Credit Card Rules Tightened

The Treasury has released draft legislation for review which is designed to improving consumer outcomes and enhancing competition. The purpose of the amendments is to reduce the likelihood of consumers being granted excessive credit limits, to align the way interest is charged with consumers’ reasonable expectations and to make it easier for consumers to terminate a credit card or reduce a credit limit.

The draft Bill would:

  • require that affordability assessments be based on a consumer’s ability to repay the credit limit within a reasonable period;
  • prohibit unsolicited offers of credit limit increases;
  • simplify how interest is calculated, including prohibiting credit card providers from backdating interest charges; and
  • require credit card providers to have online options to cancel a credit card or to reduce credit limits.

The consultation on the draft Bill will close on Wednesday, 23 August 2017.

Reform 1: tighten responsible lending obligations for credit card contracts

This introduces a new requirement that a consumer’s unsuitability for a credit card contract or credit limit increase be assessed on whether the consumer could repay an amount equivalent to the credit limit of the contract within a period determined by the Australian Securities and Investments Commission (ASIC).

This requirement will apply to licensees that provide credit assistance, and licensees that are credit providers, in relation to both new and existing credit card contracts from 1 January 2019. Existing civil and criminal penalties for breaches of the responsible lending obligations will apply to breaches of the new requirement. Existing infringement notice powers will also apply.

Reform 2: prohibit unsolicited credit limit offers in relation to credit card contracts

This prohibits credit card providers from making any unsolicited credit limit offers by broadening the existing prohibition to all forms of communication and removing the informed consent exemption. These amendments apply in relation to both new and existing credit card contracts from 1 January 2018. Existing civil and criminal penalties for breaches of the prohibition against unsolicited credit limit offers will apply. Existing infringement notice powers will also apply.

Reform 3: simplify the calculation of interest charges under credit card contracts

These amendments will prevent credit card providers from imposing interest charges retrospectively to a credit card balance, or part of a balance, that has had the benefit of an interest-free period. These amendments apply in relation to both new and existing credit card contracts from 1 January 2019.

Failure to comply with this requirement attracts civil penalties of 2,000 penalty units and criminal penalties of 50 penalty units. The infringement notice scheme contained in the Credit Act will also apply.

Reform 4: reducing credit limits and terminating credit card contracts, including by online means

A key amendment is to require credit card contracts entered into on or after 1 January 2019 to allow consumers to request to reduce the limit of their credit card (a ‘credit limit reduction entitlement’) or terminate a credit card contract (a ‘credit card termination requirement’).

Where a credit card contract contains a credit limit reduction entitlement or a credit card termination requirement the amendments also provide for the following:

  • the credit card provider must provide an online means for the consumer to make a request to reduce their credit card limit or terminate their credit card contract;
  • following such a request, the credit card provider must not make a suggestion that is contrary to the consumer’s request; and
  • the credit card provider must take reasonable steps to ensure that the request is given effect to.

These further amendments apply to credit card contracts entered into before, on or after 1 January 2019.

Failure to comply with these requirements attracts civil penalties of 2,000 penalty units and criminal penalties of 50 penalty units. The infringement notice scheme contained in the Credit Act will also apply.


Banks can’t fight online credit card fraud alone, and neither can you

From The Conversation.

Online credit card fraud is on the rise in Australia, but pointing the finger at any one group won’t help. It’s an ecosystem problem: from the popularity of online shopping, to the insecure sites that process our transactions, and the banks themselves.

A recent report from the Australian Payments Network found that:

  • the overall amount of fraud on Australian cards increased from A$461 million in 2015 to A$534 million in 2016
  • “card not present” fraud increased to A$417.6 million in 2016, up from A$363 million in 2015
  • 78% of all fraud on Australian cards in 2016 was “card not present” fraud.

“Card not present” fraud happens when valid credit card details are stolen and used to make purchases or other payments without the physical card, mainly online or by phone.

While these numbers may seem alarming, it’s important to put them in context. Australians are increasingly carrying out transactions online; the report notes that we made 8.1 billion card transactions totalling A$715.5 billion in 2016.

The shift towards online credit card fraud also comes at the cost of other types of fraud. Cheque fraud, for example, was down to A$6.4 million in 2016, from A$8.4 million in 2015.

