Stockholm, July 2001
Gunnar Enroth
Strategic Development Director
BANQIT AB
Copyright BANQIT AB
(1,417 words)
Cashing in ……
Even in today’s world of e-commerce, cash is king and plays a major part in global
payments. Access to physical cash is easier than ever. ATMs are being installed closer to
where consumers will spend it. New ATMs in department stores, supermarkets,
convenience stores and petrol stations are making the use of cash more convenient for
the consumer.
And let’s be honest, cash is convenient. Cash requires no intermediary and no track and
trace restrictions. Cash volume is growing in every country around the world as a
percentage of GNP, and that growth looks set to continue. People are beginning to
realise that substituting physical cash for an electronic equivalent is unlikely to materialise
for a number of years, despite the many advantages that electronic money has to offer.
Cashing in on cards
Since their introduction, credit, debit and payment cards have been an excellent
complement to physical cash, but they are mainly used for high value purchases and for
access to ATMs. And an obvious obstacle to further electronic adoption with these cards
is the current high level of fraud the industry is experiencing.
When smart card technology was introduced in the late 1970s, electronic cash was
expected to take over within ten years – yet in the 2000s, we still only witness small
adoption rates. After more than 100 electronic cash trials around the world, the reality is
that consumers have not yet accepted electronic cash loaded into cards, whilst most
small businesses cannot afford the expensive equipment needed to handle the cards nor
the fees charged by the card issuing banks. Furthermore, most central banks have not
accepted full electronic cash, meaning that the cash card is not a true ‘wallet’.
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Almost all so-called cash cards are in reality mere ‘electronic cheques’, meaning that
every individual transaction must be stored and sent to the issuing bank for approval.
True electronic cash means that a card is a ‘wallet’, allowing money to be transferred
between two cards without generating a transaction.
E-commerce, m-commerce and t-commerce have all, so far, been unable to offer a
viable and sustainable alternative to cash. Why, for example, should a consumer who has
never even utilised mail order suddenly change his or her shopping habits?
Cashing in on the phone
However, there might just be one solution for substituting cash: the mobile phone. The
mobile phone could become, in effect, a ‘bank terminal’, whilst also doubling as a pocket
terminal for payments in shops.
The mobile phone offers two possibilities. The first one sees customers ordering a
transfer from his or her account to the account of a retailer. By keying in an identity
number of the bill to be paid, the retailer can easily find out that he has indeed been paid.
The second option might be provided if, and when, Bluetooth technology enters the
mainstream market on a wider scale. This could allow the customer to connect their
telephone directly to the merchant’s payment terminal and transfer money from a chip
card in the phone to the retailer. The chip in the phone may be updated in advance to
speed up the payment.
In both scenarios the customer sidesteps the risk of being exposed to fraudulent
activities as he controls the payment mechanism as well as the built-in card. The security
is handled by the chip, which is provided by the telephone company operating the
phone. This could even see the payments logistics being taken over by these companies.
Maybe this technology will get the necessary acceptance by consumers and retailers alike,
as could a number of others, but otherwise, let’s be realistic and look at what we can do
now.
Cashing in on realism
At this present moment in time there is no viable alternative to physical cash, so the cost
problem of handling physical cash must be solved without substituting the cash in
question.
Today, the annual cost for cash handling is US$100 to US$120 per inhabitant in most
industrialised countries. Fifty per cent of this is covered by the retailers, almost fifty per
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cent is covered by the financial services industry, with the remainder taken care of by the
central bank and the government.
The major part of the costs for retailers and banks relates to the counting of notes and a
substantial part of any cost is related to security - for storage and transportation. One
shocking statistic is that a note used for a payment is counted up to 12 times on average!
So what is the solution? Limit the circulation? Circulate the cash as close as possible to
the retailers?
There are two major thoughts on this: Firstly, cash back at retailers, and secondly, the
automatic recycling of notes.
Cash back means that retailers take over the responsibility of note circulation. Some
customers will pay by cash, others will pay by a card, but the value of the payment
transaction is increased to contain the amount of cash needed and paid out to the
consumer. In this way, the retailers limit their cash volume and can also limit their needs
for delivering cash surplus to a bank at the end of the day. As a result, the costs for cash
handling in a bank will be substantially reduced.
However, experience shows that to create a win-win situation for the bank and retailer,
the bank will have to pay the retailer a limited fee per transaction. Successful co-
operations though show that the fee may not be higher than a third of the cost for a cash
withdrawal in a standard ATM.
The other solution is the automatic recycling of notes with no manual involvement. New
technology even makes it possible to combine an ATM with a recycling facility, including
the quality and counterfeit control of notes, so these notes are not circulated further.
Cashing in on recycling
Automatic recycling means the routing of cash - a switch for money - in a self-service
environment where retailers generate the major part of the deposits and consumers the
major part of the withdrawals.
This would mean a dramatic shrinking of the cash circulation cycle in society.
By efficient control of balancing cash in and out of a routing unit, surplus and deficit
situations may be limited. In theory, only bad quality and counterfeit notes should have
to be transported from a routing unit.
In reality, there will of course be a number of occasional surplus and deficit scenarios.
However, by deploying a central cash flow control system to supervise the routing units,
efficient prognosis and planning for optimising note transportation may be made.
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New technology also allows for storing notes in sealed packs, eliminating the need for
further counting of notes when leaving a router. A sealed pack is a closure containing a
number of qualified and counted notes. This technology enables the introduction of a
true closed note handling systems. Each sealed pack guarantees the value of the content.
In the routing machine the sealed packs are automatically stored in a secure case inside
the machine. The use of these secure cases will also allow for soft security transportation,
eliminating the need for armoured cars and security guards. A secure case itself provides
the necessary security enabling transportation in a standard car.
Cashing in on new technology
By utilising these new types of technology, the spiralling costs of transportation will be
cut dramatically for the banks as well as for the consumer. The cash routing machines
will not substitute all traditional cash dispensers. The cash routers will primarily be
installed where there is a natural high flow of cash between consumers and retailers, such
as at shopping centres, department stores and in big supermarkets.
Therefore, let the consumers continue to use their favourite means of payments, as
there are ways of cutting the tremendous costs for cash handling in today’s world of
physical cash.
To optimise the cost/performance ratio for cash, you can now move the handling of
physical cash into an infrastructure that is shared and used by all retailers and financial
institutions. The banking industry should realise that the responsibility for cash
circulation is not a high value parameter for a brand. Routing of cash is actually the same
as routing of calls and routing of transportation, it’s a matter of logistics.
Allow the new technology of cash routing to cost-justify cash and let consumers adopt
new payment means when it suites them. Consequently, innovative cash handling creates
a new scenario for a win-win-win situation for consumers, retailers and banks.
Stockholm, July 2001 Copyright BANQIT AB 4 (4)