The Business Times: The Future of Money
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Is it a matter of time before our dollars turn digital, or is cash still king?
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26 May, 2018 — Is it a matter of time before our dollars turn digital, or is cash still king?
LONG gone are the days of coins and notes stuffed in pillowcases.
The inexorable march of progress has ushered in an era of digital currency. Trading dollars and cents for bits and bytes has brought fresh business opportunities to both banks and financial technology upstarts - alongside greater risks of coups such as 2016's grand multi-million-dollar Bangladesh Bank heist. But it's tough to boldly go into a brave new world when there's nobody there yet. Singaporeans' affection for cold, hard cash still remains - much to the dismay of many stakeholders, from mobile payment startup bosses to the country's premier.
Cash or card. . . only
Digital payments in Asean should see double-digit growth rates between 2017 and 2021, according to business intelligence portal Statista, which pegged the value of such transactions in Singapore at US$21 billion by the end of that period. Statista defines digital payments as those made online or with smart devices at a physical cashier, rather than just flashing a card in stores.
You might think that Singaporeans, with their high smartphone penetration rate, would have had no qualms going digital with their dollars.
As Alwyn Lim, assistant professor of sociology at Singapore Management University, notes in an e-mail to The Business Times: "Most of our cash and payment systems are very highly integrated."
"Many Singaporeans already engage in cashless transactions for the majority of their transactions - for example, receiving their salaries, investing, even payment for everyday items - and I expect a very seamless transition into an economy that is mainly cashless."
But he may be a tad sanguine about the popularity of cashlessness in day-to-day lifestyle habits. A PayPal study last year concluded that more than two-fifths of people here make most payments in cash, while nine out of 10 said it would be their first choice.Notes and coins - archaic as they already sound - are still the most formidable opponent for cashless operators. This is despite a KPMG study, commissioned by the Monetary Authority of Singapore (MAS), finding that cash and cheques hurt the economy to the tune of S$2 billion per year - no thanks to costs such as manpower, as cash must be securely stored and moved.
Associate professor Davin Chor, from the National University of Singapore economics department, says: "There seems to be an attachment towards physical cash in Singapore, particularly among the older generation.
"But once that psychological hurdle is overcome, and once the back-end infrastructure is in place, the move towards a cashless society could, in fact, happen very quickly."
That's a big "if", as electronic payment methods are not all equal.
PayPal South-east Asia general manager, Rahul Shinghal, tells BT: "Fortunately or unfortunately, a lot of the narrative around (digital) payments has been about quick-response (QR) code payments, hawker centre payments.
"To me, that's just the tip of the spear, honestly. It's happening, it's great, but we should not lose sight of what is really happening."
And what is happening, according to KPMG's research, is that a cool 27 per cent of consumer transactions are still made with debit and credit cards - which is bad news for the QR boys.
Jeremy Tan, founder and chief executive of payments company Liquid Group, tells BT: "Realistically, in a storefront… the competition is between your UOB, DBS, OCBC, or Visa versus Mastercard. In terms of form factor, I think the bulk of people now are using 'dips' - that means you pass your card and swipe. A good base and the most efficient way to do it is tap, so people are going for that. So for QR consortium players, the biggest competition is cash as well as your 'tap'."
Anthony Chiam, head of financial services at marketing consultancy J D Power, says: "In Hong Kong, there has always been a very established payments system and a financial system, the urgency to switch is not there. You already have something that works.
"In Singapore, it's similar to that: You have payment that works. You have your Nets that works. You have your credit card that works very well, and you get incentivised because of the extra points and miles."
Mr Chiam adds that cards' credit facilities continue to be alluring: "In time to come, they probably will not be physical cards. It's already moved that way - you can load your credit card onto your Apple Pay, your Google Pay and so on. I think the card will go away - but the credit function of it is not going to go away."
"To give you an example, in China, despite the penetration of mobile payment at 90-odd per cent, the credit card is growing in double digits every year. You might ask me why.
"It's the credit component of that product. That is not going to go away. It will stay, whether we're going to have a physical card or not."
Credit cards aside, one fundamental obstacle is that electronic and mobile wallets still rely on traditional fund sources and transfer methods, as Chia Tek Yew, KPMG Singapore's head of financial services advisory, observes.
"For most e-wallet operators, the operational challenges will revolve around facilitating the topping up and encashment of the wallets by customers who do not have bank accounts that allow for fund transfers to and from the wallets," he said.
Liquid's Mr Tan says: "In a way, the competition is based on channels, because essentially we're all distributing the same thing - a way to pay. It could be linked to a credit card; it's still linked to your Visa. Whether you use your Visa to tap, that goes through the NFC (near-field communication) way, or if you use your Visa to scan."
But as Mr Tan notes: "In the end, it's still a Visa." That only entrenches the role of players such as Visa - network operators connecting merchants and banks.