Still, it’s fair to ask: are the banks doing enough to keep our details secure?

The banks and security

The banks currently have a range of measures in place to protect customers from card fraud:

  • Chip and pin: Australia mandates the use of “chip and pin” technology. This replaced the need to swipe the magnetic strip on credit cards and is recognised as being more secure.
  • Two-factor authentication: Many Australian banks use text messages or tokens that generate a unique, time-limited code to help verify the legitimacy of transactions.
  • Monitoring of customer habits: Australian banks typically have a complex set of algorithms that monitor the spending habits and transactions of their customers. They frequently have the ability to identify a suspicious (often fraudulent) transaction and block it.

Overall, Australian financial institutions are investing time and technology into the prevention of fraud. However, recent allegations that the Commonwealth Bank of Australia breached anti-money laundering laws suggest that the big banks are not immune from the problem.

Data breaches and malware

Credit card fraud is going where the action is.

According to the research company Neilsen, “nearly all online Australians have used the internet to do some form of purchasing activity”. This means that Australians are increasingly sharing their credit card details with companies around the world.

Large-scale data breaches are a common occurrence. Many organisations have been compromised in some way, including Australian companies like Kmart and David Jones. A variety of personal information can be exposed, and this often includes customers’ credit card details.

Batches of stolen credit card details can be sold on the dark web to other motivated offenders. In one UK example, such details were being sold for as little as £1 per card.

Offenders are also using different types of malware, or computer viruses, to obtain the personal information of unsuspecting victims. In many cases, this includes bank account and credit card details through successful phishing attempts (or spam emails).

The liability fight

Banks will generally refund customers for any fraudulent losses incurred on their credit cards. However, customer must take “due care with their confidential data”.

There is also an onus on the customer to check their credit card statements and notify their bank of any suspicious activity.

But this may not always be the case. In 2016, the former Metropolitan Police Commissioner in the UK made headlines for suggesting that customers should not be refunded by banks if they failed to protect themselves from fraud.

Instead, he argued that customers were being “rewarded for bad behaviour” rather than being encouraged to adopt cyber-safety practices, such as antivirus software and strong passwords.

These statements were met with anger by many advocacy groups who equated them with victim blaming. It was further exacerbated by a leaked proposal by the City of London Police to shift the responsibility of fraud losses from banks to the individual.

While this recommendation was never adopted, the tension may continue to grow when it comes to fraud liability.

Looking for answers

Pointing the finger of blame at any one party is not a constructive solution. Banks alone cannot combat online credit card fraud. Neither can their customers.

There are simple steps to reduce the likelihood of online fraud: having up-to-date antivirus software and strong passwords is an important step. There are sites such as haveibeenpwned that demonstrate how vulnerable and exposed our passwords can be.

Still, it’s difficult to protect against social engineering techniques used by offenders to manipulate victims into handing over their personal details. Not to mention, the risks posed by third-party data breaches, which are beyond the control of individuals.

The introduction of mandatory data breach reporting legislation in Australia in 2017 may have a positive impact. By requiring organisations to let their customers know when their personal information has been compromised, individuals can be proactive about cancelling cards, changing passwords and taking out credit reports to check for fraudulent activity.

Businesses also need to recognise the importance of protecting their customer information. It is critical to overcome the mentality that cybersecurity is simply a technology problem or an IT issue. It should be firmly on the corporate management agenda.

Fraud is inevitable, regardless of the technology being used. Collaborative efforts between banks, businesses, government and individual consumers must improve.

No one group alone can effectively end online credit card fraud. Nor should they be expected to.

Author: Cassandra Cross, Senior Lecturer in Criminology, Queensland University of Technology

zipMoney and Westpac Enter Strategic Relationship

In an announcement today, zipMoney has secured a $40m strategic investment from Westpac at $0.81 per share (a 14.1% premium to the last closing price).

The purpose of the investment is to allow Westpac to explore the rollout of Zip’s products and services across Westpac’s payment network.

The deal is expected to close on on 10th August 2017.

zipMoney is an ASX-listed company, which offers point-of-sale credit and digital payment services to the retail, education, health and travel industries. Zip’s platform is entirely digital and leverages big data in its proprietary fraud and credit decisioning technologies to deliver real-time consumer responses.

