Assault On Banknotes

As e-transactions and mobile money come of age, the omnipresent currency may soon be history
Raghu Mohan Source: Businessworld, 31 Mar 2012

ttam Nayak, India boss of Visa International, gets plenty of job offers. His would-be

employers want him to do an encore create a new market from scratch as he has done for Visa out here. But what is the fun doing what I did at the start of my career, when we had just 200,000 credit cards, asks the 16-year Visa veteran. Today, millions swipe plastic, even as many a new Columbus seeks to carve out space in non-cash transactions business. There is Airtel Money, there is PayPal, there is Google Wallet all with ambitions to make cash redundant. Google Wallet has tied up with Citi, Visa, MasterCard International, Discover and American Express to make sure your phone becomes your wallet. Can it become a spanner in banks payment business? It has a significant way to go (in India) given that it is a NFC (near-field communication) platform, says Muge Yuzuak, MD and head of credit payment products at Citi. In the NFC world, a digital wallet inside your smartphone will talk by radio to a terminal at an outlet to square off a bargain. It is more critical to set up the ecosystem (phones and acquiring) before it becomes widely used. NFC has caught fire in Japan and Korea. In India, we are still three to four years away, feels Ajay Adiseshann, founder of PayMate, a wireless transaction firm. Cash and cheques for that matter is going out of fashion. Plastic, as credit and debit cards, have been around for some time, but a pack of new digital transaction platforms and vendors have gained traction rapidly. Internet banking and electronic money transfers are used for utility payments to retail shopping. Third-party Internet cash alternatives such as PayPal are popular in a range of countries. Now, mobile money backed by telecom vendors is set to take off.

It has, in fact, already. In Hong Kong, the Pacific Coffee Company allows you to use your iPhone to pay for your coffee and snacks. An iPhone app scans a QR-code (a digital barcode) at the counter. HongKongers no longer need cash to get their morning cup of coffee at 100-plus Pacific Coffee stores, says Mayur Patel, country manager of PayPal (India). You are done in just two clicks. You do not have to go through the hassle of entering a 16-digit card number. Coffee never smelt so good.

The value of bank curency as a percentage of GDP is headed south, show data from Switzerlands Bank for International Settlements. Sweden has the lowest at 3.16 per cent, next comes Korea (3.68) and Canada (3.89). Among Brics nations, Brazil tops at 4.01 per cent, and is tailed by South Africa (5.86), India (12.04) and Russia (12.89). The whiff of banknotes is set to fade. In Sweden, 97 per cent of all transactions are generated electronically; then comes Canada (84 per cent; it was just 13 in 1990) and Korea (57). Sweden may become the first country to do away with cash transactions altogether. It could happen within the next decade. Brics lags for now; electronic transactions account for 23 per cent in Brazil. Russia mirrors India at just 3 per cent.

DID YOU KNOW? In Sweden, cash accounts for only 3 per cent of all payments; in India it is 97 per cen

Sure, we are on the cusp of a change. The Reserve Bank of India (RBI) tells us total electronic payments in 2011-12 will hit Rs 1,71,790 crore. That is 33 times the Rs 5,200 crore in 2003-04 when a new order was rung in. But much more needs to be done. The RBI bears costs of printing currency, currency chest management and wear and tear. Its annual report (2010-11) shows it spent Rs 2,376 crore to mint notes and Rs 45.5 crore on currency chest operations. The report of the task force on Aadhaar-enabled unified payment infrastructure (February 2012) headed by Nandan Nilekani, says the cost of cash to the economy is 5-7 per cent of GDP. It can be cut by a third with retail e-payments. As digital payment gains ground, it will upturn old hierarchies, alter the power balance in the financial mart, and usher in transparency to the regulator, who can now track every financial transaction. Life On The Wire Old money never liked new. Visa and Citi, once arrivistes much like Google Wallet, PayPal or a PayMate are the old guard today. Nayak and Yuzuak can ignore the irony, but will have to face the heat from newbies of the ether world ogres, imps, banshees, witches and boggarts.