Robert Walls, Visa's head of digital products for the Asia-Pacific, says: "Ultimately, what will prevail is organisations that can provide value to the customer, a seamless and frictionless experience that is secure and that is widely accepted. And so Visa takes the view that we can provide many of the components for the front end."
Advances in technology - such as software building blocks called application programming interfaces, or APIs - also offer more opportunities to build up the payment ecosystem.
"Our Visa developer platform, that was launched in 2016, is a platform that has many different APIs that can be injected into different payment experiences or platforms," said Mr Walls. "So a more affluent customer might get a different experience. Grab might take an API from Visa to work out the payment card that you're paying with, and based on our product hierarchy, whether that customer fits into the category that they want to offer a premium service.
"So we're taking the view (that) we can use all of the network data that we have, all of the insight that we have about customers, about businesses, and provide some of that information via APIs back to the front-end integrators."
All the same, a dollar is a dollar is a dollar - or so the person in the street might think. But the electronic payments landscape is notoriously fragmented. With some stores still resisting credit card or Nets terminal fees, consumers have even less guarantee that any of the newfangled QR wallets will be accepted by cashiers.
"In Singapore, we too have e-payments, but we have too many different schemes and systems that do not talk to one another," Prime Minister Lee Hsien Loong said in his National Day Rally address last year. "We must simplify and integrate our systems."
Most payment platforms are "closed", explains KPMG's Mr Chia. "They allow transfers or payments only when the senders and recipients belong to the same system - that is, they share the same wallets or have bank accounts with the same banks."
The bank-agnostic PayNow mobile money transfer system, available to customers of nine retail banks, was pitched as a way for people to pay one another without having to remember long account numbers.
The authorities also worked with the industry to roll out an islandwide standard for QR code payments, dubbed "SG QR". Each store could then put up just one QR icon, compatible with whichever wallet consumers want to pay with.
But, after payments players have carefully finetuned their separate platforms, what would be the incentive to make these systems "interoperable" and able to work with each other?
"A lot of interoperability exists across the world - networks like Visa, Mastercard, American Express. That's what they create - ubiquitous acceptance," says PayPal's Mr Shinghal. "The value we provide comes on top of it: it's protection, it's brand, it's security, customer service. So, interoperability just takes away the inconvenience for the customer. What you layer on top of it is what creates differentiation."
Shailesh Naik, founder and chief executive of financial technology (fintech) firm MatchMove, tells BT: "As a rule, interoperability is an absolute must, and it benefits everyone except the incumbents. The incumbents will fight it, understandably, because they've tried to build a base, they've tried to keep their users hostage, they've tried to use all kinds of barriers to the user leaving... If you don't have interoperability, we are in danger of protecting the more inefficient systems or services in the market."
OCBC Bank, one of the nine PayNow partners, integrated the inter-bank platform with its own Pay Anyone app at the outset. Customers who did not sign up for PayNow can still receive such transfers through their OCBC account. According to the bank's data, Pay Anyone transactions were up by almost 30 per cent within a month of PayNow's launch last July.
Meanwhile, Mr Tan, from Liquid, is adamant that interoperability lets minnows join forces in a small pond and challenge the incumbents. "It levels it out because it allows people to stop saying, 'Because I have 50,000 merchants, I should win'," he says.
"Interoperability allows the individual wallets to say, 'I have a special rewards programme, I have a special rebate programme, I have a special cashback programme, or I have this innovative way of tracking your spending so that I can reward you better'. And the merchants can experience all of that without having to sign up for 500 different service providers; they don't have to sign up for 10 different terminals."
Mohit Mehrotra, strategy consulting co-leader at Deloitte Asia Pacific, suggests: "The smart approach is to focus on select payment plays and actively build and participate in national and cross-border public and private multi-industry data ecosystems that are enabled by open APIs."
Yet, in the face of such success stories, problems remain. Observers point out that, while an SG QR code can be "read" by multiple wallets, a merchant may not be open to every single one of those payment modes.
To address that, a new QR consortium was launched in January, letting payments from one participating wallet be accepted by merchants using another app. It has unveiled seven members, including Diners Club, Mastercard and UnionPay, as well as Liquid and homegrown EZi Wallet.
EZi Wallet has made a play for the coffee shop space, through a tie-up with chain operator Chang Cheng, and the Fei Siong Group's Ci Yuan Hawker Centre in Hougang. But Liquid guns for the same segment, with stalls at more than 60 food centres.
Still, Ian Lee, founder and chief executive of EZi Wallet, sings the praises of joining a consortium. "There's no duplication of services, I would say. So now that Liquid basically is into the hawker centre side, we spend our resources in other sectors," he said.
"In fact, we are much stronger, because everybody is strong in their respective areas, so now we don't really need to fight with one another, because you cannot predict, or you cannot determine, the consumers' behaviour.