They provide a variety of integrated Retail Finance solutions to small, medium and enterprise businesses across numerous industries, both online and in-store.

zipMoney offers a 100% cloud-based platform that leverages its proprietary technology and Big Data to enhance the proven fundamentals of promotional finance, in particular interest-free.

zipMoney is focussed on acquiring prime, near prime and emerging prime borrowers by providing those customers with a revolving line of credit to finance their retail purchase. zipMoney does not target sub-prime or payday borrowers. zipMoney is acutely focused on simplicity and delivering transparent, responsible, and fairly priced consumer credit products.

zipMoney is a licensed and regulated credit provider managed by a team with over 35 years’ experience in providing finance solutions at point of sale.


Why the trend to use cards instead of cash should be a big worry

From The New Daily.

The revelation that Australian consumers are using card payments more often than cash is a worry because of a lack of fee transparency, an expert has warned.

The Reserve Bank of Australia reported this week that 52 per cent of all transactions are card payments, with only 37 per cent by cash.

Three years ago, cash was 47 per cent and card only 43 per cent.

Cash payments were most common for fast food, cafes, restaurants, bars and pubs, and least common for holidays and household bills. And the biggest users were Australians aged 50 to 65, and those in the bottom half of the income bracket.

Professor Rodney Maddock, a researcher at the Australian Centre for Financial Studies, said the transition to cards is premature because the current system is “wasteful” and “a mess” compared to cash.

“Most people have got no idea of the true cost they’re incurring when they use a credit card or a debit card or Eftpos or BPay. The current system makes it really, really hard for anybody to understand that,” he told The New Daily.

“Some of the fees are paid by the user, some by the merchant and some by the banks. It’s completely opaque.”

How the system works is that banks charge merchants ‘interchange fees’ for every credit or debit card payment they accept. The merchants claw back this money with surcharges (‘If you buy less than $15, we charge you $2’) and with higher prices across their stores.

The banks keep a percentage of these fees, pay a slice to the credit card company whose logo is on the card (probably Visa or Mastercard), and give the remainder as perks to rewards card holders.

Then customers must factor in annual fees and rates of interest charged by their banks.

In a recent paper, Professor Maddock and a colleague called for card holders to be treated the same as ATM users. A message should flash up on the screen asking the card holder if they were willing to pay the fee, they wrote.

“We want all of those costs to be transparent to the customer, because they are paying too many different ways. It’s too hard to tell as a customer what in the hell you are doing.”

Another academic, Professor Steve Worthington at Swinburne Business School, a researcher on the global payments sector, agreed that card fees are “incredibly opaque, incredibly not well understood”.

His particular concern was that consumers might not realise credit card rewards programs have recently been “devalued”.

“It is a very open question if they are worth it in any way, shape or form,” Professor Worthington told The New Daily.

Mozo, a financial product comparison website, has estimated that the average credit card spend required to earn $100 is now $22,426 a year, up from $18,765 in 2015 – and that the average customer would need to spend $60,000 a year on their card to make it worthwhile.

Rewards programs are being devalued because of new Reserve Bank regulations designed to improve transparency by putting caps on interchange fees.

Professor Maddock said the changes have not simplified card payments enough.

“The Reserve Bank has got itself into an awful mess having to regulate lots of different points in the system. It would be a lot simpler if they just regulated at one point.”

Mike Ebstein, a payments consultant and former second-in-charge of credit cards at ANZ, disagreed that card payments are inferior to cash. He said the advent of cards was a “quantum leap in convenience and security”.

“It’s baloney. There is a huge cost to the economy from the cash transactions that remain,” he told The New Daily.

“Merchants that accept cash don’t get value until they bank, there’s shrinkage, there’s pilferage, there’s security.

“Most advanced economies around the world are promoting the transition away from cash towards card payments, which are much more trackable.”

The Australian government has commissioned a taskforce headed by former KPMG chair Michael Andrew to investigate the ‘black economy’. It is widely expected to recommend further curbs on cash payments.

MasterCard survives £14 billion class action but more could follow

From The Conversation.

