Chris Foster

Will a cashless society pay off?

Chris Foster

Cashless Society

Anyone who has suffered bemused looks when trying to pay with cash in a shop or pub will be aware how rapidly we are moving towards a cashless society. Increasing financial resilience remains a key theme across our Sustainable Future portfolios and as part of this, we believe the shift from cash to digital payments provides overall net benefits to society. With this in mind, we are looking to invest in profitable companies exposed to this structural trend.

Going back to first principles, money provides a medium of exchange for goods and services, as well as a common measure and store of value over time, so is generally seen as a useful tool for society. Technology has transformed its use over recent years however, with the rise of online shopping and the often discussed ‘death of the high street’ highlighting a growing shift from physical to digital payment.

There are numerous benefits to this shift: digital payments are more convenient as people no longer need to carry cash and contactless transactions are quicker, easier and more hygienic. Just think for a moment, perhaps not if reading this over lunch, about how many hands the notes and coins in your pockets may have been through in their journey to get to you. Research by MasterCard – which clearly has a horse in this race found the average UK banknote is home to around 26,000 types of bacteria, including E. coli. For fairness, we should note the new polymer notes are considerably more hygienic.

In recent months however, there has been growing criticism of the digital transition, with a stream of articles across the press. The thrust of this coverage claims a cashless society could leave many outside the financial system, either through simple aversion or inability to access technology or simply general wariness towards a scenario where every purchase leaves a digital trace. Housing charity Shelter estimates there were around 320,000 homeless people in the UK last year and it remains to be seen how this cohort will cope in a digital world.

A recent report called the Access to Cash Review revealed that just three in 10 UK transactions are now in cash and in 15 years’ time, this could be as low as one in 10. The research claims 17% of the population – or eight million people, many of whom are among the country’s poorest – would struggle to adapt and sets out the following five ways to ensure cash remains “viable for the foreseeable future”:

  • Ensuring consumers can get cash where they live and avoid so-called ‘cash deserts’
  • Taking steps to ensure physical money is still accepted by retailers and other service providers
  • Adopting radical change to the wholesale cash infrastructure
  • Making sure digital payments are inclusive for everyone in society
  • Forcing the government to develop a clear policy on cash

Most sustainable investing involves some kind of trade off and while we recognise these important issues, we would also stress that in underbanked countries, access to a cashless payment and savings system can actually foster financial inclusion. The chart below shows the wide range of banking penetration across the world.

A major factor behind our view that going cashless provides net benefits to society is based on the potential to reduce or resolve the tax gap and expose the so-called shadow economy. There have been many efforts to quantify the cost of such illegal activity globally: in the UK, for example, the Bank of England revealed in 2015 that no more than 50% of notes in circulation are used for domestic transactions and hoarding with the balance either overseas or used in the shadow economy.

In the US, the figures are even starker, as revealed in Ken Rogoff’s 2016 book The curse of cash. In 2015, he calculates the amount of cash in circulation suggests every man, woman and child in the US was walking around with $4,200, 80% of which is apparently in $100 bills.

While some is abroad, some in cash registers and vaults and some lost or destroyed, Rogoff believes a substantial proportion is employed in the underground economy used to buy and sell illegal goods and services, which, by their very nature, tend to lie outside the tax system.

A 2013 report commissioned by the Institute of Economic Affairs defines the shadow economy as “activities and the income derived from them that circumvent or otherwise avoid government regulation, taxation or observation”. In the UK, such activities were estimated to make up around 10% of GDP in 2017, rising to almost 22% for Greece and 20% for Italy.

In the 2014-2015 tax year, HMRC calculated the gap between tax that should theoretically be collected and the amount that actually was to be around £36bn – enough to fund the UK’s Brexit divorce bill or indeed pay for another three or four years of UK membership of the EU. Moving away from the anonymity that cash transactions allow and towards the detailed audit trails inherent in the digital world would, if nothing else, make profiting from illegal activity more difficult.

Beyond this, we see a number of other growth drivers for the digital transition, with the most obvious being the undeniable fact more and more shopping and business is done online and, as this continues, the role of cash clearly diminishes. There are some notable exceptions to this however: in India, for example, cash on delivery remains the dominant payment method and the same is true for Nigeria, the Philippines and Russia.

Rapid expansion in Asia is another tailwind, with data from Capgemini showing cashless transaction volumes are growing seven times faster than in the developed world. Unlike the typical ‘Asian growth driver’ story, however, China is not a major factor here as its digital payment structure is effectively closed off to international players such as Visa and MasterCard that dominate elsewhere. China already has a digital payment ecosystem built by local companies such as Ant Financial (Alipay) and Tencent (WeChat Pay), and both of these have ambitious expansion plans for the overseas market.

With a broad case for our digital payments theme established, the next step in our process is identifying companies exposed to this trend and there are a number of potential areas to investigate, with many stages and players involved in these transactions.

At the simplest level, there are businesses that make the contactless payment machines but the major opportunities we see are in the companies embedded in the transactions themselves. The most common system for card payments is the four-party payment process applied by the likes of Visa and Mastercard, involving the cardholder/consumer, the merchant, the merchant acquirer and the issuer.

A cashless society remains an emotive issue that elicits strong reactions: in 2016, Deutsche Bank CEO John Cryan said cash was both costly and inefficient and would no longer exist in 10 years and yet the amount of cash in circulation has actually grown rather than shrunk.

However people feel about these underlying questions, we would end by pointing out one simple fact: despite the rapid digital shift in the developed world, 85% of payments globally are still made in cash, which creates a huge growth opportunity as technology continues to improve and any lingering aversion to it erodes.

For a comprehensive list of common financial words and terms, see our glossary here. 


Key Risks


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Disclaimer

The information and opinions provided should not be construed as advice for investment in any product or security mentioned, an offer to buy or sell units/shares of Funds mentioned, or a solicitation to purchase securities in any company or investment product. Always research your own investments and (if you are not a professional or a financial adviser) consult suitability with a regulated financial adviser before investing.

Friday, August 16, 2019, 9:50 AM