"Today, I feel like going to a restaurant - there you have the Wirecard guys. And then the same guy, going back - 'Eh, hungry, I want to eat supper, eat hor fun' - then he'll probably come to my merchant."
But absent from their seven-man party is Nets, which is owned by the three local banks. It has its own QR system, compatible with the banks'.
And at least one startup boss - MatchMove's Mr Naik - is griping that the landscape "continues to be a closed group - it's the banks working with banks to do more".
He adds: "Fintechs are not allowed in this group, so even for Fast (inter-bank transfers), MatchMove and other fintechs are not able to get into this closed group. Even ATMs - we're not allowed to access the ATM network... The fact is, I think, that we are denying the population access to available technology right now."
To infinity, and beyond
When all is said and done, the size of the lucrative payments market looks set to keep on luring entrants and encouraging market expansion. A solid 43 per cent of Asean's fintech industry was involved in mobile wallets or payments, according to a white paper produced last year by UOB.
"For peer-to-peer transfers, banks offer existing account holders a way to send money to others via mobile banking apps. While these platforms have seen good traction, the building blocks for success for private companies like Grab are already in place," says Jason Thompson, managing director of GrabPay South-east Asia, citing the ride-hailing firm's user base.
Merchants on the GrabPay network accept the pre-paid credits, which are stored in a mobile wallet, that Grab customers also use to pay for private-hire car and taxi rides.
Grab has also made a play for the rest of South-east Asia. It partnered Japan's Credit Saison in March, with a joint venture that will lend to consumers and small businesses - showing the business appeal of the region's "unbanked" population who rely on their mobile phones to access financial services.
The Credit Saison deal went hand in hand with the Grab Financial platform, launched that same day. The platform will be integrated with businesses such as an Indonesian e-commerce startup, Kudo, which Grab acquired last year.
And just this week, Grab teamed up with Malaysian bank Maybank in a strategic partnership that will let people top up their Grab wallet through Maybank's online banking portal. GrabPay and MaybankQRPay merchants will also be able to accept either app.
Other players leveraging their existing customer pool in the regional payments arena include Chinese e-commerce giant Alibaba, as well as telco Singtel, which is working to streamline mobile wallets across its regional group.
Going by its previous statements, Singtel envisions getting other players onboard its South-east Asia payments system, which is set to roll out in the second half of this year.
The first partner in Singtel's regional endeavour was revealed to be home-grown gaming technology Razer, whose chief executive Tan Min-Liang boasted last August that he could have a national e-payments scheme ready in 18 months - that is, by next February. "We will be moving into launching a wallet to be complementary to our other partners, some time later this year," Mr Tan has since said, in early May.
At the same time, watchers have observed that Singtel and Razer are taking a leap of faith in gambling on the South-east Asian payments market, which is no less fragmented than Singapore's.
Mr Shinghal, from PayPal, says: "To run a successful payments business, it's not only the money movement or the app. The app is the starting point. The plumbing that goes behind it, the compliance, the anti-money laundering, the regulatory fitness, the user experience, the risk management, the fraud management, creating global scale, getting currency management - I think a lot of the newer players have to focus on that, to be able to really compete."
KPMG's Mr Chia remarks: "Essentially, the potential for businesses to diversify into payments is good only for those who already have a large base of customers which can then be leveraged to secure a good base of merchants who will accept this mode of payment.
"Other pure e-payment players who believe they have a technologically better solution have floundered as the cost of acquiring customers and merchants is often prohibitive."
It's also clear that consumers, while placing much faith in their beloved credit cards, have trust issues when it comes to digital payment. The bridge that must be crossed is concern over the data safety of newfangled payment methods. A JD Power survey found last year that one-third of the Singapore consumers who avoid linking credit cards and mobile apps - or 34 per cent - felt that doing so was not necessarily secure.
But the digitalisation of currency is reshaping money beyond everyday payments.
Swiss bank UBS has been testing blockchain-based Utility Settlement Coins since 2015. These fully asset-backed tokens are billed as instruments to make clearing and settling trades quicker and simpler.
"In an industry that relies on acting as an intermediary in transactions, the distributed nature of blockchain could be seen as a potentially major threat to financials. But it also promises significant cost savings for incumbents," says Sundeep Gantori, an analyst at UBS Wealth Management. "We estimate that blockchain could add as much as US$80 billion to US$100 billion of economic value in the financial services industry by 2027."
And headline-grabbing cryptocurrencies not backed by any central bank, such as Bitcoin and Ethereum, have also pushed up the distributed ledger technology of the blockchain.
Just as people once scribbled graffiti on banknotes, users such as activists in China now publish material in supposedly indelible crypto transaction records, to dodge censors.
As Prof Lim, the sociologist, notes: "The move towards a cashless society would make money purely representational and completely divorced from even its paper form, which in itself was already symbolic of gold reserves in the previous period."
The brave new world cometh.