Convenience often comes at a cost. As consumers, many of us are resigned to seeing a surcharge or “processing fee” on goods and services when we pay by credit or debit card. At present, it is lawful for businesses to charge consumers these fees although the amount should be limited to the actual cost to the retailer of the transaction.

Bank charges for processing card payments were capped in the UK in 2015, but many businesses have continued to charge consumers inflated fees to generate further profit. Even the government’s tax department routinely adds a surcharge of up to 2.4% to bills paid by card.

Now, the government has announced that charges for paying by debit or credit card will be outlawed completely from January 2018. This raises several questions, not least whether retailers will simply increase their prices to cover any shortfall. Many companies argue that fees are there to cover their transaction costs, which consist of an “interchange fee”, levied by the card issuer such as Visa or MasterCard (capped by law at 0.3%) and the “merchant fee”, charged by the bank for handling each payment. This is not capped but for large businesses it should not amount to more than about 0.3%.

It is also unclear how the ban will be policed. Local authority Trading Standards departments are tasked with dealing with complaints from buyers, but the widespread flouting of the current cap indicates that embattled officers are under-resourced to deal with the issue.

Class action rejected

Future charges are to be outlawed, but what about the millions in surplus fees paid by consumer buyers in the past? A recent attempt to secure £14 billion in compensation for UK consumers was recently rejected by the Competition Appeal Tribunal (CAT).

The new law covers all card companies. dean bertoncelj /

The trailblazing claim against MasterCard, initiated by Walter Merricks, who was head of the Financial Ombudsman Service from 1999-2009, was the first collective claim of its kind under new rules introduced by the Consumer Rights Act 2015.

Previously, US-style class actions were not permitted under UK law and consumers affected by price fixing or anti-competitive behaviour had to either actively opt in as a named participant in a claim, or bring proceedings on their own behalf. In cases where the loss to the consumer was relatively small, the cost of bringing a claim meant that pursuing the trader was often not worthwhile.

Under collective proceedings rules, there is no need to register for a stake in the claim – anyone who fulfils the criteria is automatically joined in the action unless they expressly opt out. Under the new Consumer Rights Act, claims can be brought by a suitable representative of the group affected. In the Mastercard case it was Walter Merricks, on behalf of every consumer who purchased goods from a retailer in the UK between 1992 and 2008.

Had the claim succeeded, it would have given individual consumers the collective legal power to call a corporation to account. Ultimately, the claim faltered under the huge complexity of trying to quantify the total compensation payable, and then allocate it fairly among consumer claimants. Notwithstanding the CAT’s decision, the case has prompted fears from card companies that the UK will see a tsunami of similar claims, possibly resulting in vast payouts.

Onslaught of action

What happens next will be scrutinised closely by banks and other credit providers. The decision is the latest chapter in an onslaught of legal action against MasterCard dating back to 2007. The fees charged to retailers are determined in large part by interchange fees agreed between groups of banks and in 2007, MasterCard was subject to an investigation by the European Commission, which ruled that its interchange fees were anti-competitive and violated the EU Treaty.

MasterCard appealed the ruling but the European Court of Justice confirmed the decision in September 2014. Fees were subsequently capped at 0.3% of the transaction value for credit card payments and 0.2% for debit card payments.

In July 2016 MasterCard was ordered to pay substantial damages to the supermarket Sainsbury’s, after it successfully sued MasterCard over processing fees. While the court in this case acknowledged that electronic payment arrangements benefit both customers and retailers, it ultimately concluded that MasterCard’s charges were excessive and breached EU and UK competition law. This judgement potentially paves the way for a wave of further claims from retailers who were charged similar rates.

MasterCard is not the only lender affected. Visa was also investigated in 2007, but managed to avoid formal sanctions by agreeing voluntarily to reduce its fees and improve transparency around charging.

The British government’s move to scrap charges completely by January 2018 promises greater transparency over future prices paid by consumers. But, future class actions should not be ruled out. The recent rejection of Merricks’s case against MasterCard was down to the complexity of computing individual losses – if this issue is remedied then future claims could well succeed.

