by Piet Coetzer, University Of Stellenbosch Business School

Financial services

Moving towards a cashless society

Stellenbosch University
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Now firmly on the agenda of governments as a social priority - and financial institutions as a business opportunity - is to achieve full financial inclusion by eradicating the barriers that prevent the poor from accessing financial services. This will require developing nations to have a clear pathway to more electronic payments, leading to a “cash lite” system.

This is the view to David Porteous, Director of Bankable Frontier Associates, an international consulting firm based in the United States, who recently spoke at the University of Stellenbosch Business School’s (USB) Development Finance Workshop.
Guest speakers from Africa and the UK led the two day workshop that focused on assessing and understanding the mechanisms and processes to improve financial inclusion in developing countries. 
According to Porteous, South Africa is on the right path towards achieving financial inclusion, but much work remains for local government and financial institutions to understand the pathways towards a cashless system. 
“Financial inclusion can be simply explained as ‘banking the unbanked’. Few developing countries have measured the percentage of people who have banked accurately or consistently over long enough time to give accurate trend indications but South Africa is an exception.”
Porteous explains that as a middle income country, South Africa has embarked on comprehensive and explicit policies to promote access to financial services in the first part of the past decade, showing a considerable ramp up in the early years from figures in the mid 40% range to the low 60% range. 
“Efforts in the past decade have seen a large push by banks to increase low income clients. For example, basic account types have been created; new channels such as mini-ATMs have been deployed to broaden the reach of banking services and almost all permanent, formally-employed people have been reached with accounts, often via their employers for whom cash wage payments are costly and unsafe.” 
Further to this, Porteous says promoting financial inclusion has also become an accepted goal for financial policy makers in an increasing number of developing countries. “I refer to the 16 countries, 10 of which are in Africa, who signed the Maya Declaration committing them to advancing this goal. Affirming the financial inclusion goal publicly is a useful first step but actually achieving new inclusion targets require a much longer journey of discovery. This journey involves taking new pathways of exploration.”


Porteous says one key area of exploration is the pursuit of robust business models that support greater financial inclusion by reducing cash dominance as the prevailing payment instrument in most common transaction types. He says electronic transactions initiated by the customer on their own device, such as a mobile phone, cost financial institutions a fraction of branch, or even agent transactions, so they have a clear incentive to enable the shift.

“Customers, however, do not necessarily have the same incentives.” Porteous says ongoing surveys of domestic payments of various types in places like the Philippines and Ghana confirm that convenience, speed, security and cost matter to payers. He explains that even when the functionality to make electronic payments is available, customers may not use it much or at all. He refers to a recent Consultative Group to Assist the Poor (CGAP) whose study of mobile money accounts found that only 8% of those who registered to use the service remained active users. 
According to Porteous, bridges between cash and electronic value need to be built.
“This is one of the three important stepping stones towards achieving an inclusive cash lite society. Unless the majority of a country shops at stores that offer electronic payment facilities, ‘cash heavy’ will remain the status quo.”  
Porteous says that ironically, to reduce the use of cash, it is likely that people need more access, not less, to the cash handling points at which cash can be converted to electronic value (e-value) or money in its electronic form, and vice versa.  This means using ATMs and agents who handle money transactions.  “These are the bridges between cash and electronic value and it is only through the presence of these points that customers unfamiliar with electronic value can gain confidence that it exists.”
The second stepping stone is for countries to look at making real time electronic transfers easy and as cost-effective as possible. He says once consumers have e-value, they have to be able to use it. Not only as a store from which they have to cash out to use it but to transfer the e-value directly to others, whether to buy, remit or pay bills, and in turn, receive electronically into their accounts.
 “Encouraging the emergence of products which build on information and allow consumers to tailor their choice of financial products is the third step. However, even if all customers are able to make transfers and payments easily and cheaply, this does not amount to full financial inclusion by any definition, as they should have access to other financial products and services which enable them to manage their financial portfolios and their household risks,” concludes Porteous.
Article supplied by the University of Stellenbosch Business School.
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