Towards a cashless society: Opportunities, challenges

By Vince Musewe

For a good part of 2016, the cash crisis in Zimbabwe has had a devastating impact on service providers in the financial services sector and the Reserve Bank of Zimbabwe has been at the forefront of encouraging a move to creating a cashless society.

This has faced many challenges mainly due to the lack of preparedness by our banks and business sectors, but also due to a cultural resistance by the public, who are used to carrying and transacting in cash.

Interestingly enough, the introduction of bond notes seems to have expedited the use of cards and cellphones to make payments as many seek to avoid the endless bank queues.

While most retailers, clothes shops, and big utility providers now have ZimSwitch enabled point of sale (POS) machines, there has not been a rush by many to install the necessary systems mainly due to cost issues.

However, there is no doubt that there has now been an unavoidable culture shock caused by the liquidity crisis and the use of cards and cell phones is now gaining momentum.

Sadly, the retail merchant sector has not fully come to the party, with wide spread reports of excuses particularly by fuel service stations, who are avoiding the use of POS to sell fuel in preference of cash, while some retailers have resorted to giving customers incentives and discounts for using cash. This can only further delay the move to cashless systems.

A cashless society is a term describing the economic eco-system in which palpable, physical money, namely paper banknotes and metal coins, are replaced with virtual, digital money, and where cash circulation is substituted with payments done by using numerous types of cards, mobile devices and various other equipment connected to the internet.

The benefits of a cashless society to the transacting public are much more than just convenience and safety associated with the payment system. Current tight liquidity conditions and the need for financial transparency and inclusion can be solved through the adoption of plastic money. This also has the potential to contribute to gross domestic product (GDP) growth as the majority of the populace is brought into the banking system. In addition, a significant percentage of GDP can be realised in the form of savings if Zimbabweans shift from cash to an electronic-based transaction system because money remains in the bank longer.

Because cashless payments can be traced, since they leave digital trails, it is argued that illegal market activities and illicit fund flows can be restrained and possibly even eliminated in the long term thus benefiting the economy. This would help Zimbabwe tremendously, especially given the increasing illegal externalisation of scarce foreign currency.

The dark side has been the high transaction charges which practically represent a tax on every single payment, and which benefit only the banks. The argument here has been that cash transactions do not require customer education, constant power supply, non-stop internet connection, continuous customer service, continuous updating of protection systems against all kinds of activity and monitoring which costs money. Providing security in a cash economy is therefore relatively simple and inexpensive when compared a cashless system.

However the banks need to meet clients half way and not charge excessive fees.

Electronic payments have made substantial inroads among consumers in some developed countries. Many of these markets, compared to Zimbabwe, have been building the infrastructure for cashless-ness for a long time. Affordable and broadly available financial products, a vibrant and competitive merchant marketplace, a transparent and productive business environment are all strongly correlated with progress toward cashless-ness.

Zimbabwe therefore still has a long way to go, particularly in our underdeveloped rural sector where 70 percent of the population resides. In many developing countries cash still accounts for 90 percent or more of all consumer transactions. This is owed largely to low financial inclusion rates and the absence of a broadly available cashless infrastructure

The four key prerequisites for going cashless have been identified as follows:

1- Broad access to financial services. This involves the availability and affordability of financial services and products and whether people use bank accounts and electronic payment products. The in-formalisation of the Zimbabwean economy and mistrust of the banking system have worked against this in that a large section of the population does not bank its money. However, due to cellphone penetration, which is estimated to be in excess of 100 percent, there is wide spread use of cellphone banking, which is a positive attribute. We need to capitalise on this and enable cellphones to be used as payment instruments. This is certainly beginning to happen as the uptake of the necessary technology increases.

2- Merchant scale and competition are also key determinants. These indicate the potential for uptake of new payment solutions by large scale merchants and also consider the intensity of local competition. The cost of implementation of cashless systems continues to be quite high (eg a POS system costs US$500) and this has tended to limit their availability. Added to this, is the fact that Zimbabwe still has a few large scale merchants who have a monopoly and therefore can determine the pace of implementing cashless systems without necessarily losing market share to competitors. Interestingly enough, the liquidity crisis has inadvertently forced accelerated adoption of cashless systems by many retailers, large and small, and this can only work to our benefit.

3- Next are macro-economic and cultural factors. Included are factors that impact on preference for cash, such as ease of doing business and size of the informal economy. Zimbabweans prefer to use cash, this has been the case since time immemorial and we have seen how difficult it is to change that culture over-night. Endless bank queues remain common as clients queue to get access to as little as US$50. The large informal sector also prefers cash for many reasons and do not pay tax, hence the resistance of formal cashless systems. The unstable macro-economic environment has not encouraged the use of cashless systems and keeping money in the bank due to anxiety and distrust of the banking sector.

4- Lastly, are technology and infrastructure issues, which consider access to and uptake of new technologies as well as innovation (including the quality of infrastructure). If we are to expedite the emergence of a cashless society in Zimbabwe, we have to upgrade our infrastructure and ensure that all have access to it. Constant power supply, access to affordable broad band, new affordable technologies and equipment are some of the issues which we need to address here. Firstly, the historically skewed development towards urban areas leaves a large number of our population in the rural areas without access to technology and infrastructure. Secondly, the migration to urban areas has further put pressure on urban infrastructure, while effectively under developing the rural sector where 70 percent of our population resides. This does not help broad-based inclusive economic development, financial inclusion and employment creation.

These are some of the opportunities and challenges which we face in going cashless. There is no debate that the advantages far outweigh the disadvantages. As our economy develops there is no doubt that we will become more cashless.

In conclusion, it is critical that key issues of economic revival, macro-economic stability, increased competition, infrastructure development, affordable financial services, financial inclusion and renewed confidence in our banking sector, employment creation and culture change through education have to be addressed before we can see significant uptake of cashless systems and the benefits therefrom. Financial Gazette

Vince Musewe is an author and independent economist. You can contact him directly on [email protected]