Author: Joanne Atkinson , Principal Lecturer, Law, University of Portsmouth

Cash Still In The Payment Mix

A research discussion paper from the RBA – “How Australians Pay: Evidence from the 2016 Consumer Payments Survey” –  provides further evidence of the migration to electronic and digital payment mechanisms, but also underscores that cash remains a critical payment mechanism for many, especially in the older age groups. Given the fast adoption of mobile payments, the 2016 data will already be out of date!

Using data recorded information on around 17 000 day-to-day payments made by over 1 500 participants during a week, the report shows that Australian consumers continued to switch from paper-based ways of making payments such as cash and cheques, towards digital payment methods (particularly debit and credit cards). Cards were the most frequently used means of payment in the 2016 survey, overtaking cash for the first time. Contactless ‘tap and go’ cards are an increasingly popular way of making payments, displacing cash for many lower-value transactions.


Despite these trends, cash still accounts for a material share of consumer payments and is intensively used by some segments of the population.

Payments using a mobile phone at a card terminal are a relatively new feature of the payments system and this technology was not widely used at the time of the survey. However, consumers are increasingly using their mobile phones to make online and person-to-person payments. Similarly, consumers are using automatic payments, such as direct debits, more frequently.


Bank of England extends direct access to RTGS accounts to non-bank payment service providers

The Bank of England has announced that a new generation of non-bank payment service providers is now eligible to apply for a settlement account in the Bank’s RTGS system.

Holding their own settlement account at the Bank enables these non-bank PSPs to apply, for the first time, for direct access to the UK’s sterling payment systems that settle in sterling central bank money, including Faster Payments, Bacs, CHAPS, LINK, Visa, and, once live, the new digital cheque imaging system.

The new Settlement Account Policy includes non-bank PSPs delivers on a commitment made by the Governor of the Bank of England in summer 2016.1  This policy change is designed to ensure that the UK’s payments infrastructure keeps pace with the changing structure of the financial system.  It marks the first step in a much broader renewal programme designed to deliver a materially stronger, more resilient, flexible and innovative sterling settlement system for the United Kingdom in the years ahead.

The Governor of the Bank of England said today: “I am delighted that the Bank of England, the FCA and HM Treasury are working together to stimulate competition and innovation in payment services by widening access to the UK’s payment systems to non-bank payment service providers. In parallel this should support financial stability through greater diversity and risk-reducing payment technologies.”

These changes will enable non-bank PSPs to compete on a more level playing field with banks.  In turn, reduced dependence on bank competitors for access to payment systems will allow non-bank PSPs to offer a wider range of payment services.  These factors will all help to increase competition and innovation in the provision of payments services.  In the longer term, the innovation which stems from this expanded access should promote financial stability by:

  • creating more diverse payment arrangements with fewer single points of failure;
  • identifying and developing new risk-reducing technologies; and
  • expanding the range of transactions that can take place electronically and be settled in central bank money.

At the same time, as the Governor made clear last summer, these benefits cannot be allowed to come at the cost of reduced resilience of RTGS. That is why the Bank has been working over the past year with the Financial Conduct Authority (FCA), HM Treasury, HM Revenue & Customs, the Payment Systems Regulator (PSR) and the payment system operators to develop a comprehensive risk management framework to ensure the continued resilience of the Bank’s RTGS service.

Before non-bank PSPs can open a settlement account, they will need to demonstrate compliance with this risk management framework. A number of legislative changes also need to complete their passage through Parliament. As a consequence, the Bank’s expectation is that the first non-bank PSPs will join RTGS during 2018.

To assist firms interested in exploring direct access to UK payment systems and RTGS, the Bank, FCA and the major payment systems operators are today publishing a guide providing more detail on the requirements and application process.  In the first instance, interested firms should contact the relevant payment systems operator to discuss these issues further.

The ATM at 50: how a hole in the wall changed the world

From The Conversation.

Next time you withdraw money from a hole in the wall, consider singing a rendition of happy birthday. For on June 27, the Automated Teller Machine (or ATM) celebrates its half century. Fifty years ago, the first cash machine was put to work at the Enfield branch of Barclays Bank in London. Two days later, a Swedish device known as the Bankomat was in operation in Uppsala. And a couple of weeks after that, another one built by Chubb and Smith Industries was inaugurated in London by Westminster Bank (today part of RBS Group).

