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Is hard cash on its way out in South Africa?

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As the world shifts towards cashless payment methods, South Africa is gradually moving away from cash against a social and economic backdrop of inequality and slow economic growth.

Research done by MPhil in Futures Studies graduate of the University of Stellenbosch Business School (USB), Diana Bresendale found clear benefits of moving to a cashless society, but it could generate and emphasise new uncertainties. “It is the lowest income earners that show the highest incidence of cash usage and therefore bear the burden of hidden and unhidden costs more frequently,” she cautions.

The intended cashless society will be implemented in South Africa by 2030 and is supported by recent planning and implementation strategies by the Payments Association of South Africa (PASA).

A cashless society uses plastic cards or digital transfers to make payments and eliminates physical cash from the economy. “It is clear that physical cash will be replaced by digital money but maintain its function and its value will continue to be determined through monetary policy. Digital money is more cost-effective than physical cash and these savings can be passed on to individuals and businesses,” she says.

“Cash is not only costly but constrains economic growth when compared to more efficient non-cash forms of payment. The economic benefits of going cashless are emphasised but the value proposition of non-cash alternatives has not inspired mass adoption in South Africa.”

Bresendale says furthermore, there are costs and access issues associated with digital money which have not been sufficiently mitigated. “The longer that it takes to disperse non-cash payment methods, the longer these benefits will take to be realised. There are outstanding questions regarding universal digital access for South Africans, consequences of having money available in digital format only and prevailing monetary policy which will determine its value,” she says.

During her research, she did a detailed analysis of the contextual environment and established that a cashless society in South Africa could aggravate the socio-economic ills we are trying to solve. “Rationality is required when evaluating the merits of moving to a cashless society. Reducing the payments menu by excluding cash limits choice for citizens who rely on it as their preferred form of payment. As an example, the informal sector, which forms such an important part of South Africa’s economy, stands to be left out in the cold,” she says.

Informal traders hesitant to adopt cashless payments

Bresendale says the informal sector relies on cash as a means of payment, and as evidence, it is the only means of payment they accept. “The informal sector is underbanked and their use of financial instruments to grow their business or enhance their cash flow is underutilised.”

According to a Stats SA report, there are 1.8 million South Africans operating as informal traders. In terms of payment methods, eight out of ten traders had no bank account and 60% of those who did possess one, only used it to process payments.

“Since cash is still a mainstay of payment tender in South Africa it indicates that both consumers and informal merchants are cautious to adopt cashless forms of payment. The challenge with the uptake of cashless payment methods will be addressing perceptions, especially around cost, to induce a natural gravitation towards cashless payment methods,” she says.

How technology can help convert the unbanked

Bresendale says according to reports, the current number of South Africans who are unbanked (those without bank accounts) or underbanked (those with bank accounts but who rely on cash or non-formal financial institutions) is reportedly 11 million – which constitutes 18% of the population.

“Banking services are competitive and their profitability is highly dependent on high transaction volumes. The high costs involved in servicing the low-income earners, small entrepreneurs and the poor made it an unappealing segment of the market for the established banks.”

She says Capitec Bank’s success in growing its customer base is attributed to offering a product that is simple and easily understood across all consumer segments. “Their strategy and business model is underpinned by the use of technology to simplify customer-facing processes, improve customer experiences and to lower costs.”

She says that with clear indications of consumer preference and the pervasiveness of cell phones throughout South Africa, mobile payments are expected to be a highly used payment alternative in a cashless society.

“The growth and support of M-Pesa (a mobile phone-based money transfer service, payments and micro-financing service) highlight the potential influence that mobile-based payments are likely to have in South Africa. The speed at which South Africa can realise economic growth will depend on how quickly payment alternatives are diffused,” she says.