Going Cashless in Emerging Markets

A busy marketplace in Mysore, India. February 16, 2017 Radiokukka/iStock


In countries where many have no access to formal banking systems, cash has traditionally been the only way to conduct business. It is simple to use, and easy to understand. But the growth of mobile phone ownership, coupled with advancements in mobile payment technology, has changed the way people conduct financial transactions.


In 2015, the number of payments made without cash grew by 11% worldwide, the fastest growth in the past decade. These transactions were facilitated by a half-century of investment in cashless infrastructure, spearheaded by a dense network of card readers controlled by corporations such as Visa and Mastercard. In Asia, cashless transactions increased 43% from 2014 to 2015. In all emerging economies, cashless transactions went up by 21.6% during the same period.


Cashless transactions are also on the rise in BRICS countries. According to the World Payments Report, Brazil and Russia ranked fourth and eighth globally in non-cash transaction volume in 2015. In India, non-cash transactions surpassed all paper money transactions for the first time in 2015. China ranked third globally, with mobile payments comprising a significant share of overall transaction volume. According to iResearch Global, Chinese mobile payment transactions amounted to 15% of GDP ($1.45trn) at the end of 2015, and are projected to more than triple to $3.4trn by the end of 2019.


What is driving the enthusiasm for cashless transactions? Primarily, it is necessity. Mobile payment is one of the most secure methods of transferring money. It is also easier for many who do not have a bank account, but have a mobile phone. From a governance perspective, cashless transactions are easier to regulate than cash. As such, cashless transactions help governments combat tax evasion, corruption, and black market transactions.


Mobile payments on the rise


Emerging economies are financially less developed, and have less established banking systems or entrenched financial infrastructure. As such, many residents do not have access to banking services or even bank accounts. In 2014, the Global Findex Database found 46% of adults in developing economies had no bank accounts, compared with only 6% of adults in high-income OECD economies. In markets lacking modern and efficient banking services, mobile payment platforms have become especially popular for remittance payments.

Average Cost by Instrument to Fund Remittance Transaction, Q4 2016-Q1 2017

Average Cost by Instrument to Fund Remittance Transaction, Q4 2016-Q1 2017

Source: World Bank, 2017


The growth of the emerging economies and the rise in their migrant workers’ remittances have created demand for easier and cheaper international money transfers. This demand has grown alongside the rapid rise in smartphone usage, and the emergence of indigenous mobile payment services. Increasingly, smartphones and access to mobile payment services have become a critical means of ‘banking the unbanked’ and improving financial inclusion.


Sub-Saharan Africa is a key example of how mobile payments are leapfrogging underdeveloped banking systems to transform small economies. According to the World Bank, more adults as a percentage of the population use mobile money accounts for personal finance in sub-Saharan Africa than anywhere in the world. Kenya is a leader among emerging markets in mobile payment technology. Between 31% and 50% of Kenya’s GDP is estimated to flow through M-Pesa, a mobile phone money transfer and financial service system.

Source: Pew Research Centre, 2015


Mobile payments offer solutions to systemic problems that unbanked people regularly encounter: Remitting their earnings back to families, and the secure and documented settlement of debts. According to the World Bank’s Remittance Prices Worldwide survey, mobile payment systems are the cheapest way to fund a remittance transaction. Moreover, mobile payments provide confirmation of receipt and eliminate costly middlemen associated with sending funds through informal networks. As such, the implicit costs of cash are high and represent a drag on capital formation by individuals.


Hand of the government


Last year, Indian Prime Minister Narendra Modi shocked the world when he announced that 500- and 1,000-rupee notes would be rendered obsolete. The motivation for this historic demonetisation effort was to combat corruption and tax evasion in the world’s largest democracy. The elimination of fiat money to combat corruption is not a new idea. According to Harvard Economics Professor Kenneth Rogoff, governments in developing countries should reduce fiat money in circulation because it will bring down tax evasion, corruption, and black market transactions.


In just 50 days, the nominal value of 86% of India’s economy in paper money was rendered null and void. The resulting shortage of paper money in other denominations was a policy objective meant to hasten the transition to a cashless economy, and force citizens to use regulated bank accounts.


India is still reeling from this shift and there are conflicting reports about the efficiency of the transition. Black market money has been laundered by savvy criminals while India’s poor have been hit hard with taxes on their savings held in 500- and 1,000-rupee notes deposited into new – and regulated – bank accounts. The question, which may have some bearing on Modi’s political future, is whether the Indian government will be able plug the existing gaps in paper money and get the economy running at pre-demonetisation levels.


Conclusion


The rise in mobile connectivity and associated disruptive technologies means people have better and more secure options for their financial transactions. In many emerging markets, it is often easier to register a mobile phone than open a bank account. As fintech pioneers continue to connect people’s money with their mobile phones, paper money usage will decline.


This is a positive development for individuals who will enjoy lower fees on remittance transfers and secure financial transactions that remove unregulated middlemen in informal economic sectors and the black market.


The drive towards a cashless future is also an opportunity for governments. India has shown that governments have the ability to remove fiat money to clamp down on corruption and tax evasion, and attempt to get their citizens into the regulated financial sector. Regardless of the regulatory environment, emerging markets are a testing ground for a new cashless future.