NB Financial Innovation
Why the Crusade Against Cash Isn’t Clearly ‘Pro-Poor’ – UPDATED
EDITOR’S NOTE: This post has been updated with information submitted by the Better Than Cash Alliance, below, clarifying the characterization of their organization.
Digital financial inclusion and mobile payments are at the forefront of financial inclusion. The promise of reaching many more people at low cost fuels hopes that new, cashless approaches will overcome the costs and constraints of more “traditional” brick-and-mortar, cash-based financial services.
The present hype around digital financial inclusion connects with what sociologist Bill Maurer calls an ongoing “troubling” of the status quo around money in society. Payment systems based on sovereign currency are under attack from all sides, from Apple Pay and PayPal to multitudes of local currencies and proposals for “sovereign money” (soon to be voted on in Switzerland). Kenneth Rogoff’s new book – with characteristic lack of nuance – even diagnoses the world to be suffering from a “curse of cash” which cripples monetary policy and feeds tax evasion, corruption, terrorism, drugs and human trafficking.
Digital innovations may well inevitably change the face of microfinance – “Fintech or Die.” But would getting rid of cash in the name of financial inclusion unequivocally be a good thing for the poor? Digital financial inclusion aficionados often highlight three benefits for developing countries going “cashless”: it’s cheaper, it’s more transparent and it’s cleaner. But the full story, as I argue in a recent paper, “Card Crusaders, Cash Infidels and the Holy Grails of Financial Inclusion,” is complex and ambivalent. It’s not clear whether the poor really stand to benefit.
Crusaders against cash and their three holy grails
The digital crusaders seek three holy grails: 1) lower transaction costs relative to cash-based systems; 2) greater transparency to monitor the poor better; and 3) to tackle corruption, graft and crime. However, it’s a bit like in “Indiana Jones and the Last Crusade,” where not everyone seeking the holy grail has pure motives; some want to seize the benefits for themselves, and finding the grail won’t necessarily end well.
First, digital payments are actually not cheap at all, let alone free. Instead, they promise to shift a vexing cost burden from the financial industry onto the users of money. Cash may be expensive for financial institutions to handle, but it’s free for the users to use. Digital transactions, on the other hand, can be milked for revenue. Credit card transactions incur an average 1.76 percent fee, paid by the merchant and (while often hidden) ultimately passed on to the consumer. And the fees charged on mobile monies in Africa are often far higher, with M-Pesa in Kenya charging as much as 43 cents on the dollar for the smallest transactions. As a recent report commissioned by Visa discussed, micro and small merchants in developing countries represent a vast frontier: They transact over $6.5 trillion a year, which the report estimated could be tapped for around $35 billion in fees.
Second, when poor people buy things or send money digitally, this can be used to cast a glaring spotlight onto their economic lives. Weaker data-protection laws and less traditional concern over privacy infringement make the “big data” of the poor in the Global South a potential treasure trove for payment providers, the broader financial industry, governments and, lastly, the behavioural economics profession. But as former hedge fund quant Cathy O’Neil’s recent book warns: “Big data increases inequality and threatens democracy.” Systematically monitoring poor people’s transactions treads a fine ethical line, and those who wield the tools and make the rules can shape the outcomes toward empowerment or disempowerment. Will the data be used to improve services and have greater positive impact? Or will “libertarian paternalists” exert new forms of observation and discipline, and perhaps even cut the “undeserving poor” off from finance and social assistance altogether?
Third, digital transactions may be bacteriologically cleaner than cash, but they are not always as clean morally as the anti-cash crusaders would suggest. The global Financial Action Task Force worries that digital financial inclusion could complicate anti-money-laundering and anti-terrorism-financing efforts. And, unless one believes that the ill-gotten wealth documented in the Panama Papers arrived there by boat, cash clearly isn’t the culprit behind many societal ills related to finance. True, benevolent governments could use cashless payment systems to hunt down corrupt petty officials, from which poor people would benefit. But less-benevolent governments could also use compulsory cashless payments to tax or illegalise the informal economy in which many poor people earn their living.
The new hype around digital monies
While digital crusaders often portray the shift of money from cash to cards as natural or inevitable, behind the scenes the “fintech-philanthropy-development complex” is hard at work to make sure it happens. The Indian government’s recent “demonetisation” (analysed in this new book) is part of the broader crusade, as are the lobbying efforts of the opaque Better Than Cash Alliance*, which consists of a few large banks and payment systems providers and a handful of large philanthropy organisations. It publishes toolkits, case studies and reports to “accelerate” the “transition from cash to digital payments,” but it doesn’t publicly disclose its funders, leadership or governance. Of course, none of this means that going digital and cashless is harmful, and just because someone hopes to profit, or wants to keep some privacy, they won’t necessarily do bad things. But we should look closer at who has access to relevant decision-making processes around the future shape of money.
The digital financial inclusion hype comes with many of the same trappings as the microcredit mania of the early 2000s, including:
- an aura of impending revolutionary change – “this will change everything”
- ambitious sales/outreach targets – “in the next decade everyone will/must have access”
- universal benefit – everyone will gain, in many ways, especially women and the most marginal, and
- an ambiguous amalgam of financial and philanthropic interests.
Ruth Goodwin Groen, managing director of the Better Than Cash Alliance, showcases the hype well: “If you want to make sure women are participating in the economy and have economic opportunities, one way to do it is by digitizing payments. Women in informal businesses not only increase their economic opportunity by digitizing payments, but it helps them move their business to formality.”
She would probably be hard-pressed to furnish solid evidence for the claim that women benefit disproportionately from digital payments; but also, looking more closely, the promises turn out to be vague and tenuous. What matters is that these statements falsely suggest that a miracle cure for poverty and disempowerment has recently been found. Remember the microcredit hype? The card crusaders show signs of the same epistemic closure and “groupthink” as used to be at work in microfinance.
Private money or democratic money?
In my “Card Crusaders” paper, I advise for critically questioning the hype around digital financial inclusion, and checking how plausible the narrative linking cashless payments to pro-poor development really is. More broadly, as Maurer writes, this is also about recognising the questions that the push for digital money raises about the “democracy” of money, and its “publicness”: “Something else is afoot here. And that something is a focus on generating revenue from the privatization of the means of value transfer.” So while digital, cashless systems may look like a technical fix for including the “next billion,” there’s more at stake.
Clearly, as money moves into the digital age we can’t turn back the clock, but neither should we naively allow those who have a particularistic interest in new monetary forms to set it to whatever time they want. This is particularly important given the increasing pressure on governments to cull cash, and hurry up the digital turn by “demonetising.”
Let’s be realistic: If the mission really is poverty alleviation, it’s not money’s physical form, but how it is distributed, that matters. Digitalising currency and abolishing cash, however, will be regressive if poor people are forced to pay for everyday transactions, are subjected to more observation and discipline, or could even find their livelihoods criminalised. Meanwhile, cash might have insufficiently recognised advantages, including being free to use, anonymous and under public stewardship. It’s time for a conversation whose parameters aren’t strictly “cashless.”
* EDITOR’S NOTE: Better Than Cash Alliance responded to this post by pointing out that its alliance is a global partnership of over 50 governments, companies and international organizations, which are listed on its website. The organization says its governance structure is publicly available here, its funders (described as “resource partners”) are listed here and its entire membership can be found here.
Phil Mader is a research fellow at the Institute of Development Studies in Brighton.
Photo courtesy of Wikimedia