These events fired the starting gun for today’s self-service banking culture – long before the widespread acceptance of debit and credit cards. The success of the cash machine enabled people to make impromptu purchases, spend more money on weekend and evening leisure, and demand banking services when and where they wanted them. The infrastructure, systems and knowledge they spawned also enabled bankers to offer their customers point of sale terminals, and telephone and internet banking.

There was substantial media attention when these “robot cashiers” were launched. Banks promised their customers that the cash machine would liberate them from the shackles of business hours and banking at a single branch. But customers had to learn how to use – and remember – a PIN, perform a self-service transaction and trust a machine with their money.

People take these things for granted today, but when cash machines first appeared many had never before been in contact with advanced electronics.

And the system was far from perfect. Despite widespread demand, only bank customers considered to have “better credit” were offered the service. The early machines were also clunky, heavy (and dangerous) to move, insecure, unreliable, and seldom conveniently located.

Indeed, unlike today’s machines, the first ATMs could do only one thing: dispense a fixed amount of cash when activated by a paper token or bespoke plastic card issued to customers at retail branches during business hours. Once used, tokens would be stored by the machine so that branch staff could retrieve them and debit the appropriate accounts. The plastic cards, meanwhile, would have to be sent back to the customer by post. Needless to say, it took banks and technology companies years to agree common standards and finally deliver on their promise of 24/7 access to cash.

The globalisation effect

Estimates by RBR London concur with my research, suggesting that by 1970, there were still fewer than 1,500 of the machines around the world, concentrated in Europe, North America and Japan. But there were 40,000 by 1980 and a million by 2000.

A number of factors made this ATM explosion possible. First, sharing locations created more transaction volume at individual ATMs. This gave incentives for small and medium-sized financial institutions to invest in this technology. At one point, for instance, there were some 200 shared ATM networks in the US and 80 shared networks in Japan.

They also became more popular once banks digitised their records, allowing the machines to perform a host of other tasks, such as bank transfers, balance requests and bill payments. Over the last five decades, a huge number of people have made the shift away from the cash economy and into the banking system. Consequently, ATMs became a key way of avoiding congestion at branches.

ATM design began to accommodate people with visual and mobility disabilities, too. And in recent decades, many countries have allowed non-bank companies, known as Independent ATM Deployers (IAD) to operate machines. The IAD were key to populating non-bank locations such as corner shops, petrol stations and casinos.

Indeed, while a large bank in the UK might own 4,000 devices and one in the US as many as 12,000, Cardtronics, the largest IAD, manages a fleet of 230,000 ATMs in 11 countries.

Bank to the future

The ATM has remained a relevant and convenient self-service channel for the last half century – and its history is one of invention and re-invention, evolution rather than revolution.

Self-service banking and ATMs continue to evolve. Instead of PIN authentication, some ATMS now use “tap and go” contactless payment technology using bank cards and mobile phones. Meanwhile, ATMs in Poland and Japan have used biometric recognition, which can identify a customer’s iris, fingerprint or voice, for some time, while banks in other countries are considering them.

So it’s a good time to consider what the history of cash dispensers can teach us. The ATM was not the result of a eureka moment of a single middle-aged man in a bath or garage, but from active collaboration between various groups of bankers and engineers to solve the significant challenges of a changing world. It took two decades for the ATM to mature and gain widespread, worldwide acceptance, but today there are 3.5m ATMs with another 500,000 expected by 2020.

Research I am currently undertaking suggests that ATMs may have reached saturation point in some Western countries. However, research by the ATM Industry Association suggests there is strong demand for them in China, India and the Middle East. In fact, while in the West people tend to use them for three self-service functions (cash withdrawal, balance enquiries, and purchasing mobile phone airtime), Chinese customers consumers regularly use them for as many as 100 different tasks.

Taken for granted?

Interestingly, people in most urban areas around the world tend to interact with the same five ATMs. But they shouldn’t be taken for granted. In many countries in Africa, Asia and South America, they offer services to millions of people otherwise excluded from the banking sector.