Airtel and Vodafone want to help you shop, pay, remit, and make money out of it. Citi, which has done this all its life, got sleepless. It decided to throw in its lot with the new guard. In 2009, it wired up with Nokia and Vodafone in Bangalore for one of the worlds largest NFC pilots for MasterCard PayPass. A fortnight ago, Nokia threw in the towel. It says it will stick to its core competency as a handset maker. But plenty of others are ready to get into the ring. Not too far away from our shores, Korea saw a jamboree with MasterCard, LG Telecom (handset) and Shinhan Card (a credit card company) to make PayPass work across the networks of Korea Telecom, LG Telecom and SK Telecom. It works so well that no one missed a bank at the party. T.V. Seshadri, country president (India) for MasterCard, is candid: We are likely to see more players develop and build electronic and mobile payment platforms to support traditional platforms. It has forced traditional players to join hands with or buy outright the gatecrashers. In June 2011, Visa gobbled up South Africas Fundamo, a mobile-based financial services firm, for $110 million. In 2008, Telenor bought 51 per cent of Tameer Microfinance Bank in Pakistan. The acquisition provided Telenor Pakistan with a banking licence to offer mobile financial services. In the new digital world disorder, nobody gets to beat anybody. You team up with anybody so that you do not become a big nobody. break-page-break Gary Matuszak, global chair of technology, communication and entertainment practice at consultancy firm KPMG, says, Firms willing to engage in cross-industry tie-ups and coopetition are more likely to succeed and dominate. KPMGs Mobile Payments Outlook (2011) says banks and plastic firms play the most important roles in digital money; telcos come third, ahead of the specialist online payment firms such as PayPal, Boku and Obopay. Anand Sinha, deputy governor of the RBI, was spot on last month when he observed, Channel innovation will play a crucial role. It could take many forms a high-tech branch, a more intelligent ATM, social media, cloud banking or a cellphone that replaces both cards and currency. Clearly, Fortress Cash is under siege, even in India which has always favoured banknotes over plastic. You have 284 million pieces of plastic credit (15.6 million) and debit cards (268.8 million) with annual spends of about Rs 1,20,000 crore. The RBI wants plastic to smile more; cash has too many problems. It is fungible, often moves without a trace and boosts black money. So the central bank wants new and renewed cards to be chip-based with a PIN in two years; 70 per cent to move to chip and PIN by the fourth year. In five years, every credit card should be both. The RBI feels this will cut down on frauds and boost e-commerce.

Apart from security benefits, e-transactions have a few other things going for them that make central bankers happy. The EU says cash costs 0.6 per cent of GDP. A white paper by Moodys says e-payments can nudge annual global GDP by an additional 0.2 per cent. It greases the economic engine, makes transactions flow more smoothly and creates efficiencies in commerce. It leads to lower inventories, ups production, and you get more jobs. It expands personal income and spends.

The Plastic Economy It has taken long, but plastic has come of age in India. Its diehard supporters tout prepaid plastics as the way to reach out to the unbanked; it is also a lucrative business opportunity. Four years ago, Naveen Surya (40), quit TCS to sign up with Itz Cash, a startup prepaid cards firm in the fold of Subash Chandras Essel Group. Itz sits on top of the prepaid issuer pile with spends at Rs 4,000 crore. The average on its 9 million cards is Rs 3,500. Nayak calls Surya the messiah of prepaid. Surya thinks it is a great way to get the unbanked and under-banked into payment systems. Surya read the tea leaves right, but he is not in it only to foster inclusive banking. Every time you fund an Itz prepaid, the dough is float. Yes, it has to be kept aside in a bank account. The RBI does not want prepaid to turn into a money laundering game. But Itz gets to pocket the interest paid on the float. Prepaid spends (of bans and non-banks) stand at $8 billion (Rs 40,000 crore). It was zero when Surya printed his Itz business card. He forecasts it will soon rival spends on credit and debit cards at close to Rs 1,20,000 crore a year and it took them years and years to get to where they are now. A Boston Consulting Group prepaid market sizing study done for MasterCard says prepaid will zoom to $59 billion or Rs 6 lakh crore by 2017 in India. By 2012, it is seen at $840 billion globally, up from the $200 billion now.

Even as prepaid gains traction, debit cards appear to be sluggish. Loney Antony, managing director of Prizm Payments, which helps banks set up ATMs, says most people use debit card to withdraw cash from ATMs. Antony feels sorry for debit cards 80 per cent which belong to state-run banks. But they have not tried enough to migrate to cashless at point of sale (PoS ) level. It has created a huge imbalance in e-payment penetration; its limited to the top 25 cities. The average monthly spend on debit is flat at about Rs 2,000. In 2010-11, transactions at ATMs were Rs 10,91,114 crore, of which debit card-ATM transactions stood at Rs 10,90,053 crore, as compared to credit-card ATM transactions at Rs 1,061 crore. At the same time, at the PoS level, credit card transactions stood at Rs 75,516 crore in 2010-11, while that of debit card was Rs 38,691 crore. Manish Sinha, head consumer assets at HSBC, explains. Debit cards imply an immediate debit, and a lot of customers are not comfortable with this. You do not have enough places to swipe as well. The number of PoS terminals in India will touch 600,000 by end-March 2012. Brazil has four times the number. The PoS market is fuelled by the consumption story over the past decade. During this period, some sought to increase marketshare with the firm belief that higher transaction volumes in future will compensate for infrastructure cost, says Yuzuak.

