Cash is still king, but for how long? Prehistoric man used shells as proto-money, coins were introduced in modern-day Turkey from around 600BC and notes may have been used in China from as early as c800AD. Total cash in circulation at end-17 was US$37tn, equivalent to over 40% of global GDP, or cUS$5k per capita. Over 80% of transactions globally are still conducted in cash.

What are cash’s big advantages? Key reasons for cash’s popularity include its ubiquity and universal acceptance, low transaction costs (typically one-third of a debit card, for example) and anonymity.

What is the problem with cash? For governments, the popularity of cash is a double-edged sword. Although they can control the absolute volume of cash in circulation, transactions cannot easily be tracked at a micro level, resulting in fiscal leakages. Meanwhile, for the private sector, cash entails costs in terms of security and fraud, and is not a productive asset.

What does this have to do with Covid-19? Cash has been shown to carry germs – coronaviruses can survive on paper for up to five days. To reduce transmission risks, governments, regulators and private sector businesses are encouraging individuals to avoid cash transactions. But, with large swathes of the globe now in lockdown, an alternative medium of exchange has become necessary to stop the wheels of commerce grinding to a complete halt. Electronic payments seem poised for sharp growth.

What are we seeing on the ground? The experience in the Nordic region shows whole economies can be weaned off cash. In Kenya, Rwanda and Pakistan, central banks have lowered fees on mobile payments/electronic banking to help reduce cash usage. Earlier this year, Malaysia’s central bank tried to limit individual physical cash transactions to US$6,000, while the government is at the same time promoting digital payments initiatives.

Which EM economies could benefit most from the end of cash’s reign? We think markets with high levels of digital infrastructure are most able to sustain a switch away from cash. Markets with anomalously high levels of cash usage include Pakistan, Morocco and Russia.

How can banks benefit from this cashless trend? We see two primary routes:

1. Operating costs can be reduced; cash handling consumes up to 10% of a bank’s cost base. A switch away from cash should also allow banks to reduce their branch networks – this is already happening in several EMs like Malaysia and Nigeria. 
2. Electronic payments can be a valuable revenue generator, as seen in Kenya and Nigeria, for example.

How best to invest in this theme? Names within our coverage universe that are geared to the rise of non-cash transactions include Equity (Kenya) and BRAC (Bangladesh) within the banks space, Safaricom, Sonatel in telcos and Qiwi and Jumia in the technology space. Other relevant listed names include Alibaba, Cassava Smartech, GetBucks, Fawry, Mercado Libre, MTN Ghana, Tencent, Vodafone Tanzania.

Nordic countries have kicked cash to one side

In the Nordic region, cash is no longer the preferred medium of exchange for most transactions. In Sweden, card payments are 10x times more common than cash transactions. Moreover, this shift away from cash has been both relatively recent and quite rapid.

We believe this transition could take place even more rapidly in some emerging countries, given the impetus created by the coronavirus crisis, but also as a result of higher implicit costs of carrying cash inventory (security, lost interest income, devaluation risk).

We note that cash utilisation levels in many frontier and emerging markets are relatively high. However, the increasing popularity of mobile phone-based payment platforms has reduced levels of cash utilisation in several African economies.

Figure 1: Sweden cash usage

Source: Sveriges Riksbank. Note: The figure shows the proportion of those who paid for their most recent purchase in cash.

Figure 2: Ratio of currency in circulation/GDP

Source: Sveriges Riksbank, Tellimer Research

Pakistan, Morocco, Russia seem to have significant scope to reduce their cash usage

Figure 3 presents on the y-axis the level of cash usage in an economy (measured as cash in circulation as a percentage of M2 money – which is itself defined as cash penetration). On the x-axis, we have compiled a digital infrastructure score for each economy (based on mobile subscribers and internet users).

Our view is that countries with more developed digital infrastructure should be better placed to switch from cash-based to digital payments transactions. On this basis, Pakistan, Morocco and Russia appear to be outliers, as their cash usage levels appear to be unusually high.

With coronavirus-combating lockdowns likely to spur the growth of electronic payments, these three economies could see the biggest transition in their cash utilisation levels.

Figure 3: Currency in circulation/M2 ratio (y-axis) versus digital infrastructure score (x-axis)

Source: Tellimer Research. Note: Digital infrastructure is calculated using mobile subscribers and internet users in each market.

Implications for EM banks

We see two key benefits for EM banks from greater adoption of electronic payment methods.

1. Lower operating costs. Cash handling costs can account for up to 10% of a typical bank’s total operating costs. In addition, cash utilisation has other more profound cost implications, such as greater branch footfall, and ATM network costs. Lower cash utilisation can therefore help banks keep their overall infrastructure costs down.

Figure 4: Nigeria ATMs and branch network

Source: World Bank

Figure 5: Malaysia ATMs and branch network

Source: World Bank

2. Increased fee income. Banks have shown that they are able to benefit from the increased volume and convenience of electronic transactions via improved fee income generation. In Nigeria, e-banking fees have grown from 8% of the overall fee pool in 2014 to 21% in 2019. In Kenya, greater volumes of mobile phone-initiated transactions have not only boosted fee income, but have also helped contribute to better cost efficiency in an environment that, until recently, has suffered from both low loan growth and loan price restrictions.

Figure 6: Nigeria banks non-interest income split

Source: Company accounts, Tellimer Research. Note: Sample based on Access, UBA, GTB, Fidelity, Stanbic, Zenith.

Figure 7: Kenya banks transaction mix

Source: Tellimer Research. Note: Sample based on Co-op, KCB, Equity.

Appendix 1: Digital banking leaders by market

Based on our qualitative assessments in various markets, we highlight below the listed banks that we believe are ahead of their local peers on digital banking.

Figure 8: Selected digital banking leaders

Source: Tellimer Research

Appendix 2: Digital infrastructure score

In Figure 9, below, we present the underlying metrics used to arrive at our digital infrastructure score.

Figure 9: Digital infrastructure score inputs

Source: World Bank, Internet World Stats, Tellimer Research

Acknowledgements

We would like to thank the following analysts for their assistance with this report:

Tellimer: Nkemdilim Nwadialor, Faith Mwangi

Alfa: Evgeniy Kipnis

CMA: Alejo Rodríguez Cacio

Others: Paul Domjan