In most developed counties, meanwhile, the retail branch and the ATM are the only two channels over which financial institutions have 100% control. This is important when you need to verify the authenticity of your customer. Banks do not control the make and model of their customers’ smart phones, tablets or personal computers, which are vulnerable to hacking and fraud. While ATMs are targeted by thieves, mass cybernetic attacks on them have yet to materialise.

I am often asked whether the advent of a cashless, digital economy heralds the end of the ATM. My response is that while the world might do away with cash and call ATMs something else, the revolution of automated self-service banking that began 50 years ago is here to stay.

Author: Bernardo Batiz-Lazo, Professor of Business History and Bank Management, Bangor University

Cash is falling out of fashion – will it disappear forever?

From The Conversation.

On June 27, the ATM turns 50. Former U.S. Federal Reserve Chairman Paul Volcker once described it as the “only useful innovation in banking.” But today, the cash that ATMs dispense may be on the endangered list.

Cash is being displaced in so many ways that it’s hard to keep track. There are credit cards and electronic payments; apps such as Venmo, PayPal and Square Cash; mobile payments services; cryptocurrencies that operate outside the purview of central banks; and localized offerings such as Kenya’s mPesa, India’s Paytm and Bangladesh’s bKash. These innovations are encouraging cashlessness across communities worldwide.

It’s reasonable to expect cash to follow the path of other goods that have been replaced by digital alternatives, such as photos, music and movies. Will cash – and the ATMs that dispense it – experience a “Blockbuster” moment and disappear from our neighborhoods?

Not so fast. Cash will likely become less popular, thanks to the high cost of using cash and the growing array of alternatives. But I expect it will remain with us forever. The future will be “less cash,” rather than cashless.

The cost of cash

As of 2013, approximately 85 percent of the world’s transactions involved cash.

Reliance on cash is quite uneven across the world. While Singapore, the Netherlands, France, Sweden and Switzerland are among the least cash-reliant countries, in Malaysia, Saudi Arabia, Peru and Egypt, only 1 percent of transactions are cashless. Even some highly advanced countries, such as Japan, are still highly reliant on cash.

Cash usage in the U.S. is still high relative to EU countries. In 2015, cash usage in the U.S. represented 13.1 percent of its GDP, whereas it represented just 7.1 percent in France and 4.5 percent in Switzerland.

Concerns about social equity offer one motivation for lawmakers to push for cashless alternatives. My colleague Benjamin Mazzotta and I have studied the costs of cash across a wide range of countries, with a particular focus on the U.S., Mexico, Egypt and India. Our research shows that the poor and those with less access to institutions bear a disproportionate share of these costs of using cash.

In the U.S., for example, cash usage imposes a regressive tax on consumers, with the highest impact on people who do not have an account with a bank. We found that the unbanked pay four times more in fees to access their money than those with bank accounts. They also pay US$4 higher fees per month for cash access on average than those with formal financial services. Such fees include those charged for payday lending, buy-here-pay-here auto loans and check cashing. The unbanked have a five times higher risk of paying cash access fees on payroll and EBT cards.
Poorer consumers also have to spend far more time getting cash. On average, Americans spend 28 minutes a month traveling to get cash, but that time isn’t evenly distributed. People who don’t use a bank spend about five minutes longer getting to the place where they can get cash, and unemployed people spent nearly nine minutes more.

In the meantime, other scholars have argued for the benefits of a “less cash” society. Ken Rogoff at Harvard has argued that eliminating higher-denomination banknotes can prevent currency from being used to fund illegal activities.

A world without cash

A combination of public and private initiatives are currently chipping away at the global predominance of cash, with some countries moving more quickly than others.

Sweden, already high on the cashlessness scale, may become the first country to come close to a truly cashless state. Sweden’s history in banks promoting cash alternatives dates back to the 1960s, with digital bank transfers used to pay wages. Cards also become more popular in the 1990s, when banks also started charging a fee for checks. The app, Swish, developed by the major banks, is widely used today for digital money transfers by nearly half the population. Many businesses discourage use of cash, and retailers are legally allowed to refuse cash.

In several other countries, governments are experimenting with innovative digital alternatives. In 2012, the Royal Canadian Mint launched the MintChip project, recently handed over to the private sector. The plan is to store cash on computer chips, enabling the transfer of money between chips through encrypted messages.

