While we have seen extensive coverage and discussions in the payments world related to cashless transactions, there are still hurdles to overcome in order for consumers to leave their wallets at home. Cash is still king when it comes to low dollar transactions in the long tail of small, independent retailers. They find interchange fees and other processing costs to be inhibiting factors in encouraging their customers to go cashless. Additionally, many consumers do not have the interest or trust in using the various cashless payment systems in place now including Apple, Samsung, or Android.
According to a recent report by Citi, cash is slowly but steadily on its way out. At the same time, questions are being raised on why we should not accelerate the transition as much as possible. Converting payments to digital helps with transparency, and reduces both social and other labor costs on the overall system.
Why then is cash still going strong? Almost all studies including this often quoted one by Federal Reserve Bank of San Francisco point to cash being the dominant form of payments for low value transactions, even in advanced economies like the US. When we analyze the reasons, we often look at demographic such as income and age groups, acceptance of cards, reliability of digital instruments etc.
Enter Fintech companies like Dwolla and Venmo that are providing the value prop for both consumers and small merchants alike. Ease of use—at little at no cost—will usually advance the acceptance of new systems or services beyond the early adopter stage, and this is happening in low denomination cashless transactions. Look for the card networks and financial institutions to deliver integrated tech solutions so the cashless society will work for merchants of all sizes.
ACH based mobile payment models are on the rise, and especially with same day ACH transactions coming in soon, the merchant’s perspective on intermediary fees might just be heard. Services like Dwolla which bypass the payment networks are starting to catch up. Essentially you fund your Dwolla account, and payments are immediate with small transactions completely free. Same goes for several person-to-person payment services like Venmo (now PayPal).
Consumer incentives for a growing digital payments ecosystem will come in the form of associated services such a loyalty programs for frequent purchases, and even bringing different businesses together. Such theme based and social oriented loyalty programs are just now starting to take off.
Overview by Raymond Pucci, Associate Director, Research Services at Mercator Advisory Group
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