Is Cash Obsolete?

October 4, 2018

Is Cash Obsolete?

Shuji Kobayakawa
Associate Professor, School of Political Science and Economics,
Meiji University
 

FinTech refers to the synthesis of finance and technology delivering innovative financial services. It has attracted increasing attention in recent years. Cryptocurrency is one of the products developed by FinTech. In addition, FinTech drives the move toward cashless transactions in our daily life. The use of non-cash transactions and settlements has become increasingly popular in some economies around the world. By contrast, Japan seems to have been left behind by this global trend. It is important for us to deepen our knowledge in FinTech and further our financial literacy using basic cashless payment instruments.

Developing financial literacy

It was once believed naively that trading cryptocurrencies was lucrative business. Lured by this rumor, young people in particular rushed into cryptocurrency trading to earn profits in a short time period without understanding the technology behind cryptocurrencies. Despite a delay from saving to investment in Japan, recent adoption of new financial services driven by FinTech is a welcome development. Still, among the household financial assets in Japan, safe assets such as cash and deposits currently account for over 50%. Given the strong preference for safe financial assets among Japanese households, it is likely to take much longer than expected to create a society in which people are willing to invest in new opportunities and are motivated to try something new in their careers. Meanwhile, young enthusiasts and housewives are often lured by cryptocurrency trading or FX trading (foreign exchange margin trading) to make lucrative profits in a short period of time. Mrs. Watanabe has become a very popular term abroad, denoting an archetype of the average Japanese housewife who stays at home and acts as an active speculator on the forex market. Market participants abroad often wonder why average retail investors in Japan collectively known as Mrs. Watanabe rush into the highly-speculative money trading in the forex market. Average Japanese individual investors’ tendency to take one of two extreme approaches when it comes to taking risk in building assets; that is, either to invest in high-risk instruments or to accept excessively low returns on risk-free financial assets. They are unlikely to examine the trade-off between risk and return of their investment portfolio. For most of them, taking the middle risk when building assets by investing in vehicles such as investment trusts in a Nippon Individual Savings Account (NISA) has not become a part of their investment strategies. This naive approach in investment seems to be typical in Japan because basic financial literacy skills are lacking. We are currently in a transitional period, moving toward high value-added financial services to be delivered on the strength of new technologies. Given this situation, it is vital to deepen our understanding about financial services and the related instruments while keeping ourselves open to new ideas and developments.
Chinese vendors embracing cashless payments

In some countries around the world, financial innovations driven by FinTech have been embodied in the movement towards a cashless society. For example, China is moving quickly toward the cashless society with Alipay and WeChatPay becoming increasingly popular as cashless payment methods in the society. Alipay provides a contactless payment service with a QR code (two-dimensional code). WeChatPay is a mobile payment application using a messenger service. You can make a payment on the go by simply scanning a QR code on your smartphone when you go shopping or visit museums. This mobile payment application allows you to wire money to friends and complete transactions in a seamless manner. Users can hail a taxi or buy movie tickets and make payments with this mobile application. This means that consumers in China use a very convenient payment service without bothering to count money bills from their wallets when making a payment and to receive their change every time.

A similar movement to a cashless society is underway in South Korea and other countries in South East Asia, primarily because the ever-growing popularity of smartphones and internet among consumers has triggered efforts to provide new financial services on the web. For instance, people living outside the big cities in China have long been provided with only limited access to financial services and suffered inconvenience in life. To address this issue, expanding a network of commercial banks and ATMs across the country was once examined. But this plan required a huge budget and a significant amount of human resources; it was not ensured that the expected earnings would justify the cost associated with building the network. Meanwhile, smartphones have become popular in those remote areas in China with increasing access to internet. Consequently, a plan was adopted to provide payment services on smartphones. Financial inclusion has prevailed as the availability and equality of opportunities for individuals and businesses to access financial services spread. FinTech and IT vendors have joined and found the way to overcome the existing challenges. As a result, they have succeeded in moving things forward at once.
 

Movement to cashless society in Japan: services to “Wow!” customers

Unlike China, ATMs are ubiquitous in Japan, with on-line networks linking commercial banks and JP Bank across the country, and over 90% of Japanese own bank accounts. This sets the ground for Japanese consumers to be content with the existing payment services, providing weak motivation to achieve a cashless society. But the cashless services could improve customer convenience much more easily than the existing ones. In fact, Alipay and WeChatPay are both operated by IT companies in China. Making mobile settlements on a smartphone was a very unique idea based on insights provided by these IT companies. The new payment style could not have been developed by anyone else without IT expertise. In this sense, the new settlement services in pursuit of customer convenience with IT technologies have been developed by Alipay and WeChatPay only because they are not banks.

