the total amount spent on cash and electronic payments.

That’s real money of course. But I’m not sure its nearly as much as some pundits (and data jockeys for payments companies) are forecasting. It is only a 13-14 percent drop in the use of cash over a decade. And, if anything, we think we’ve probably overstated the likely decline in cash.

A couple of observations.

First, the world – and Visa – will probably look a lot different in 10 years. For one thing, that is the bewitching hour for the Visa/Chase Merchant Services deal, which is a 10-year deal. We’ll have certainty around just how fast and deep the impact of the inevitable CMS three party system will be. The U.S. is a hugely important beachhead for Visa and so a big deal. Developing markets, while a greenfield, are particularly sensitive to economic conditions as we are seeing today in Turkey and Brazil – two countries that everyone thought were among the more stable developing economies. Ten years from now, we’ll also see how far CMS’ tentacles have or could reach and any impact that might have on American Express. We’ll also have more certainty about the combination of PayPal and Discover and how that has influenced payment choice and volume at the point of sale.

Visa’s investor deck, which was given to analysts in early June, suggests that Visa has its sights on an $11 Trillion number, which they say is the payments volume in 2016 that is attributed to cash and check. That number might be right (we haven’t checked) but we’re not all that optimistic that all electronic payments are going to get a big chunk of that by 2016. In our 10 countries, by 2016 we project that electronic payments will take only an additional 1.0 percent bite out of cash (0.5 percent in the U.S.). And the total shift is only $314 billion ($92 billion in the U.S.). That reflects our forecast that most of the reduction in the share of spending on cash will take place after 2016.

Second, there are sound reasons why cash use (as a share of spending) isn’t going to plummet – but just decline gradually – in most places in the world. Our work on cash provided some tangible quantitative metrics on what drives innovation in payments forward or keeps it in check. The availability of innovation isn’t enough to ignite it in any country. As we discussed in our paper, there are actually seven influencers that, when considered individually and scored collectively, give us great insight into why countries like Sweden, Italy and Germany are giving cash the heave-ho much faster than countries like France, Portugal, and Spain. Factors such as the degree of fragmentation of the banking system, general economic conditions, the growth of immigrant populations, the degree of smartphone penetration, merchants’ interest in and ability to support new point of sale systems, and consumer attitudes about mobile payments all weigh heavily on the speed at which payments innovation will grow in any country.

Then there’s the relationship between early adopters of new technologies and consumer spending. It’s a given that young people flock to new technologies like bees to honey and are more willing to experiment with new payment methods, like using their mobile phones to pay for things at the point of sale. They, however, do not drive the majority of spend – their parents do. The implications for the adoption of new payments methods that will replace cash, and not simply substitute the use of a plastic card for a card account registered to a digital wallet, is significant.

These unhip oldsters are much more likely to have cards already and their payments habits are pretty well entrenched. They’re the ones most likely to pull out their leather wallets and skip over a collection of credit and debit cards to choose a $20 bill to pay for lunch. It’s not always easy to explain or even rationalize, but the ways people think about and use various payments methods are pretty well ingrained and very hard to change. The oldsters are also the ones most unwilling to stop using cash where they are accustomed to using it.

These unhip oldsters control the bulk of spend. In the U.S., boomers control about 75 percent of it. It will take several decades (our work suggests three) before enough offspring of these oldsters have enough spending power to dominate spending using new payments innovations and for enough new payments innovation to be available at merchant locations that account for the bulk of consumer spending. It will just take that long for young people to acquire wealth, for Boomers to slow their spending or move on to the great shopping adventure in the sky and for merchants that drive the volume of consumer spending to adopt new payments technologies. What also works against the hipster youngsters is that there are fewer of them – and even fewer hipsters-in-training since population growth is slowing and, as a result, populations are aging in most every country. There’s more scoop here on the relationship between different demographics, Millennials in particular, and consumer spending.

There’s one perhaps more subtle, but important point related to the merchant categories that account for cash spending today. Those segments that are cash intensive now – delis, coffee shops, bakeries, QSRs – don’t really drive enough spend anywhere in the world to really move the payments volume needle. Our work shows that 100 percent of these establishments could move to cash and the impact to both cash growth, and therefore the growth of electronic payments volume, would be very slight.

All this said, there are probably three big takeaways and one big so what. First the three takeaways:

1. Electronic payments take pretty much all of the decline in cash use but outside of Sweden and a few other places around the world, that drop is likely to be pretty gradual.

2. The degree to which payments innovation ignites in a country is related to a number of factors that go well beyond the interest and the availability of payments innovation in a particular country.

3. Growth in the volume of electronic payments will happen slowly, with not much at all happening in the next five years. Expect change to happen more quickly once the early adopters of payments innovation control enough spending power via those new innovative payments methods, but that will take several decades.

Now, all that said, there is one Black Swan worth mentioning that could change things a smidge.

Apple devices – smartphones and tablets – are disproportionately owned by people with spending power. In fact 30 percent more people who make $75k and more own Apple products than Android devices. They are also a slightly older demographic. Could a payments application enabled by Apple or a cloud-based payments application offered by another innovator but easily accessed via an Apple device shift the adoption curve forward just a bit? Yep, but not be enough to juice the numbers in the next five years and maybe not even in the next 10. As cool and fabulous as that hypothetical payments innovation might be, merchants would still have to enable it, and that process alone just takes time. (Case in point, it’s taken 27 years for debit to account for 50 percent of consumer spending, for example.)

Now for the big “so what.”

Almost a trillion dollars of available spending in the 10 countries we looked at ($421 billion in the U.S.) switching to electronic payments in a decade isn’t chump change, but it’s perhaps not as much as one might have thought – and there will be a lot of players with their proverbial hands out vying for their fair share. For the traditional payments networks to drive top line revenue growth by a lot, they will need to develop and deploy other revenue generating activities and to do that in stable markets where consumer spending is a bit more predictable. The BRICS, as we have seen recently, seem to be cracking a bit. Although they represent great opportunities for payments innovators, they remain unpredictable and volatile. And based on our analysis we see the decline in cash to be gradual as well in China, India, Brazil and Russia.  Markets like the U.S. and UK, where economies are more robust and resilient, cash as a “white space” opportunity isn’t as large as it might have once seemed.

But, that’s what makes this space interesting, fascinating and far from certain – and will keep it that way – for many years to come.


New PYMNTS Study: Subscription Commerce Conversion Index – July 2020 

Staying home 24/7 has consumers turning to subscription services for both entertainment and their day-to-day needs. While that’s a great opportunity for providers, it also presents a challenge — 27.4 million consumers are looking to cancel their subscriptions because of friction and cost concerns. In the latest Subscription Commerce Conversion Index, PYMNTS reveals the five key features that can help companies keep subscribers loyal despite today’s challenging economic times.

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