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« Photographic evidence | Main | SOCA it to them »

Cash does have some unique properties

By Dave Birch posted May 10 2010 at 3:48 PM

[Dave Birch] The cost of cash isn't only the cost of the notes and coins, the ATMs and armoured cars, the night safes and counting machines. It's the lack of efficiency in the economy that goes with it. And economies that are stuck with cash are the worst off. So how much does cash cost in a developing economy? I happened across this figure while I was looking for something else in connection with a project that we are working on.

"The total cost of cash handling in Indonesia is Rp 6.13 trillion a year," she said.

[From More consumer purchases made in cash | The Jakarta Post]

It's hard to work out by calculating adjusted GDP and historic exchange rates, but I reckon this is about 0.5% of GDP, which is comparable to the UK. Considering that over 90% of all Indonesian retail transactions are in cash, this seems low to me, but who knows. Anyway, in discussion with someone else today, another point emerged. The real hidden cost of cash in developing countries is corruption.

A friend of mine just got shaken down by the Kenyan police in an excellent new scam. Watch out for this one next time you go to Nairobi! He got a approached by a man who wanted to talk to him: my friend ignored him and carried on walking down to the street. A few metres on he was stopped by two policemen who said that they had just seen my friend talking to someone who was a known terrorist and that they were going to arrest him and he would get five years in jail. Unless, that is, he could pay the fine for talking to known terrorists, which in Kenya is apparently $300. My friend was marched back to an ATM (the policemen were very specific that it had to be a Barclays ATM, connected to the Visa network) to get the money. If only, I thought, he had had been using the excellent M-PESA mobile money transfer! Then he could have paid the fine on the spot. That would have been much more efficient.

An easy way to improve the lives of poor people is to get rid of cash. If there were no cash in Kenya, how would the police have been able to steal my friend's money? Electronic payments, if implemented properly, can bring transparency as well as efficiency. And transparency can have some unexpected consequences. Look what happened when the M-PESA service was launched in Afghanistan (as M-PAISA) and used to introduce efficiency into the process of salary payments for civil servants...

The trial was a success, despite having to overcome some initial challenges such as a police commander who wanted the service shut down as he was no longer receiving his usual cut of the salaries. The police officers were initially surprised at how large the payments were when they received their full salary, which was a third higher than what they were used to receiving.

[From In Afghanistan, going where no bank has gone before]

An immediate benefit of the transition to m-payment. Now, no-one is claiming that mobile phone payment schemes are fraud-free compared to the internet, credit cards and so on because no matter how splendid the electronic solution, there are always going to be people in the loop and people can be corrupted.

On Sunday, a Molo farmer, Mr Nicodemus Anuri and an Egerton University student Mr David Ngugi became the latest victims of the syndicate when they lost Sh50,000 and Sh15,000, respectively. The two were called by people purporting to be from customer care to inquire about certain details concerning their money transfer accounts. Those privy to the racket suspect agents offering the electronic money transfer are colluding with the criminals.

[From Daily Nation: - News |Police probing mobile money transfer racket]

The point, however, is that even with imperfect systems, with corruptible people in the them, moving to electronic payments means that money can be tracked and traced and this is not always a bad thing. And the alternative, which is that people use cash, is far far worse.

About a year ago, Muqtar Ali's brother was shot dead by gunmen in the busy Bakara market of Somalia's capital Mogadishu, and his $200 in cash was stolen. Ali says that if a new mobile money transfer service unveiled by Somalia's biggest mobile telecoms firm last month had been in place then, his brother would still be alive.

[From Mobile transfers save money and lives in Somalia - News, Gadgets & Tech - The Independent]

Mobile is going to make a big difference to a lot of people. But, as my colleagues at Consult Hyperion have been explaining at a number of events recently, this is not only in the developing world. Mobile is going to make a difference in the developed world as well, where we can take some of the lessons learned from the large-scale deployment of mobile payment systems in developing countries and apply these in developed markets. Even in an advanced payment market like the US, mobile can help to improve the infrastructure.

But if I focus on the U.S., the innovations are primarily going to come in the form of smarter devices that initially are just going to add value to the existing card-based magnetic stripe infrastructure. So we see mobile as something that is going to improve the consumers' protection of security and additional information content tied to their transactions.

[From Transcript: Captains of the Industry - Bill Sheedy on What's Next with Visa - pymnts.com]

That's why Consult Hyperion has begun funding Ph.D research into mobile phone transaction security at the University of Surrey. A secure mobile payments and banking infrastructure will make an amazing difference to the lives of people around the world, but it will be the poorest people, the people who are trapped in cash economies, who will benefit the most.

People who keep their savings in cash at home rather than in banks make themselves easier prey for criminals and are more likely to lose their money to fire, flood, or just neglect.

[From New underground economy - Washington Times]

Incidentally, it's also why I like coming into work on days like this, working on a project to help to design the next generation of mobile payment systems.

These opinions are my own (I think) and presented solely in my capacity as an interested member of the general public [posted with ecto]


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Privacy isn't anonymity. I will blog more on this soon, but my central point is that I think that consumers want privacy, not anonymity. Using cryptographic techniques, we can construct solutions that can deliver that: the choice is not between the anonymity of cash and the absonymity of the bank account, if you see what I mean.

Dave, I know you are generally sensitive to privacy considerations. In that light, I am curious how you weigh the privacy advantages of anonymous e-cash against the drawbacks you mention in this post.

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