How cashless payments will reshape commerce in Asia

Transcription

1 Nuttawut Atiratana, Tanai Khiaonarong, Sayan Pariwat Bank of {NuttawuA, TanaiK, Abstract How cashless payments will reshape commerce in Asia is an important issue, not just for Asian countries, but for the entire world. Moving to a cashless economy will foster economic growth and expand business opportunities throughout Asia. This paper intends to provide the Thai regulator s perspective on this development and indicates appropriate roles of how both payment service providers and regulators should play to make this happen. The paper is divided into five sections. The first provides a brief overview of the current state in Asian payment markets, and the second discusses the fundamental changes that are taking place in this environment. Section three illustrates how costly and inefficient cash is, and the fourth looks at how, in detail, expansion of cashless payments will affect commerce in the region. The paper concludes by setting out strategies we can follow to achieve this transformation. Keywords: Cashless payments, Cashless economy, e-payments Table 1. Asian cash usage in 2004 Cash / M2 S % 2.9 % Malaysia 5.4 % 3.4 % 6.6 % Indonesia 10.6 % Philippines 13.8 % 10.3 % Source: Asian Development Bank 16% 14% 12% 10% 8% 6% 4% 2% Cash / GDP 2.5 % 6.6 % 6.4 % 10.9 % 7.6 % 4.7 % 5.4 % 9.3 % 1. How Asia pays today At present, Asian economies are characterized as highly cash dependent society. The opposite table, showing the ratios of cash to M2 and to GDP of countries across Asia in 2004, indicates how much each Asian country still depends on cash. The ratio of cash to GDP, from 1995 to 2003 [1] as shown in figure 1, reveals upward trends for,, and and downward trends in and. Cash has dominated consumer payments across Asia. and are top of the pile, by using cash for over 90% of their purchases and bill payments. The figure for and is 70%, while the lowest is South, below 60% [2] Source: Use and Substitution of Cash and Electronic Payments in Asia, Tanai Khiaonarong and David Humphrey, June, 2005 Figure 1. Percentage of cash to GDP ratio 100% 90% 80% 70% 60% 50% 40% 30% 20% Source: Use and Substitution of Cash and Electronic Payments in Asia, Tanai Khiaonarong and David Humphrey, June, 2005 Figure 2. Percentage of cash use in consumer payments 141

2 E-PAYMENT, E-LEGAL & LAW Going electronic Clearly, Asian economies are still highly dependent on cash. But there are good signs that several countries in Asia are moving toward cashless payments, as indicated by rising trends in electronic payments (e-payments) from 1995 to The biggest increases in the use of electronic transactions have been in, and [3]. For, in 2005, the number of electronic transactions reached its highest point to date, accounting for 90% of non-cash payments. 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% Source: Use and Substitution of Cash and Electronic Payments in Asia, Tanai Khiaonarong and David Humphrey, June, Figure 3. Percentage of electronic transactions to noncash transactions, like many countries in Asia, is moving from cash to electronic means of payments. The Bank of (BOT) has set out a policy agenda to promote the usage of e-payments, and the number of e-payment transactions has continued its rising trend for many years. In 2005 alone, Thais made 874 million e-payment transactions. Payments made by credit and debit cards were the highest proportion of all non-cash transactions. In 2005 there were 11.2 million credit cards and 11 million debit cards in use in Thai economy. ATM cards however are by far the most popular with 27.6 million in existence. The latest service in non-cash category is ORFT (On-line Retail Funds Transfer) offering service via the only ATM network in the country. The service takes advantage of over 15,784 ATM machines located nationwide, by allowing customers to use their ATM or debit cards to make interbank fund transfers from their bank accounts to the recipients accounts. Although ORFT has just been in service for only 6 years, its transaction volume has been increasing dramatically, by rising from only a half million transactions in its first year of operation to 28 million transactions in At the end of 2005, the service expanded its customer base by allowing customers to initiate their fund transfer order from over 4,228 bank branches, as an attempt to facilitate market segment that is not familiar with ATM machines. Table 2. Number of cashless transactions in (in thousands) Cashless transactions Paper-based Transactions 104,300 (13%) 104,796 (10%) Cheque 104,300 (13%) 104,796 (10%) E-Payment Transactions 695,614 (87%) 874,379 (90%) Payment cards : 549,210 (69%) 709,886 (73%) Debit card 210, ,484 Credit card 319, ,406 ATM-ORFT 19,071 27,996 Automated : 146,404 (18%) 164,493 (17%) Direct credit (Pre-authorized) 87,977 98,778 Direct debit (Pre-authorized) 45,356 48,483 SMART (ACH) 11,862 15,728 BAHTNET (RTGS) 1,209 1,504 Source: Bank of 2. The changing payment environment There are two essential factors that make the shift to cashless society more possible. The first factor is the availability of many proven technologies. Telecommunication networks, which are crucial for requesting and authorizing e-payment transactions, are becoming much more efficient and reliable. Both fixed-line telephone and wireless networks can convey not only voice, but also data or even images that allow people to make and authorize their payments online in real time manner. With the advent of wireless technology, people can now make their payments anyplace at anytime. The development of IT and payment solution technologies, such as mobile and internet payments, enables people to make payments more easily and safely. In addition, these advanced technologies are much more affordable for both payment service providers and customers. The second factor is customers needs for more efficient services to better fit their changing lifestyles, both work and personal lives. It might say that customers today are more demanding and sophisticated. Besides, they need to be charged for services at lower rates. Undoubtedly, these two factors are going to significantly alter our payments industries in Asian region. 3. Cash is inefficient and costly Cash is not efficient for the current business environment, which is entering an era of e-commerce, as it requires face-to-face transactions, contrary to e-payment means that support remote transactions. Moreover, cash is reckoned to be the costliest mean of payment, but calculating a precise figure for this is difficult as there are a wide range of hidden costs. Most of its costs derive from labourintensive counting and storing, reconciliation, transport, and the risk of loss and theft. According to several studies, cash-handling costs vary from 4% to 9% of the value of a purchase or 5% of GDP [4]. An interesting question to ask here is: Who bears most of the costs? 142

