Friday, January 21

Is cash going out in South Africa?


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

My research finds clear benefits of moving to a cashless society, but it could create and emphasize new uncertainties. It is the people with the lowest incomes who show the highest incidence of cash use and therefore bear the burden of hidden and non-hidden costs most often.

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The envisioned cashless partnership will be rolled out in South Africa by 2030 and is supported by recent planning and implementation strategies from the South African Payments Association (Pasa).

A cashless society uses plastic cards or digital transfers to make payments and removes physical cash from the economy. It is clear that physical cash will be replaced by digital money but it will retain its function and its value will continue to be determined through monetary policy. Digital money is more profitable than physical cash and these savings can be transferred to individuals and businesses.

Not only is cash expensive, it limits economic growth compared to more efficient non-cash forms of payment. The economic benefits of not using cash are emphasized, but the value proposition of non-monetary alternatives has not inspired mass adoption in South Africa.

Additionally, there are costs and access issues associated with digital money that have not been sufficiently mitigated. The longer it takes for non-cash payment methods to spread, the longer it will take for these benefits to be realized. There are outstanding questions regarding universal digital access for South Africans, the consequences of having money available only in digital form, and the prevailing monetary policy that will determine its value.

During my research, I did a detailed analysis of the contextual environment and established that a cashless society in South Africa could exacerbate the socio-economic ills we are trying to solve. Rationality is required when evaluating the merits of moving to a cashless society. Reduce the menu of payments by excluding the option of cash limits for citizens who rely on it as their preferred form of payment. For example, the informal sector, which forms such an important part of the South African economy, will be left out.

Informal merchants hesitate to adopt cashless payments

The informal sector relies on cash as a means of payment and, as proof, it is the only means of payment they accept. The informal sector is underbanked and its use of financial instruments to grow its business or improve its cash flow is underutilized.

According to a report by Stats SA, there are 1.8 million South Africans who operate as informal traders. In terms of payment methods, eight out of ten merchants did not have a bank account and 60% of those who did, only used it to process payments.

As cash continues to be a mainstay of payment tenders in South Africa, it indicates that both consumers and informal traders are wary of adopting cashless forms of payment. The challenge with adopting cashless payment methods will be addressing perceptions, especially around cost, to induce a natural gravitation towards cashless payment methods.

The current number of South Africans who are unbanked (those without bank accounts) or unbanked (those who have bank accounts but rely on cash or non-formal financial institutions) is reported to be around today. 11 million, which constitutes 18% of the population. .

Banking services are competitive and their profitability depends largely on a high volume of transactions. The high costs involved in serving low-income people, small entrepreneurs, and the poor made it an unattractive market segment for established banks.

Capitec Bank’s success in growing its customer base is attributed to offering a product that is simple and easy to understand across all consumer segments. Its strategy and business model is based on the use of technology to simplify customer-facing processes, improve the customer experience and reduce costs.

With clear indications of consumer preference and the ubiquity of mobile phones throughout South Africa, mobile payments are expected to be a widely used payment alternative in a cashless society.

The growth and support of M-Pesa (a mobile phone-based microfinance, payment and money transfer service) highlights the potential influence mobile-based payments are likely to have in South Africa. The speed at which South Africa can achieve economic growth will depend on how quickly payment alternatives spread.

Diana Bresendale MPhil in Future Studies graduated from the University of Stellenbosch Business School (USB).


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