October 20, 2015
LTP has been at the forefront of putting a spotlight on the #Cashless conversation. Mehul Desai’s new book, August of Money - The Quest for Cashless Society, was recently published by LTP Studio.
In this article we will try to understand, in brief and pragmatically, how a society can move towards the predominant use of credit and debit cards instead of cash and we will see in practice two possible strategies to achieve that.
First, let’s take a step back: Why is it so beneficial for a society to become cashless?
An increased use of credit cards instead of cash would primarily enable a more detailed record of all the transactions which take place in the society, allowing more transparency in business operations and money transfers. This will eventually have the following chain effect:
1. Improvement in credit access and financial inclusion, which will benefit the growth of SMEs in the medium/long run. (A bigger impact will be recorded among developing countries.)
2. Reduce tax avoidance and money laundering thanks to the higher traceability of all the transactions.
3. The increased use of credit cards will definitely reduce the amount of cash that people will carry and as a consequence, reduce the risk and the cost associated with that.
In theory, these are all great advantages, but in order to achieve a concrete application, several meticulous steps must be taken, also considering the different internal dynamics of each society.
Strategy 1: Abolishment of government fees on credit card transactions; reduction of interchange fee on card transactions; increase in taxes on ATM withdrawals.
The combination of these three remedies will hopefully have a chain reaction that can be explained as follows:
1. The reduction in bank fees, will bring retailers to delete or reduce the minimum payment for card use
2. The abolishment of the minimum payment threshold will generate savings that will be split among retailers and customers
3. The savings will increase the disposable income and therefore, consumption
The Irish government is moving in this direction and has already proposed some of these measures, which will be converted into law at the beginning of 2016.
Experts claim that these practices will save retailers 36 million euros a year and that a major shift towards payment by debit cards, smartphones and online transfers could save the economy one billion euros a year.
Strategy 2: Tax rebates for consumers and for merchants who adopt electronic payments.
The strategy will be executed by leveraging both the consumer and merchant sides:
How to stimulate the use of electronic payments leveraging the consumer side:
1. Through an income tax rebate determined as a percentage of all the expenses paid by credit and debit cards.
2. Remove convenience fee, service charge, surcharge for card payments at petrol pumps, gas agencies and for railway tickets.
How to stimulate the use of electronic payments leveraging the merchant side:
1. An income tax rebate could be extended to a merchant if a certain percentage of the value of their transactions is through electronic means.
2. A percentage reduction in the VAT could be considered on all credit and debit card transactions made by merchants.
Some of these remedies have been proposed by the Reserve Bank of India and other stakeholders, banks, card service providers and mobile service providers, and there is the chance that we will see something in action from the end of 2016.
Of course, every regulatory jurisdiction is different when it comes to payments interchange and incentives. Some economies are clearly advanced in their march towards cashless, yet the stakeholders are not all happy. On the other hand, as we highlight above, certain other emerging economies still need to take determined steps on the cashless journey.