3 According to the European Payment Council [5], there are three parties who bear most of the cash handling costs. Two of these taking up 90% of all costs are banking and retail sectors absorbing 65% and 25%, respectively. Most of the costs go to counting and storing, transporting, insuring and the distribution process. Central banks in Europe are responsible for 10%, which typically goes to printing process of the banknotes. It is assumed that the cost distribution in Asia is not much different from that in Europe. USD 3 USD 2 USD 1 Check 66% 44% Costs to corporate in writing checks Costs to banks in providing check service SMART 48% 52% Retail sector 25 % Central Bank 10 % Source: Bank of and Development Research Institute (TDRI) Figure 5. Cost comparison between check & SMART in 4. Reshaping commerce in Asia Banking sector 65 % Figure 4. Cost Distribution of the cash handling service in European countries As the total costs of cash-based transactions are hard to be calculated, the example of cheques is perhaps a good way to show how costly paper-based payment is compared to those made electronically. The opposite chart provides a comparison of the costs of cheque transactions and those carried out by SMART 1 which is Automated Clearing House (ACH) as part of the study, carried out by the Bank of and Development Research Institute (TDRI) in 2006 [6]. It showed that writing one cheque costs the economy USD 3 whereas the cost of making one SMART transaction is only USD1.20. With such an obvious difference in costs, why are cheques still so popular with consumers? There are two main reasons. Firstly, cheques have lower fees, especially on consumer side, compared to other non-cash payment means. Secondly, they are easy and convenient to use compared to some e- payment services. 1 SMART (System for Managing Automated Retail Funds Transfer) is an electronic retail funds transfer system, owned and operated by Bank of, for batch-oriented transactions and a recurring payment period. The system supports both credit transfer and debit transfer. Customers can make payments for payrolls, utilities, installment loans, insurance premiums, dividends etc. Moving toward cashless society will increases efficiency among households, businesses, and governments in making their payment activities. For households, their burden from payment fees will get much lower. Their quality of life will improve with faster and more convenient services that can get accessed anywhere, anytime, anyway for anyone. For businesses, companies, especially small and medium-sized enterprises (SME), will benefit from lower transaction costs that will make them more competitive. Cashless payment services also increase the opportunities in doing business. One good example is in the retail business, where accepting credit cards increases sales volumes because they allow customers to buy goods and services despite not having liquidity at that time. By accepting credit cards, businesses can also expand their sales channels through internet, telephone or mobile phone and enlarge their market to cover overseas markets. For governments, e-payments will have an enormous impact as government is the single largest purchaser of goods and services in the country, as well as the collector of funds such as taxes and other revenues. Governments will benefit from huge cost saving in making payments and reduce tax evasion manners and other fraudulent activities. Cashless payments also help improve financial transparency because they are easy to trace and monitor, which will reduce the possibility of corruption and increase government s integrity at both local and central levels. Moreover, moving to cashless society will also make it difficult to conduct transactions in the underground economy as cash is an anonymous mean of payment that is often used to support illegal business. According to the International Monetary Fund, underground business account for 35-44% of 143

