By Thomas Pays, CEO and co-founder of Ozow, Digital payments company
Is 2020 the year when we finally let go of our unhealthy relationship with cash payments and usher in a new era of financial and digital inclusion?
Widespread access to digital and financial services is a cornerstone of a healthy 21st century economy. By digitising payments, the financial services sector can gain greater insight into the payment habits and trends of a greater share of South Africans, not only the higher-income earners that have credit cards and other electronic payment tools at their disposal.
This data can also inform government policies and regulations that guide how financial services providers design and offer products and services to consumers. But it all requires that most – if not all – South Africans use digital payments instead of cash.
Cash payments are largely invisible, and can’t be tracked the way digital payments are tracked, leaving policy makers and service providers in the dark over what new measures or tools to introduce to support consumers and businesses.
Cash is also unsafe, prone to theft, and locks people out of access to other value-added services such as credit, investments, and other modern tools designed to provide a measure of financial security.
And yet South Africans still overwhelmingly utilise cash as a preferred payment method.
Our costly love affair with cash
According to a Deloitte study, despite the number of banked adults increasing from 63% in 2011 to 77% in 2015, cash transactions still accounted for more than half of the overall value of consumer transactions in South Africa.
Cash is expensive to use. A 2015 study by MasterCard found that cash payments cost South African consumers R23-billion per year. Given the astronomical cost of security, it would be unsurprising to find this figure has doubled since then.
Considering the prevailing income inequality in South Africa, where the top 20% of earners hold more than two-thirds of all income, it is safe to say that the cost of using cash disproportionately affects lower-income earners who are excluded from digital and financial services.
I believe the best path to financially empower people is to give them access to the financial and digital services they need to improve how they manage their money.
And it starts with decashing the economy – not by banning cash altogether but by ensuring every South African that needs electronic payments and other digital financial services have access to such services.
Decashing strategies should be country-specific
Decashing the South African economy is not about trying to remove cash from circulation entirely. A completely cashless society could be possible in advanced markets such as Sweden, where 80% of the population pay mostly by card, or South Korea, where mobile payments have gained a strong foothold in the market.
In developing markets, attempting to go completely cashless has proven ineffective.
Nigeria introduced a government-led initiative in 2011 to limit cash-based payments and drive greater financial inclusion. However, the country was forced to backtrack due to widespread market confusion and consumers’ insistence on using cash as a preferred payment mechanism.
The Central Bank of Nigeria (CBN) has subsequently changed its approach, and recently launched a revised Cash-less Nigeria project that places additional charges on cash-based transactions with the aim of reducing, not eliminating, the amount of physical cash in circulation.
The CBN lists the expected consumer benefits of this renewed push to decash the economy as “increased convenience; more service options; reduced risk of cash-related crimes; cheaper access to banking services; access to credit, and financial inclusion”.
Learnings for South Africa
What can we learn from other countries’ efforts at decashing their economies?
Firstly, any effort should focus on reducing cash use, not eliminate it entirely. Cash will likely be with us for some time as consumers are unlikely to completely abandon it as a payment method.
Secondly, reducing the use of cash benefits everyone. Consumers can transact more safely, gain access to a broader suite of financial services, and can more easily use digital services. Payment providers can develop more sophisticated products and services aimed at all citizens regardless of their income. And government gains deeper insight into consumer purchasing habits and can develop policies accordingly.
Thirdly, decashing the economy is fundamental to driving greater digital and financial inclusion. Cash use is disproportionately expensive to precisely the people who can least afford it. Driving uptake of digital payments can therefore have a direct positive impact on their financial wellbeing and can support broader economic upliftment efforts.
Finally, the events of 2020 have created greater urgency in decashing the economy. We face prevailing income equality, and now the new dynamics of social distancing and a general economic downturn. Digital and financial inclusion is more important than ever to ensure every South African has access to the financial tools they need to survive and thrive in a radically different world.