It’s time to leave cash behind

Even though trading and commerce have at least a hundred and fifty thousand year old history, cash has only existed for less than three thousand years. It’s expensive, dirty, and outdated.

More than two months of domestic product is lying around in the form of cash today in Hungary. It is not even just lying around, it is circulating – often through illegal channels and uncontrollable transactions. Not only does its volume not decrease, it has tripled over the past decade. We don’t normally think about this but the cost of production, storage, transfer, safekeeping and exchange of cash is horrendously high. According to a study conducted in the US last year, these costs can in fact be as high as 5-15 percent of the face value. By Hungarian experts’ estimate, the cost of the country’s 6000 billion HUF cash stock is approximately 450 billion HUF – not including the hundreds of billions of HUF of VAT, fees and other charges avoided on illegal transactions. But just how high are those numbers?

„A significant decrease of the cash-related expenses in the state budget could make space for lowering personal income tax to the much-desired 9% rate.”

 This exceptionally brave step for instance would cost 650 billion HUF and would bring Hungary a significant competitive advantage. Other than the costs and obvious safety and law enforcement reasons, there is another argument for ditching cash: hygiene. It is a bizarre but interesting fact that microbiologists were able to identify two dozens of pathogenic agents on the coins and banknotes that go through many unwashed hands, including the dreaded and arguably most dangerous hospital infection MRSA.

Since the adoption of Euro is not going to happen anytime soon, and the country’s economy is growing, this would be an ideal timing to start the ambitious digitalization of payment transactions. Similarly to how the state has already managed to power through numerous bigger and more unpopular challenges (e.g. e-tolls, electronic freight control system, electronically connecting cash registers and invoicing systems to IRS), it is time to take regulatory steps in the matter at hand. With the adoption of the EU directive on regulating financial services called PSD2 and the introduction of an immediate payment system (IMPS), banks are up or will soon be up for the challenge. The secure technology is available, and digital bankcard payments and carrier-billing payments have spread without any complications throughout the past decade. The Hungarian fintech scene is up for the challenge; its key players have studied the best practices from around the world, from North America to South-East Asia.

In 2014, Europe introduced new legislation and put a ceiling on bankcard transaction fees. This has driven merchant service fees down to half, or even third of what it used to be. Today, a large store pays less than one percent commission after bankcard transactions. New legislation could follow suit and could create new and exciting services for consumers, and affordable acquiring solutions for small businesses.

Lawmakers could support the process by introducing legislations prioritizing cashless transactions (ideally even making them mandatory) and repressing the use of cash by revealing its costly nature. Authorities could contribute by enforcing said legislations, and service providers by continuous innovation. The solution would be a mobile payment system all Hungarian businesses (even the smallest ones) can adopt, maybe even free of charge, and use with transparent and affordable fees.

Different, but standardized

„mobile applications could serve hundreds of thousands of businesses and millions of customers for cheaper, faster, simpler and more secure transactions than ever before”

all on a secure IT platform.

One would be able to make a payment straight from a bank account with one click, but it would be just as easy to apply for a loan or redeem customized benefits. Options are endless; financial and investment advisory services to help manage personal finances can be built on the foundation of data that can be obtained from analyzing the spending behavior of users.

China has already left the rest of the world behind in this field, and the United States is innovating (and entering trading war) to regain leadership. Developing countries in South-East Asia (out of necessity) and Scandinavians (with careful planning) are already preparing to leave cash and the traditional banking framework behind. If we make moves fast, Hungary can be the first in the region.

Dr. János Kóka, former Minister of Economy, fintech entrepreneur

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