In Japan, e-money cards such as Suica and Pasmo are used to pay for train transportation and accepted at KIOSK as well as convenience stores inside and outside train stations. With more smartphone users having access to familiar and seamless mobile payments, the movement toward a cashless society may gather momentum very quickly in Japan. In that sense, the movement to standardize QR codes is noteworthy. The electronic terminals installed inside Japanese convenience stores offer a variety of payment services today. With QR code in use, shops do not have to install those terminals specific to respective payment services. This will help shops reduce their commission fees. Users can make payments by scanning QR codes on smartphones without taking money bills or credit cards out of their wallets. The all-in-one terminal will be beneficial to shopkeepers and consumers. When the new mobile payment system starts offering more seamless services in our daily life, the sense of convenience can be felt more easily when making payments. Cashless payments driven by FinTech will have great potential to bring “Wow!”, an excitement to end-users.

The movement to a cashless society is widespread not only in Asia but also in Europe. In Sweden, mobile payment (electronic settlement service on mobile terminals like smartphones) has been embedded in the society. Swedish citizens do not bother to carry money bills in their wallets. The Riksbank, the Swedish central bank, is investigating whether it would be possible to issue a digital complement to cash, an “e-krona”. The movement to a cashless society has become a global trend today. We should have a keen interest in a variety of initiatives underway with respect to cashless payment services.

Let’s start with basics of FinTech
FinTech is often regarded as part of the comprehensive financial reform initiatives driven by the latest technologies. But innovations are underway with respect to basic transaction services involving existing technologies, rather than merely paying attention to the latest technological developments. For example, blockchain is a distributed ledger technology currently under the spotlight as one of the tools supporting cryptocurrencies. With this technology applied to a variety of financial infrastructure, users may be able to achieve a significant reduction in commissions and management costs related to a variety of financial services. However, it is likely to take long time before the technology will be adopted to the sophisticated financial infrastructures currently in place. Above all, operators for those infrastructures must be fully prepared against a cyberattack. Accordingly, it will probably take longer to introduce this technology on a full scale while many central banks and financial institutions, based on their research and studies, agree that the technology has great potential. The consistent movement toward a cashless society involves established technologies in place, while responding to higher demands for user-friendliness.

Last but not least, it will be important to meet the customer demand in all circumstances. For example, Japan is often affected by natural disasters such as earthquakes and typhoons. In the event of a natural disaster stopping power supply and breaking down communication networks, people would find it difficult to survive the disaster in a cashless environment similar to the one in Sweden. Therefore, we must design an environment where physical money bills and e-money or digital currency will coexist. With this environment in place, users will be able to have diverse payment options and choose options that they prefer in life even in an environment moving toward a cashless society. This may create a sense of security and a highly convenient environment for Japanese. Another point of discussion is related to the process through which digitalization for campus life should be promoted. For example, an electronic wallet embedded with a digitalized student ID could be used as “MEIJIRO Coin” around the campus. This may help develop new services and tap new user demands. We should use Fin Tech pro-actively, rather than merely waiting for new services to start with Fin Tech. If we take this approach, our interest in the cashless society will grow. This will eventually improve our user convenience and help our efforts to build portfolios in the long run. That is where financial literacy will come into play, providing us with necessary knowledge and expertise.


* The information contained herein is current as of August 2018.
* The contents of articles on Meiji.net are based on the personal ideas and opinions of the author and do not indicate the official opinion of Meiji University.


Profile

Shuji Kobayakawa
Associate Professor, School of Political Science and Economics

Research fields:
Banking and finance, Microeconomics of banking

Research themes:
FinTech and the future of money

Main books and papers:
◆Project Stella: The European Central Bank and the Bank of Japan joint research project on distributed ledger technology) (Co-authorship, 2018)
◆Central Bank Digital Currencies (Co-authorship, 2018)
◆Distributed ledger in payments, clearing and settlement - an analytical framework (Co-authorship, 2017)
◆Monetary Policy after the Great Recession (Co-authorship, 2014)


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