With electronic payment growth accelerating, you might be forgiven for thinking the end of physical instruments is upon us. So why does a payments industry veteran still carry cash?

A Fistful Of Dollars?

Before Christmas, a former colleague and I were discussing the pace of change in the world of payments. He mentioned that he’d recently asked a group of friends, from the payments industry, how much cash they carried. Unsurprisingly, for most, the answer was only a few dollars, maybe twenty at most. When asked for his response, he said he tended to carry about $200 or as he put it “a grocery shop’s worth”. His reason for this was: “Just in case.”

Our reliance on electronic payments has continued to grow – the use of debit cards is accelerating exponentially, credit card and bulk (direct entry) continue to grow at a steady rate and New Payments Platform (NPP) payments are now gaining momentum. At the same time, the use of physical payment instruments, such as cash and cheque, has dropped significantly with cheque usage reducing by 88% since 2002 and ATM withdrawals declining by over 30% since they peaked in Jan 2009.

So why does an industry veteran and payments expert decide to buck the trend and still carry cash? Just in case of what?

The vast majority of payments involve the interaction of at least two banks and a range of intermediaries to support a transfer of value, for example:

  • telco providers such as Telstra and Optus,
  • payment scheme providers like BPay, SWIFT, Visa and Mastercard,
  • technology companies providing hardware, software and services.

For any individual transaction to work successfully, let alone the 40 million transactions that typically go through the system every day, there must be payments orchestration across thousands of different software applications, running on a multitude of different hardware configurations in different organisations. All of these individual components are susceptible to failure and, as we see regularly in the news, fail they do. And what finds its way into mainstream media is typically only the tip of the iceberg, with armies of tech and ops people spending countless hours trying to steer the payments Titanic away from disaster.

Because it takes two (plus quite a few more) to tango in a payments context, an outage at one payments provider doesn’t just affect the customers of that specific institution. Customers of all the other payments providers may well be impacted as there’s a very good chance that the outage will affect receiving payments from or sending payments to other institutions.

The number of payments delayed by outages, as a proportion of the total, is relatively small but the impact is very real for anyone:

  • left stranded at the petrol station,
  • faced with leaving a store without a basketful of groceries,
  • contemplating washing restaurant dishes, or
  • unable to withdraw cash from the only available ATM and a branch not open until Monday.

For corporates and small businesses, facing the wrath of an antagonised workforce because salaries and wages haven’t gone through, angry exporters desperately waiting to receive their overseas transfers, or something as simple as not being able to see balance and transaction reporting for reconciliations, the impost and imposed workload is very great indeed.

What makes it worse, in many ways, is the lack of transparency around performance. There are no published industry statistics on the failure rate for specific transaction types, nor how long it takes to recover – simple statistics like Mean Time to Fail and Mean Time to Recover are incredibly powerful drivers of behaviour when they are made visible. Customers’ expectations are being set by the tech giants and having a Return Time Objective of 4 hours for critical assets, when customers are used to transacting other aspects of their life in real time, no longer seems to hit the mark.

The reason for the outages and time to recover is typically put down to “complexity”. The electronic payments ecosystem has evolved over many decades, without a grand “master” plan. If you built a national payments ecosystem from scratch today it would be nowhere near as complex as what we have. Unfortunately, starting from scratch is unrealistic and what we do need is a comprehensive master plan to renovate, modernise and simplify the architecture for the ecosystem over the next decade. This will not be easy and will be expensive (at a time when the banks have other, perhaps more pressing demands on their capital expenditure.) But we can start by setting out a roadmap of how many clearing streams we should have, what expectations we should set for consumers around uptime, what the consequences of not meeting those expectations are, and clearly identifying who is accountable for payments as a piece of critical infrastructure that is very much in the national interest.

This will take time to implement, so in the meantime here’s what individuals can do:

  • Carry a “grocery shop’s worth”, “petrol tank’s worth” or a “restaurant bill’s worth” of cash with you just in case the system fails at precisely the wrong time for you.
  • Carry cards issued by different institutions and different schemes e.g. Visa card from Bank A, Mastercard from Bank B.
  • Carry a couple of personal cheques with you – not all outlets accept personal cheques but faced with the prospect of nothing or running the risk of a bounced cheque, the cheque risk is probably worth it.
  • For corporates, many large organisations multi-bank, so the risk can be mitigated but there’s still a real need for active treasury risk management to ensure there are sufficient funds accessible in the “available” account.
  • For small businesses, operating too many accounts across multiple institutions can present liquidity issues but separating personal and business can provide some cover.
  • For merchants, the old “click-clack” machine and flimsy merchant paper still have a role to play.

As with most things, the right approach comes down to good risk management:

  1. Think through the possible failure scenarios in terms of timing e.g. when you’re at the checkout, paying for petrol, booking tickets for a sell-out show or just about to send payroll or BAS through.
  2. For each scenario, ask yourself what you would do today if that happened and assess if it’s acceptable.
  3. If it’s not acceptable, identify and evaluate your options e.g. multi-bank, carry more cash etc.
  4. Put the plan into action and hope you never have to use it!

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