Why cash will remain vital to global financial inclusion

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What is the goal of financial inclusion? Could it just mean giving everyone a bank account — or must cash still play a role in an increasingly digital future?

The challenge with cash is its nature makes it hard to transition away from it. Access to credit is based on past use of credit, so cash-heavy businesses have a difficult time growing. On the other end of the scale, digital-only businesses may never accept cash, meaning they may always exclude the cash-based consumer.

"Access to cash does not equal financial inclusion," said Carlos Menendez, president of enterprise partnerships at Mastercard. "We need to think of what the end goal is here, of how do we assure these residents and citizens get access to e-commerce, education and the broader [economy]."

Menendez and others discussed this topic at the annual P20 conference, which took place in London on Oct. 3.

John Glen MP, economic secretary to HM Treasury and UK City Minister, addressed the political complexity of the problem.

"In the U.K., contactless payments have increased fifteenfold in the four years between 2014 and 2018," Glen said. "The consequence of that — and quite naturally — is the demand for cash in ATMs has fallen, and fallen rapidly."

Cash usage in the U.K. has gone from 60% of payments in 2008 to 28% in 2018, Glen said, citing data from UK Finance.

"That trend is continuing, accelerating, and it's anticipated to be less than 10% by 2028," he said. "But for many people cash continues to be very, very important."

Even Kenya, which is known for giving birth to digital payment systems like M-Pesa, remains heavily dependent on cash. Mastercard has worked in this market to promote financial inclusion by improving options for small businesses.

"We asked ourselves why small businesses [in Kenya] were not getting access to credit," Menendez said. "The answer was, unfortunately, that all their data was in cash. They sold in cash. And as banks and other financial institutions looked at them … there was no history, there was no data on which to base a lending decision."

So Mastercard went upstream to find the data it needed. It found it in the shop's delivery data. Mastercard enlisted companies that would report which shops they made deliveries to and received cash on delivery. Mastercard packaged this with other data on nearby stores, and went to lenders to ask if they would be willing to use this information in their lending decisions.

Through this project, Mastercard has enrolled 20,000 Kenyan shops "to create an economic model that's self-sustaining," Menendez said.

But can this model be exported?

Back in 2015, Mastercard set a goal of financially including 500 million people by the end of 2020, and that goal is about more than reaching a number. "It's about the quality of the inclusion and what it means to be part of the economic system," Menendez said.

Mastercard must acknowledge that while it benefits from getting people to use its cards, many people will cling to cash even as other forces suppress its use.

To this end, the card network announced a cashback initiative in September to encourage cash access in the U.K. Starting in April 2020, retailers will earn a fee by providing cash to a shopper who uses a Mastercard debit card. In 2018, Mastercard partnered with Diebold Nixdorf to promote cardless ATM access alongside Mastercard Cash Pick-Up, a service that allows people to get cash at ATMs even without a bank account. That service is meant for use cases such as government benefit disbursements and remittances.

"We don't think cash is a great long-term solution, but we think that the long-term will take a while," Menendez said. "We need to work through the transition as responsible members of society and recognize that there are people who won't make the transition."

Clive Kahn, CEO of Payzone UK, noted that pro-cash efforts — including legislation — are working against the interests of certain retailers.

"I can't see how legislating to retailers that [they] must take cash is going to work," Kahn said. "Retailers on the high street are already under considerable pressure — considerable cost pressure. Putting an additional cost requirement on them to take cash, I think, is only going to make more and more retailers close their doors and move from retail to online. And again, that's happening anyway."

When these stores go fully online, they effectively exclude people who don't have access to electronic payments, Kahn said. Thus, the requirement to accept cash could have the opposite effect of what is intended.

Glen said it's important to watch the U.S. states that have enacted laws that require cash, as well as promote options that make pro-cash legislation unnecessary.

"My instincts are not to rush to legislation … but we've got to see rapid evolution in alternatives," Glen said.

Glen categorized this issue as a top political priority. "While consumer preferences will change, we have to make sure that no one is excluded," he said.

Although Mastercard is working to improve access to cash, it has also been scrutinized for its own role in potentially diminishing it. The company's 2017 acquisition of the U.K.'s Vocalink came under fire from the U.K.'s Competition and Markets Authority, which worried the $920 million deal would give Mastercard too much control over the nation's dwindling ATM market.

Mastercard appeased this concern by promising to open connections to the ATM network, and transfer or license the intellectual property rights of the Link Liss messaging standard. Mastercard also agreed to contribute to Link ATM members' switching costs.

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