In some countries, the private sector has led the way, creating “less cash” societies in the unlikeliest of places. Consider Somaliland, one of the poorest countries in the world. It stands at the forefront of a mobile payment revolution with its ZAAD platform. At over 30 mobile payment transactions a month on average, the average citizen of Somaliland is far ahead of the rest of the world’s average of 8.5 such transactions per capita per month.

Perhaps the most dramatic nudge toward “less cash” was experienced recently in India. Last November, the Indian government made a high-risk, high-stakes move by demonetizing the 500 and 1,000 rupee banknotes, in effect voiding 86 percent of cash in circulation. Their initial aim was to root out corruption and illegal activity funded by cash. New 500 and 2,000 rupee banknotes were issued, so consumers had to go to a bank and exchange their demonetized currency.

In a country that is almost 90 percent reliant on cash, this move led to disrupted enterprises, unpaid wages and long lines at banks. Mobile wallet players were the unqualified winners of the decision, with market leader Paytm claiming a 435 percent increase in traffic and a 250 percent increase in overall transactions and transaction value.

However, despite the surge in mobile payments after demonetization, cash in India remains resilient. In March, five months after demonetization, cash withdrawals were actually 0.6 percent higher than a year earlier.

The future of cash

What explains the resilience of cash, despite its costs and a growing array of alternatives?

Cash is unique among payment instruments in that anyone can transact, any time, any place, with no third parties involved. With this freedom comes strong privacy protection. Currency neither knows nor cares who holds it or when and where a transaction occurred. People have a visceral sense of security when they have cash with them. Much of this sentiment was uncovered in our Cost of Cash studies spanning multiple countries.

These thresholds will, of course, evolve as our societies become more digitally native. However, old habits and perceptions take a long time to turn over. Some merchants will resist the costs of new equipment or fees that accompany cash alternatives. Cash is also considered more convenient and versatile, while with digital transactions there’s always concerns about hacking and fraud.

So, no matter where we are in the world, let us celebrate the ATM’s half-century of service. The human connection with cash will be hard to break. Though cash may become less popular, rest assured that there will always be someone who will stop you in the street asking for directions to the nearest ATM.

Author: Bhaskar Chakravorti , Senior Associate Dean, International Business & Finance, Tufts University

Australians Choose Digital Payments

Australians are embracing digital payments according to the latest  Milestones Report released by the payments industry self-regulatory body Australian Payments Network (previously Australian Payments Clearing Association). As a result, cash and cheques are in decline. Australia’s digital economy underpins what can increasingly be characterised as a less-cash society.

Cheque use plunged 20% to 111.6 million – the largest drop ever-recorded. The value of cheques dropped by 6% over the same period, after remaining flat in 2015 and dropping by less than 1% in 2014. Over the last five years, cheque use has dropped 56%.

The number of ATM withdrawals dropped 7.5% to 648.5 million in 2016 following a 5.5% drop in 2015 and a 4.7% drop in 2014. Since 2011, ATM withdrawals have dropped by 22%.

CEO of the Australian Payments Network, Dr Leila Fourie said “Looking at the payment choices that Australians make, it’s clear that the vast majority of us are moving away from cash and cheques faster than ever before. This is happening because of widespread use of new technology combined with a strong preference for faster and more convenient payment options.”

Consumers’ preference for digital payments is reflected in the strong year-on-year growth in card and direct entry transactions:

  • Australians used their cards 12.3% more in 2016, making 7.4 billion transactions.
  • Direct entry transactions (direct debit and direct credit) increased by 8.6% to 3.5 billion.

Over the last five years, card transactions grew by 72% and direct entry by 36%.

Increased smartphone penetration, which reached 84% in 2016, up from 76% in 2014, is an important contributing factor.

Australia’s online retail spend was estimated at $21.6 billion in 2016 and encouragingly from a digital inclusion perspective, this spend is not restricted to digital natives. Older Australians are using online shopping platforms more, with domestic online spending growing by 8.7% for those in the 55-64 age group, and 7.5% for 65+.

The Report also tracks progress on initiatives supporting Australia’s transition to the digital economy including the industry’s New Payments Platform and Australian Payments Plan.