Redefinition of cash

CEOs from Wincor Nixdorf and Giesecke & Devrient recently confessed that the annual spent on a global level reaches $300 billion for processing of cash. That is not a small cost of course… it is big business! Or let’s say a burden on business. In the LinkedIn group Innovation in Payments we have spent a lot of energy on this topic, about 130 comments! The discussion was ‘how to get rid of cash’. I guess the conclusion was more of less that we cannot get rid of cash. Via this new series of blog posts, I am going to try to give a summarizing view on this topic, with here and there a personal touch of course.

Key questions will be:

  • What is cash actually about? In my opinion is it not just coins and notes, in this post I will try to explain why.
  • Are there reasonable alternatives that might work? To replace cash? Or to disfavor cash maybe?
  • What can be done to decrease the cost of cash?

So what is cash? According to Wikipedia cash is, when referring to money, “the money in the physical form of currency, such as banknotes and coins”. No surprise I guess ;). However it was not always cash and notes people used to pay with, although it also fits under the term ‘cash’. Wikipedia tends to elaborate on the history or a search item as well, and there we find that after the collapse of the Western Roman Empire the only form of money were coins, silver jewelry and hack silver.  The example of Asia and Africa shows that shells were for a very long time the common payment product. They were not only used for regular transactions within the African community but also in the international slavery business, making shell more or less an international currency ;).

These examples offer valuable information on how to interpret cash. After all, history shows that from a certain level of development and standardization of society coins were produced, depending of the value and the culture it could be iron, silver, gold or another commodity. Later also notes were printed for making transfers easier.

The point that I want to make here is: which of these examples is cash? Should we only consider the coins and notes as cash? I tend to disagree. All these examples have a common ground, which makes me believe the definition of cash from Wikipedia should be narrowed down. They should stick to “money in the physical form of currency [dot]”, after all by completing it with “such as banknotes and coins” Wikipedia makes readers think cash would only be banknotes and coins.

However, if you ask me, cash is any form of value exchange between two parties that is generally accepted within a population and that can be exchanged anywhere, and anytime within the community where the payment method is used and acknowledged. In that sense cash transfers can be any transfers of values that fulfill the upper definition. That means also shells and other tools can be put under the denominator of cash.

I see two critical differentiators of cash compared to other payment methods: the first one is the time-and-place aspect, and the second one is the idea that it is a transfer between two parties.

The most important element is that it is a transfer between two parties! The payer offers a value to the payee without intervention of another player. To that extend it cannot be compared with a bank transfer, where the bank is the intermediary in the transaction. For a card payment it gets even worse: not only the payer, payee and bank are involved but also the scheme that owns the card brand intervenes in the transaction. Why this is so important is foremost the anonymity aspect: if no other parties are involved in the transaction there is no trace of the reason of transaction. That to be more concrete: the means a cash transaction can be made for any exchange, legal or illegal, black or white market, secret of non-secret. A card or bank transfer can always be traced back and the account statements will more often mention where the transaction is made and also why it is made (in a form of reference, free text for example).

Funny though the government keeps printing cash (at on average 8% in the euro-zone), but demands more and more transparency and traceability for non-cash transactions…

A transfer, a direct debit and cards can only be initiated under certain circumstances and often only at specific timeframes: when the payee has a POS terminal, of where a card reader and internet access is available, or simply in a bank branch of course. On top of that it is common use that it takes a couple of days before the money arrived on the payee account. The transfer is not a real time event, unlike an exchange of coins or shells for example.

The use of a card is dependent of the opening hours of a merchant for example and the credit transfer can only be initiated when the user has (a) access a laptop/PC with internet connection; or (b) when the bank branch is open. There is no anywhere/anytime principle for these payment products, while this is the case for cash.

Again this is nothing new in fact. However what this does prove is that by making card transactions more popular, the use of cash will not be eliminated! What probably might come closest to a ‘new are cash transaction’ is the peer-to-peer mobile transfer. It is indeed a new form of value exchange: the virtual currency. I am convinced that are likely to be (one of the) new forms of cash in the future, after the shells, hack silver, coins and notes. Unfortunately at this moment that is not yet the case, as not everyone has the technology to participate in this new way of making transactions. As long as that is not the case for me it is not yet a cash transaction. On top of that the scheme or brand behind the peer-to-peer transaction still acts like a third party. That is the second burden in this new way of making transactions… Unless the legal framework would offer the opportunity of keeping the transaction (to a certain extend) anonymous.

Examples like M-Pesa probably come closest to the new cash, where mobile is used for transferring cash. Shepherds can  easily pay with their mobile phone for a new goat for example, other will buy a new bike with their mobile, or food… Indeed, the mobile players act like the distributor of the value. However, the transactions are still quite anonymous. That is possible because the majority of payments are about low value payments. The anywhere/anytime principle still stands, as the money is ‘real-time’ transferred for the one mobile account to the other (it’s a real-time closed-loop systel). And because the network of mobile phone is more or less everywhere available, and 24/7, you can say also this argument holds ground.

The ones that acknowledge this as a new form of cash will often call the value exchange in the example above ‘e-cash’, or ‘m-cash’. However I do think that in the future these value exchanges will sometimes become a perfect substitute, and then e-cash and m-cash might simply be called ‘cash as well!

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