Monday, September 18, 2017

Non-Cash Payments - The Wave of the Future for Americans?

While most people look at trends in the United States as a guide to what will happen in the future, a report from the Reserve Bank of Australia (RBA), Australia's answer to the Federal Reserve, gives us a good indication of where the global economy is headed.

In its one of its recent annual reports, the RBA's Payment Systems Board looks at how consumers in Australia pay for retail items.  They also track the frequency with which consumers withdraw cash from ATMs.  All of this is done to "promote the efficiency of the payments system and promote competition in the market for payment services, consistent with the overall stability of the financial system.". 

Let's start by looking at the RBA's statistics for the change in the number and value of ATM cash withdrawals, a key metric of how much cash is used in Australian society since ATMs are the primary method by which individuals obtain cash:

In 2014/2015, the number of ATM cash withdrawals fell by 5 percent and the value of ATM cash withdrawals fell by 2 percent.  The trend in 2014/2015 continues a trend of shrinking use of ATMs that started in 2009 - 2010.  The RBA notes that the continued decline in ATM withdrawals reflects a number of factors:

1.) consumers' adoption of new technologies including contactless card payments.

2.) growth in online commerce.

Cash payments continue to be used but are mainly utilized in low-value transactions although that is changing as well.

On the other hand, Australian consumers have become quite fond of using debit cards as we can see on this table:

The average annual growth rate in the use of debit cards between 2009/2010 and 2014/2015 is 13.7 percent compared to only 5.2 percent for credit cards.  BPAY is an electronic bill payment system that is owned by the four major Australia retail banks.  It allows consumers to make bill payments through a financial institution's online, mobile or telephone banking system.  BPAY payments have risen by an average of 5.9 percent annually over the same time period.

In 2014/2015, an average Australian made around 400 non-cash transactions per person with card payments accounting for nearly two-thirds of those payments as shown on this graph:

It is interesting to see that the average transaction value for both credit and debit cards has continued to fall as shown on this graph:

This indicates that, despite transaction fees, consumers are becoming increasingly comfortable using non-cash payment methods for even small transactions.  One way that banks have prodded consumers into paying for small items using non-cash methods is through the increasing use of contactless transactions where cardholders merely wave their smart credit card over a merchant's terminal, requiring no PIN input or signature.  Currently, this method is used for only relatively small transactions under a specified limit (i.e. $100), however as time progresses and consumers become more addicted to the contactless system, it will expand.

The RBA is even so kind as to provide us with a summary of per capita non-cash payments for other countries for the year 2013 as you will see in this table:

Here is a graph showing how the percentage of non-cash payments has skyrocketed since 1997:

In 2013, nearly 60 percent of all non-cash payments in the nations that make up the Committee on Payments and Market Infrastructures (CPMI) were made using either debit or credit cards.

Lest the banking system try to fool us into thinking that debit and credit cards are safer for them and us, here's a graph showing how the losses associated with fraudulent use of credit cards in Australia has mushroomed since 2006:

In 2013, Australian debit, credit and charge cards wound up with total fraud losses of $421 million, up 30 percent from $322 million in 2013.  The increase in card fraud was driven by a 61 percent increase in losses associated with Australian cards being used to make fraudulent purchases overseas in a "card-not-present" transaction (i.e. where a card is used online, by telephone or by mail).  For those of us that have suffered fraudulent use of one of our cards, we can attest to the pain that is created when a card has to be cancelled and reissued.

Where is Australia headed from here?  Recent research by Australia's Westpac Bank shows that 79 percent of Australian smartphone users agree that making payments by a smartphone will soon become the norm.  Those who use their smartphones for payments also believe that Australia will be cash-free by 2022.  Westpac has gone so far as to invest in a smartphone app called "HeyYou" which allows Westpac customers to preorder takeaway food and coffee directly from their Westpac app without having their wallet.  This saves frustrated consumers thousands upon thousands of hours spent every year waiting for food and drink to be served (sarcasm noted).  Westpac notes that:

 "As well as making the customer's life easier, Hey You helps cafe owners run more efficient businesses. The Hey You app allows cafes to process more orders by removing cash and reducing the time and cost to serve each customer." (my bold)

Not to mention increased transaction fees charged by the bank!  You'll even note that Westpac is offering a $5 credit for customers that order through their app:

With the United States being among the highest per capita users of cashless transactions, it looks like our future has been determined.  All we need now is for the Federal Reserve and the federal government to sell the benefits of a cashless society to American consumers, particularly to those that still insist on using checks as a payment method.

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