Saturday, July 27, 2013

Government policies that could reduce cash

Cash is bad. This is the case for everybody involved with money. Managing cash is complex and expensive for consumers. Retailers have big overheads to secure cash and to reconcile payments with purchases. Governments lose tax because of grey transactions and banks have big overheads in dealing with cash. If this is the case, should governments not do more to make cash transactions less attractive?

The Central Bank of Nigeria has been extremely active in promulgating rules to reduce cash usage (especially in Lagos). Much can be read about the philosophies ans actions to create a "cashless Lagos". (For instance read this report). The approach of placing limits on cash-transactions may not have the desired effect as the right eco-system may not exist to support a cash-less economy. Other central banks use the usual levers to try and change cash-transactional behaviour. These banks use interest rates, money supply and penalties to change cash-usage behaviour. This light touch, while probably the text-book approach may not have good traction fast.

I am a big proponent of taxing bad behaviour. Not only will tax generate revenue, but it will discourage consumers to change their behaviour. One should ask which actions taken by consumers will trigger more cash usage and one should then tax this (withdrawing cash from a bank or ATM, cashing in a check, doing a retail transaction in cash). On the other hand, one should look at behaviour that one would like to encourage and then reduce (or eliminate) tax of these activities (electronic payments, depositing cash into an account etc.). Unfortunately, because the latter is digital, traceable and known, these transactions are often taxed and the former not.

Bitcoin in emerging markets

I am far from being an expert in Bitcoin technology. I am also not the guy that is going to shout that this is the new uber-trend. For this I have been too long in payments and I understand the difficulties in getting something to critical mass. However, Bitcoins do have an interesting angle in the sense that it is extremely well-governed, without any-one specifically doing the governing. It is therefor very predictable (and thus stable). It does not take a Governor making a strange rule to change the direction of the currency as is the case in all other currencies.

In emerging markets where regulations are often the biggest inhibitor to innovation in payments, having a currency that is fully predictable could be a big advantage. No-one can therefor be blamed to reach out to Bitcoins as the possible solution to roll-out digital payment solutions in emerging markets. It were therefor not a surprise when the first Bitcoin-backed mobile payment solution was recently announced in Kenya. (Read here). Called Kipochi, the wallet is integrated with mPesa, allowing value to be transferred to and from Bitcoins. And this touches on the first of two major problems:
  • Bitcoins have been successfully growing in the digital world where many exchanges exist to convert Bitcoins between other currencies and vice versa, but it will prove extremely difficult to build these exchanges in markets where the bulk of currency are still in hard cash. Not only will it be difficult to sign up agents that will be willing to convert cash into Bitcoins, but to do this legally at the same time. By transfering cash into a mobile wallet before it can be transfered to Bitcoin (as is the case with Kipochi) really limits the application.
  • As is the case with most new things, the ultimate take-up and growth of Bitcoins in emerging markets will be a function of how well it is understood and trusted. While new technology has been embraced in emerging markets (look at mobile phones for instance), I am not so sure if the Bitcoin paradigm (don't trust in dollars - or other government backed currencies, trust the system), will be naturally embraced in emerging markets. It will take a lot of education, I think.
Solving for the above in an effective way, will allow Bitcoin-backed payment systems to grow in emerging markets.

What can one learn from Qiwi about payments

Qiwi is a very successful, Russian payments company. (I am still trying to figure it out why it is called Qiwi and have a logo that make you think it is a New Zealand company). The beauty of the products provided by the company is the scope of the offerings (from virtual to mobile, it even recently start issuing Visa cards).

But it has not always been so. The consumer-base and transaction volume was initially built on providing payment services through kiosks. My information is that Qiwi currently run more than 200 000 kiosks predominantly in Russia and CIS countries. This is quite a unique situation. One sees kiosks in many places (shopping malls, bank branches and small retailers), but never has it been rolled out to be the back-bone of the growing business. So what is it that one can learn from Qiwi?
I would say that the following is important learnings:
  • Roll out kiosks with a well-thought-out integrated transactional strategy. The services offered and how these are integrated in the back-office is critical to build a sustainable business.
  • Put a lot of emphasis on branding. It is important that the customer should be able to associate a service that is available at a kiosk with a well-defined brand. The brand-promise should be clear and must be delivered faultlessly.
  • Build other payment services around and in support of the kiosk. For instance, soon after launching the kiosk service, Qiwi followed this up with the Qiwi wallet that can be loaded at a kiosk, but can be used for payments remotely. This innovation lead to further brand re-enforcement, client-loyalty and an increase in traffic.