The U.S. may never face the type of crisis sparked in India through a government decision to recall high-currency bills to curb fraud. But the countries and their financial institutions have something in common — they welcome any technology that introduces digital money in lieu of cash.
Now it's just a matter of the U.S. and India getting more bold in advancing those technologies; otherwise, both nations risk stalling or backtracking in their efforts to eliminate cash.
Despite reports from Paytm and others that Indian citizens are rapidly shifting to mobile payments, It is too early in India's cash crunch to determine if there will be a truly long-term shift away from cash. And in the U.S., where multiple industries are aggressively trying to replace cash with their own apps, currencies and closed-loop systems, old payment habits are proving very hard to break.
But cash can fade, as happened in Denmark, Finland, Sweden and Norway, said Ben Knieff, senior analyst at Aite Group. "In a lot of European countries, they have e-purse transactions that are like a prepaid card, and they are used for contactless transactions of a certain number of euros," he said.
Because the U.S. has so many different mobile payment methods available and many banks are supporting the Zelle network (formerly clearXchange) for person-to-person money transfers, it is likely that U.S. banks will move toward more consolidation of these services before they make a bigger dent in cash use, Knieff added.
"We can't have all of these banks having their own apps," Knieff said. "It will cause confusion and merchants just want to support a few mobile options, not multiple ones."
The incentive game
In the meantime, banks are still too cautious when promoting their mobile wallets or other electronic money services designed to limit use of paper checks.
"I'm not really seeing incentives," said Larry Berlin, vice president with Chicago-based First Analysis Securities. "But banks are always looking at ways to service their customers at lower costs and sometimes that means using a vehicle that creates a record."
A debit or credit card transaction creates a record that can be recorded in a bank system. "Use of cash does not create that," Berlin said.
Banks would obviously rather see people increase their use of payment cards because they get extra money for those transactions even after the Durbin amendment lowered debit fees, Berlin added.
"Still, we're not seeing a huge incentive at this point to flip from cash to card usage, beyond what is normally said [in promoting online banking]," Berlin said.
The incentives will come naturally after real-time payments initiatives from The Clearing House and Zelle take hold next year, said Mihail Duta, leader for U.S. payments product management at Toronto-based financial services technology provider D+H Corporation. For many, the appeal of cash is that the transaction is complete — and irreversible — as soon as bills change hands.
"Banks are going to be interested in providing incentives for merchants and consumers to adopt these new real-time payments," Duta said. "The U.S. is finally on board with faster payments and everyone wants it to be a success."
In addition to real-time payments making cash less attractive, banks and merchants have to be certain that fraud prevention programs are so strong that consumers will be comfortable enough to skip cash transactions and use their cards or mobile technology for payments, Duta added.
"The security factor not only applies to large banks, but also the smaller financial institutions," Duta said.
Because Early Warning specializes in security and its Zelle network offers real-time payments, the bank-owned operation figures to have a significant say in what happens to cash in the coming years.
"While I cannot comment on behalf of our partner banks and the fees or incentives they may offer, there is certainly an industry case for incenting consumers to transact electronically with their mobile devices," said Lou Anne Alexander, group president for payments at Early Warning. "I believe the value proposition offered by Zelle will encourage and enable broader adoption of P-to-P payments and mobile banking."
Zelle will initially focus on P-to-P use cases including corporate disbursements such as insurance claims, Alexander said. "More cases for faster payments are expected to roll out in the months following the launch," she added.
Ultimately, Early Warning predicts it can replace many longtime uses for cash and paper checks, Alexander said.
"Unfortunately, much of the infrastructure designed to manage and maintain paper payments and coin will have to be supported until the last check or cash payments are made — if that day ever comes," Alexander said.
That means the cost of managing checks and cash per unit will increase as the volume of those payment types decreases, she said.
Hard time ditching cash
It would seem that certain tech-savvy, younger consumer age groups will certainly do their part to hasten the decline of cash. But those younger consumers, who use debit cards for many transactions at the POS, are generally also having a hard time giving up on cash when it comes to P-to-P money transfers.
Research from Aite Group last year indicated that 86% of younger millennials and 77% of older millennials said they used cash for those types of payments in 2014, both higher marks than their second choice of PayPal, at 62% and 58%, respectively. Millennials are generally categorized as those born between 1980 and 1995.
While cash may continue to be a choice for young consumers, it is facing increasing competition from other choices they trust, including payment cards.
"Most places in the U.S. accept cards, so if the security aspect is in place, consumers eventually will be using payment cards for everything from a pack of gum to a new car," D+H's Duta said.
That would be good news for banks, which certainly know first-hand how costly cash it is to print, mint, move, protect, reconcile and — most importantly — monitor in efforts to discourage money laundering and other serious crime.
Controlling cash flow
In that regard, the banks may not be able to entirely deter cash usage among U.S. consumers, but they can control how much is going in and out of bank branches, said analyst Russ Schoper of Atlanta, Ga.-based Business Development International Inc.
"To some degree, the larger money-center banks are promoting mobile wallets and mobile payments," Schoper said. "But that strategy appeals more to younger tech-savvy consumers, which they want to attract."
Equally as important, banks are "working hard to better manage cash through technology advancements in branch teller automation," Schoper added.
The number of cash transactions at a bank branch on a daily, weekly and monthly basis determines the amount of cash needed to operate the branch.
Each bank has its own cash ecosystem and the "teller cash recyclers," which automate the process of reusing cash deposited by consumers or small businesses on the next day or week, eliminate the need for more cash to have to flow into the bank, he said.
Banks benefit when they can eliminate the cost of cash delivery to replenish supplies at a bank, Schoper said. "That's still [reliant on] an armored car and security guards with guns," Schoper said. "It's just not a great process."
Embedded payments' role
Other efforts are clearly eliminating the need for cash to be stuffed in consumer wallets and purses. Many common consumer experiences no longer rely heavily on cash.
Vending machine technology provider USA Technologies reported that its digital advertising for using Apple Pay at a vending machine boosted overall transactions 26% in less than a year. It all points to a more current way to spend money — and leave cash either in the pocket or out of the equation entirely.
Uber and Lyft have eliminated not only cash, but also plastic cards for ride fare. Uber understands its place in a cashless society, quickly responding to the problems in India by starting a car-booking service for weddings in that country that would call for the embedded payment process.
Consumers have more of these types of apps on their phones that make payments seamless than they might even know, said First Analysis' Berlin. "There are the apparent ones like Apple Pay or PayPal, but if you have Uber, Lyft or anything like LevelUp or iTunes, you don't think about those as much, but they are payment apps."
As more of these apps come into play on mobile devices — even for narrow purposes like ordering a cab or paying for coffee — the use of cash will continue to decline, Berlin said.