4 E-PAYMENT, E-LEGAL & LAW GDP in developing countries, compared to a range of 21-30% in members of the OECD. Cashless services also play an important role in promoting tourism, which is a major source of income for many Asian countries, by attracting more travellers into the country and allowing them to spend more as e-payment services can be offered in various forms without the need to go through a separate process of changing currency. Finally, for the government, moving to a cashless society will stimulate higher consumption in the country as well as increasing GDP. For Asian region, there will be more regional business integration and intra-region trading. According to Boston Consulting Group, intra-asian cross-border retail payments will grow in value from $32 billion in 1998 to $92 billion in Meeting customer needs One crucial reason why the move to a cashless society is not as fast as it should be is because most of the services do not really give what customers want. The key factor for success in moving to a cashless society is to customise each service or expand its usage to better serve the various needs of each market segment, whether they are P2P, B2C, B2B, G2C to G2G. Customizing each e-payment service to better each market segment P2P B2C B2B G2C G2G Goods & services Debt services Goods & services Payroll Installment loans mortgages Insurance payments Dividends Taxes Service fees e-payments as alternatives to cash-based payments ACH (Automated clearing House) Card payments (ATM / debit / credit cards) Mobile payment e-money (card & software based) e-banking (Direct debit & direct credit, ATMs, M- banking, Internet banking, Phone banking, etc.) Internet payment RTGS (Real Time Gross Settlement) Figure 6. Key success factor in moving to cashless society: Payment service providers can expand their services to serve wider customer bases in a number of ways. For example, in many countries, ACHs are only allowed to provide recurring transactions, such as payroll, instalments on loans, insurance payments and tax payments. However, in some developed economies, ACHs have created applications to provide services for non-recurring transactions, such as making payments at the point-of-sale for goods and services, and providing both domestic and crossborder payment services. In the past, ATM machines only provided traditional banking services, such as cash withdrawal, transferring and balance inquiry, but today services have expanded to cover bill payments, e-commerce transactions, and money transfers for both domestic and international transactions. Credit card usage used to be constrained only to face-to-face transactions by making payment at the point of sales, but today we can use credit cards to make any payments via the internet, which has led to the rising number of credit card usage for P2P payment. Credit card issuers have also broadened their scope to reach out to larger market segments such as corporates and governments. Different instruments and channels will also play an important role in transforming Asia into a cashless society faster. For payment instruments, card payment and e-money are the driving force to shift away from the cash-based economy, as consumers need a payment tool that can offer a high degree of convenience to compete with cash. According to Visa, the Asia-Pacific is the fastest growing region for card payments. For payment channels, ATM machines, mobile phones, the internet or even traditional channels like post office branches will all play leading roles in gearing making a cashless economy a reality. Mobile phones and the internet, which are emerging as important channels in making payments, are going to expand in influence due to their increasingly high penetration rates. In 2005, mobile penetration rates in,, and is over 70% and in it is 51%. Internet penetration rates in Australia,,, and are over 30% and is 12%. 5. Promoting cashless payments There are four strategies to consider in moving to a cashless society. These require cooperation from all the parties involved, by giving the central bank a lead role in the process. The first strategy is to promote cost-based pricing which would encourage greater use of more efficient payment instruments. Inappropriate pricing of paperbased and electronic-based payment services is a chronic problem that restricts the spread of e- payments. As we can see, in many countries, fees charged for paper-based payment services are cheaper than those for electronic ones. It falls to regulators to make sure that prices charged for payment services are not diverging too far from their cost. The second is the development of e-payments to best fit customers needs, which already mentioned in the paper. The third element is removing legal and regulations that impede e-payments and foster public trust in cashless payments. Legal systems in many countries were developed at a time when payments were made in cash or cheques. They are not suitable for e-payment systems. It is important, therefore, that 144

5 regulators review the legal and regulatory framework to remove barriers that prevent improvements in e- payments. Fourthly, customers need to be educated about the benefits of e-payments and become IT literate. Follows are the Thai experience in trying to promote e-payments in the country. The government fiscal management information system (GFMIS), which is under the e-government programme is a Thai government initiative to move all governmental payments from paper-based transactions to electronic systems (SMART and BAHTNET 2 ), starting in The programme requires all government agencies to use credit cards for travel expenses, organising meetings and allowances, which total around USD 400 million each year. The project on pricing in payment services in 2005 that aimed to promote cost-based pricing. The result of the project let to a new fee structure which reduces some e-payment fees and increases fee on paper cheque. The project on promoting the use of e-payments and discourage paper-based payments. Although cash and cheques are still used widely in today there are some good signs. E-payment transactions are increasing, both in value and volume, and the number of cheques processed has declined at a very fast rate over recent years. Although the road to a cashless society is a long one, developments in countries across Asia lead me to believe that they are ready for the journey. 6. REFERENCES [1] [2] [3] Dr. Tanai Khiaonarong and David Humphrey, Use and Substitution of Cash and Electronic Payments in Asia, 2005, P11-13 [4] Donges, William R., Retail Payment Systems-A vision for Egypt, 2002, P. 4 [5] European Payments Council, Cash Working Group Summary of Finding & recommendations, 2003, P.4 [6] Bank of and Development Research Institute, Strategies for promoting e-payments as substitution of cash and cheque, 2006, P.41 2 BAHTNET (Bank of Automated High value Transfer Network) is an electronic network which used for transmitting and receiving message between Bank of (BOT) and financial institutions or other organizations maintaining deposit accounts at BOT for settling large value funds transfer on Real Time Gross Settlement basis (Online RTGS). It has been designed to mitigate risk in payment systems so as to facilitate settlement process of business transaction in effective, secured and timely manner. 145