The Painfully Long Path to Electronic Payments Nirvana

The Painfully Long Path to Electronic Payments Nirvana

Gareth Lodge and Zil Bareisis both blogged on the difficulties mobile payments have had at the London Summer Games over the past few weeks. I have nothing to directly add by way of personal observation, since I’ve been stuck in Atlanta the past few weeks.

Gareth’s citing the widespread use of cash despite Visa’s expensive promotion of mobile NFC payments caught my notice. Payment choice at point of sale is a consumer choice, of course, so long as the merchant accepts the payment of choice. Much has been written about consumer adoption of NFC (or not). But what of merchants. What do they wish for? We know the Starbucks story and that now, Dunkin’ Donuts has launched its own mobile payment application. To that I say big deal. Even Waffle House has its own app, but it doesn’t do payments. But what about small businesses – all several million of them? Will they all want their own app too (and will you want them on your phone)? I digress. Having nothing to do with the Olympics, Celent surveyed 500 small business owners of multiple varieties this summer to explore attitudes on invoicing, payments and the like. We found that checks were the most widely accepted payment method, closely followed by cash. True, a significant number of the businesses surveyed were B2B businesses, but c’mon! Barely a third accepted credit cards. What gives? smb-payments-acceptance-june-12

The survey went on to ask, “If you could be paid the same way each time by every customer –how would you choose to be paid?” Here we go again… checks and cash – dramatically more preferred than the next closest payment type (ACH) by a factor of three!

smb-payment-preferences

Why the devotion to antiquated payment methods? In the case of cash (in order of incidence): 1. Less chance of bad funds 2. Less expensive (no interchange) 3. Immediate funds availability In the case of checks, it’s all about the lack of transaction fees, since the chance of bad funds is a real and present danger with checks unless one spends for guarantee services. Sure, there are use cases where Square may be awesome for example, but to the significant majority of U.S. small businesses, neither technology nor electronic payments is all that interesting to them. This seems particularly true among older demographics. For example, in the same survey, only 15% of business owners/managers 65 and older thought tablets were “somewhat or very important to running their business”. In contrast, 45% of owners/managers 40 and younger felt that way. So, while it often appears that we are on a fast-track to mobile payments ubiquity, at least among the millions of small businesses that aren’t yet convinced, it may in fact be a long and winding road. Don’t throw away your leather wallets just yet.

Cash may no longer be King, but…

Cash may no longer be King, but…
Lest there be any thought about cash going away, use of cash in the US continues to increase despite the rapid growth in the use of electronic payments. The Federal Reserve reports the dollar amount of currency in circulation has grown 88% in the past 10 years to US$770 billion in 2007 and US$889 billion in late 2008. Meanwhile, the amount of cash ordered and deposited through Federal Reserve Banks has increased 75%, to over 27 billion banknotes annually. This trend may seem reasonable in light of the US economic and population growth over the period. For perspective, per capita cash in circulation grew from US$183 in 1985 to US$2,537 in 2005 based on US Bureau of Census population estimates, or at a rate of 6% CAGR – well above the 4.2% inflation over the period. Cash usage is growing – absolutely. Meanwhile, cash usage at traditional point of sale locations has been remarkably steady alongside the dramatic growth in debit card usage. As a percentage of POS mix, cash declined from 39% in 1999 to 29% in 2008 according to recurring research by Hitachi Consulting. The data suggests debit card growth has primarily come at the expense of check usage at point of sale which has dropped from 18% to 8% over the period. There appear to be two dynamics at work. The first is our stubborn affinity for cash payments. Immigration trends as well as grey market economic activity also contribute to the sustaining popularity of cash payments for obvious reasons. Another factor has been the worsening economic conditions of late. 2008 has seen a return to an 8% CAGR of cash in circulation. The fourth quarter alone witnessed a 5.4% growth corresponding to US$45 billion in additional cash in circulation. This suggests the worsening recession impacted holiday spending, reversing the long-term trend favoring credit and debit card usage at point-of-sale. On top of that, there is clear evidence of cash hoarding as seen by the significant rise in the number of high value notes in circulation. Celent expects cash in circulation to peak in the next two years. So in addition to investments in alternative payment mechanisms, Celent encourages banks to revisit their cash logistics management systems. In many banks, there may be significant opportunity for cost savings. On the product side, a growing number of banks are being rewarded for their support of remote cash capture solutions. Remote cash capture will be the topic of a forthcoming Celent report.