Card transactions normally entail a merchant discount rate (MDR), borne by the merchant. It is split between the payment scheme operator, and the banks handling the transaction. It is rumoured that the MDR is about 0.9 per cent ad valorem. Merchants feel it adds to the cost and resist accepting card payments. Retailers want to avoid expenditure tax. Nayak says the priority should be to up the PCE (personal consumption expenditure) usage of cards. It is the lowest in the world at 3 per cent against the global average of 16 per cent. It is almost 50 per cent in Canada, Australia and New Zealand. break-page-break Fiscal incentives to discourage cash payment at the retail end can boost card payments. In Korea, merchants got tax breaks for terminalisation. In 2002, the e-payments industry added $1.75 billion to its economy. It led to significant increases in transaction transparency, tax revenues and deposits. It has a PCE of 57 per cent a strong example for India to follow. The National Payments Corporation of India launched RuPay to replace Visa and MasterCard for debit payments much like Chinas UnionPay and Singapores Nets. The intent is to bring down the MDR and encourage retailers and banks to switch, says Ravi Rajagopalan, who has set up Empays Payment Systems. Some say RuPay is a hair-brained idea; the moment you step out of India, you have to hook up with Visa or MasterCard. It is the same with UnionPay and Nets. And it is unlikely that without fiscal sops, the MDR will drop. It is into this low acceptance world that newbies plan to airdrop. Your Phone Is Your Wallet Even as plastic players push for acceptance, there is a real chance that mobile wallets will outstrip them in popularity. There are more cellphones in India than credit and debit cards. The latest census shows that an estimated 53.2 per cent of households have cellphones. Even in rural areas, mobile penetration is 47.9 per cent. In contrast, of the 15.6 million credit cards,

almost half is held by one user. In the case of the 268.8 million debit card holders, many reside in the same wallet due to multiple bank accounts. Telcos know the power of float. Of the 736.14 million mobile users, 96.91 per cent are prepaid. The average revenue per user is Rs 98. You have Rs 7,000 crore in floats to play with. It is an $8 billion window. Of this, $5 billion will be earned in direct fees (when someone uses a mobile to make a purchase or peer-to-peer payment) and $3 billion in indirect fees (usage of voice, network and other services), says Sameer Nemavarkar, CEO of Atos Worldline (India), a USbased transaction solutions consultant and provider.

Empays has tied up with Hal Cash International, a consortium of six big Spanish banks. If your bank is part of it, you can make a payment. The recipients mobile number is the destination identification. You do not have to know the account number or card number of the person you want to remit to. She gets a set of codes, punches this into an ATM and pulls out cash. Axis Bank is part of this loop. Eight more state-run banks are set to sign up. Rajagopalan says he gets a small fee and telcos earn for the codes sent as SMS. It is a sign of bigger things to come. Globally, mobile payments crossed $80 billion in 2010. It is set to more than double to $200 billion in 2012 and, hold your breath, $600 billion in 2015. Then you have a booming retail shopping mart. A study by industry body Assocham and Deloitte says it is worth an annual $410 billion (Rs 18 lakh crore). Airtel has buzzed with Airtel Money it has teamed up with over 1,800 brands. Sriram Jagannathan, CEO, Airtel mCommerce, hopes one day, its acceptance will be across Visa and MasterCard.

HSBCnet Mobile service has been used to authorise $500 million of payments in Asia. It is puny when compared to the World Banks remittance estimate of $191 billion in Asia-Pacific in 2012. But HSBC has run up this number within 19 weeks of the services launch. You have direct etransfers between individuals at around $3 trillion a year. A US-based technology firm, Dwolla, has hit the ground running with a low-cost payment service for both businesses and individuals. It charges you a flat fee of 25 cents per transaction and works on iPhone, iPad and Androidbased devices. You can wire money via Facebook and Twitter. Of course, worries over security abound. Ask Google. A fortnight ago, it disabled pre-paid mobile wallets. Its woes started when Zvelo, a security firm, said a brutal attack on a mobile phone could expose its users PIN. The firm pointed out the clear data and reset payment options makes it easy to hack into an Android phone and plug into the wallet.

Have We Let Out A Genie? E-transactions have given rise to digital quasi tender money equivalents that work just as well as official tender in a host of areas. Adiseshann of PayMate talks of the day when NFC will be used to boost offers and loyalty programmes. Like Shah Rukh Khans RA.One on Nokias Symbian Belle Nokia 700 and Nokia 701 (the movie flopped, but Nokias not to fault). You walk into a Cafe Coffee Day, tap on a table with your smartphone, and you get to know if there is a discount on, says Adiseshann. What he tells you next is not innocuous. The worlds largest used currency (outside of what nations mint) is air miles. An airline is happy when you earn miles, not when you burn it. When you buy stuff and pay for it in air miles, it gets monetised. Of course, you cannot use air miles for too many other purchases. But you get the idea. The trouble is: other tender may not have such limitations.

