Sunday, July 09, 2006

CashCards and Cash

Soon there will be a new stored-value card that will combine the features of the existing CashCard, used now mostly in cars, and the EZ-Link card, used now in buses and trains. The new card is expected to be introduced shortly and to be used widely by 2010.

Its advent is being sold by its creators, and reported in the media as a (wholly) positive development. The proclaimed benefits include being able to pay for public transport and burgers – and other retail items – with just one card, instead of two now. Development towards this cashless environment will include “upgrading” card readers and devices such as those in retail outlets, in MRT stations, in vehicles and in relevant toll-gantries.

Other touted benefits of the new convenience include a boost in consumer spending, with the Infocomm Development Authority of Singapore (IDA) saying that it will raise e-payments from $25 billion to $50 billion by 2010. The IDA quoted a Visa study that suggested that a 10 per cent rise in e-payments could grow GDP by 0.5 per cent. What more, the new cards will use a locally developed e-payment standard which could be adopted internationally.

CashCards and e-payments in general are promoted in Singapore and there is rarely a critical look at them. So I will try to address the imbalance a little bit here by raising a few questions.

CashCards are part of a wider, more modern, system of concluding money transactions without cash. The wider system includes card readers, payment kiosks and the Internet as a means to transfer funds. The card’s place in the system is as an electronic wallet in which money-value is stored and then used for payments. It is different from the ATM card, with which you can access funds from your bank at the point and time of payment.

Electronic payments in general – whether with a CashCard, payment kiosk or through the Internet ­– are indeed convenient and beneficial. Cash has a cost to manufacture and maintain and, in Singapore, it is expected to top $1.1 billion by 2008. This cost is a main driver behind the country’s effort to reduce the use of cash. See this IDA page for a summary, and Pg 147 of this OECD paper for details, some of which I believe have not been reported in detail.

A discussion of the pros and cons of going totally cashless, with references to Singapore, can be found in this academic paper, which raises interesting points about privacy in a cashless society. The paper leans slightly towards e-money; however any electronic system that replaces cash will also have development, manufacturing and maintenance costs, even if it turns out to be cheaper than using cash.

The clear long-run benefit, I believe, is savings in human resources as businesses cut down on manpower involved in payment transactions. For example, with Electronic Road Pricing, it has become unnecessary to have staff to sell Restricted Zone coupons for entry into the city area, and officers stationed at RZ entry points to enforce the display of the coupons.

In general with e-payment ­– with the Internet, for instance – human cashiers have disappeared and with them, the costs of employing them. This is where the first question crops up: How much, if any, of the savings have been passed on to consumers? How will consumers benefit as we go more cashless?

The clearest case I can think of where savings have, indeed, been passed on is with Internet bookings. Airlines and hotels, for instance, often charge less for online bookings. But back to the CashCard. Are any savings being passed on to them?

I don’t remember ERP being adjusted to account for manpower savings when it was introduced; or parking charges being lowered at carparks where e-payment has replaced cashiers. If ERP is more expensive (less efficient) to run, why implement it?

A second question is who's paying for the e-wallets, and who'll pay in future. Unlike cash, for which the State picks up the manufacturing and maintenance bill, CashCards require deposits from their Users.

According to the report on the new card in The Straits Times, Singapore now has about 15 million cards. A $2 deposit for each card would mean $30 million held by those who issue them. It is not clear how this benefits the consumer. However it does look like the cosumer having to “buy” his cash – or at least the e-wallet – from private parties where he once got it “free”.

The third question is more about why the technology took a turn towards stored-value when it could have (I'm assuming there's no rocket science involved) been "value-on-demand" the way ATM cards are.

The fact that the CashCard is a stored-value wallet, in which funds must be withdrawn from the bank in advance of use, is a disadvantage to consumers. This is because they lose on interest the minute the funds are transferred to the card, just as when cash is withdrawn. Consumers would be better off with an ATM-like card, which draws on funds only as and when needed.

However, there is hope on this front because the BCCS intends (see the OECD paper) to pay interest on unused amounts in e-wallets. Let's wait and see.


At 5:56 pm GMT+8, Anonymous billy teo said...

Hi Geoff,

there is no easy way to say this, but my gut feel is that it's the card issuing corporations that benefit.

From firstly, charging deposits for issuing the card in the first place, and secondly, getting a fresh transfer of money upfront from commuters and consumers each time they add value to the card.

I read somewhere that the money collected in advance, is stored in some investment account. So issuing a cash card, EZ-link card or any form of stored value card is hardly a money-losing proposition.

Maybe the Money pages folks should do a feature looking at this.

Anyway, there is such a feature called Giro auto-transfer of funds to your EZ-Link card.But again, this is activated only to top up value to the card when a minimum threshold (say, only $2 remaining) is reached, not on a per transaction basis.

My guess is, the banks will charge the issuing authority to process every transaction made by the typical consumer passing through the fare gates...and hence, eat into their profits.

One more point: For the EZ Link card (as with the previous magnetic farecard system), commuters do get transfer rebates when you switch from train to bus (and vice versa) or bus to bus -- 25 cents transfer, as I recall.

But on the whole, you are right about consumers not benefiting from the cashless payment options. The NLB, for example, mandates that you use a cashcard to pay for fines and book reservations, but no perks are given for being forced to use the cash card.

I apologise if I have droned on too long.....


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