Going Cashless at the Point of Sale

01 December 2008

Storing value electronically … sending value electronically … many people living in developed countries take these things for granted because making electronic transactions are part of everyday routines for them. After all, who would think twice about making a payment or getting cash from a debit or credit card?

Debit cards are indeed becoming a standard payment instrument for people with a savings account. Debit cards have achieved critical mass adoption in most developed countries. Their further spread is mostly limited at this point by three factors:

•The penetration of bank accounts among the population.
•The weak business case for deploying a sufficiently dense network of acceptance terminals (automated teller machines [ATMs] or point-of-sale [POS] devices) in environments with low economic activity or population density.
•The cost of communications underpinning the real-time authorization of payments, in markets with limited communications infrastructure or for very low-value transactions (for which the communications cost as a percentage of the transaction cost may be too high).

These are important limitations in many developing countries, where the spread of banking services and infrastructure is often restricted by socioeconomic stratum and geography. Even in developed countries, these limitations may create niche opportunities for alternative electronic payment (e-payment) schemes to exploit the gap between the informality of cash and the heavier communications infrastructure required for debit cards.

Yet, many initiatives that have sought to push the frontier of electronic money (e-money) and payment devices to drive out cash beyond debit cards have failed, because customers often are not convinced of the need or practicality of these systems. Europe tested the market for these services early on—and collected some high-profile failures in the process, from cash-substituting smartcards in the second half of the 1990s (Mondex, Proton) to interoperable mobile payment platforms in the early 2000s (Simpay, Mobipay).

The more developed markets in Asia—Japan, Hong Kong, Korea, Singapore, and Taiwan—have taken the lead in devising new schemes and are, in fact, meeting with some success. So against overwhelming failures in Europe, we can point to underwhelming successes in Asia.

There may be factors specific to Asia at play in explaining the more positive experience in Asia— customers’ fascination with new technology, the importance of conveying innovation in the branding strategy of mobile operators, the low penetration of credit cards. Some of the Asian formulas are now finding their way back to Europe. Hong Kong’s success with transit cards Octopus) is also proving its mettle in London (Oyster). Japanese and Korean operators (NTT DoCoMo [DCM] and SK Telecom, respectively) are slowly proving the benefits of mobile phones with very short-range communications technologies for use with in-person mobile payments, and many European operators are now anxiously awaiting the spread in Europe of phones with embedded NFC capabilities.

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