Quasi-tender has the potential to wreak havoc on the real world of DID YOU KNOW? The money. A substitute for genuine money appears post-modern, but is modern credit card was really barter. In the US, you have Flooz (a gift currency you can use born in 1959 as BankAmericard it is on websites), Beenz and Cybergold. In Britain, iPoints. When the virtual world of Second Life was built, it created Linden dollars. You now called Visa could earn in Linden dollars and use it like real dollars in many places. You could also exchange it for real dollars. break-page-break Just look at the truly out-of-the-world bitcoin, dreamt up by mysterious coder and cryptographer Satoshi Nakamoto in 2008. Till early 2010, bitcoins were worth nothing much and were taken only by a small community of coders and digital cryptographers. Then, suddenly its popularity soared and at one point, each bitcoin was worth $27 dollars. And bitcoins had no official backers no country, no central bank stood behind it. Yet, it could be swapped for real money and used to pay for goods and services. Bitcoins have since dropped in popularity and value, but central bankers do wonder what will happen if a quasi-tender gets popular and takes the place of real currency. While central banks can tighten or relax, print or decommission their own currencies in line with monetary policies, how do you control digital cash with a life of its own? Narendar Jadhav, member, Planning Commission, posed this DID YOU KNOW? Onequestion as chief economist at RBI. What are the implications of the fifth of global epayment and settlement system design for the conduct of monetary commerce is done via PayPal; it processes policy? This question is even harder to answer as the relationship $315 million per day between payment systems and monetary policy is still evolving even in the most advanced economies, he said. The first, somewhat cataclysmic view is that central bank money could eventually disappear once debit and credit cards substitute cash in transactions and settlements take place through private networks which do not need to take recourse to central bank systems. The alternate view, according to Jadhav, is the monetary base would certainly shrink, demand for cash would diminish, but it will survive and central banks could always insist on central bank clearing. You have legal issues too. Intermediary, under Section 2(1)(w) of IT Act (2000) does not directly refer to banks, but the RBI is of the view that the position cannot, however, be regarded as free from doubts. So, whose cash is it anyway? Well, anybody who breaks into Fortress Cash and kills the regent. Yours, Mine Or Ours Everyone agrees e-transactions is a movement whose time has come. It poses challenges. We require inter-operable platforms and standards to create payment instruments as well as acceptance solutions for electronic payments to succeed, says Nemavarkar. A first has been made on the m-commerce front. Movida, a mobile payments joint venture backed by Visa and

mobile banking services firm Monitise, has tied up with HDFC Bank. You can pay bills, top up prepaid airtime and buy tickets from your mobile phone and it is designed to operate across all mobile networks using any Visa or non-Visa branded payment account. Yet, you cannot get away from the fact that proximity (Tap & Go) mobile payments are complex. You have banks, telcos, handset manufacturers and application service providers. Without an increase in volume (if you simply execute a traditional PoS transaction with an NFC-enabled phone), there may be no incremental revenue, but the transaction pie is split between more parties. Banks are reluctant to share these revenues and are cautious of an environment in which they neither own nor control the distribution of the payment form factor (sending out cards). We now have islands of runaway success such as transit and toll payments that benefit a few stakeholders. A moot point is who owns the customer? Many claim a relationship with the customer and a share of transaction revenue. Says Jagannathan of Airtel mCommerce: When banks first issued plastic, how did they create the ecosystem? The same will happen with m-commerce, too. He gives the analogy of a British Airways frequent flier. Does it matter if she does not have a relationship with the bank servicing the card? It may not be so simple. Telecom companies and banks will tango on deployment of mobile payment technologies only when they see a winning business case. Due to this deadlock, telcos have begun to launch their own semi-closed wallet programmes. Airtel Money is one such example. And unless the bank-telco stalemate is ended, there is no way they can move ahead. According to a recent report by Capgemini, the Royal Bank of Scotland and the European Financial Marketing Association, the number of global e-payments (online payments for e-commerce) is likely grow to 30.30 billion transations from 17.9 billion between 2010 and 2013, while mobile payments are expected to grow to 15.3 billion from 4.6 billion during the same period. It shows the import of mobile as an additional option to market as well as the increasing consumer demand for convenient and secure payment solution, says Seshadri. Writer Stewart Brand said: Once a new technology rolls over you, if you are not part of the steamroller, you are part of the road. If you dont kill cash, you will be part of the road. raghu(dot)mohan(at)abp(dot)in (This story was published in Businessworld Issue Dated 09-04-2012)