Can Singapore Become a Cashless Society?

By the SMU Social Media Team

Cash is still king in Singapore. Around 40 per cent of all transactions in Singapore involve cash, and cash in circulation in Singapore is approximately 10 per cent of the country’s total gross domestic product, as compared to just under two per cent in Sweden. This dominance of paper money, to the detriment of more modern methods of transacting, is a persistent drag on the economy.

“Cashless societies are the future,” says Hu Jianfeng, Assistant Professor of Finance at the SMU Lee Kong Chian School of Business. “Cash is essentially a credit certificate, backed up by the central bank, to facilitate transactions in an economy. Compared to advanced methods such as mobile payment, cash is much less efficient in transactions because it takes longer to verify, count and exchange. Cash also has costs in production and managing, and can be vulnerable to counterfeits.”

In some respects, Singapore seems to have several advantages in moving towards a cashless society. The country is small, highly connected with technology and has banks and a regulator that are early adopters of innovative technology. However, a number of different solutions are in the marketplace, with different merchants accepting different payment mechanisms. This can be confusing for consumers, Asst Prof Hu says, meaning that they revert to cash.

“To make a payment method prevail, it must be accepted by most merchants and service providers. In that sense, the payment industry is a natural monopoly industry where one or a few service providers meet the demand with highest efficiency,” he says.

“With multiple competitors in the same domain, consumers can be easily confused by what to use and this greatly increases transaction costs. On the other hand, the requirement of technology infrastructure, i.e. investment by service providers, is almost the same regardless of the size of customer base because settlement needs to be done in a timely fashion and tends to cluster around certain events and time periods.”

While Singapore has been slow to transition away from cash, China has surged ahead. The country made $16.7 trillion in mobile payment transactions in 2017, with QR codes linked to mobile wallets, now a common sight on the high street. Mobile payment businesses have evolved out of the major social media and e-commerce companies, and are now a significant part of the financial system.

Asst Prof Hu says that the rise of mobile payments in China is a by-product of those large tech companies’ rollout of other services. The two leading players are Alipay, which spun out of online marketplace Alibaba, and Wechat, which is predominantly a social media and communications business.

“Alibaba invested a lot in their databases and servers to handle surging visits and transactions during their annual double 11 promotions. With that computing power idling for the rest time of the year, it is natural for Alibaba to think of other ways to monetise it,” Asst Prof Hu says.

The absence of other payment methods for e-commerce, such as Visa and Mastercard, in China has also accelerated the creation of mobile payments.

“Wechat experienced a similar transition after attracting hundreds of millions of users. We saw similar phenomenon in the USA, where Amazon gradually shifted its business focus from e-commerce to cloud computing,” Asst Prof Hu says.

Singapore, as a far smaller market, is unlikely to take a similar path, according to Asst Prof Hu.

“Singapore does not have a large enough customer base to support new business models targeting retail customers and naturally benefits less from all the by-products and extensions as well,” he explains. “I don’t think the Chinese model, where a few industry players become natural oligopolies, can apply to Singapore.”

Moving to a cashless system does involve a great deal of investment in technology infrastructure by banks and merchants.

“First, one needs a powerful computing system to handle all transactions in a timely fashion. Customers will abandon a payment method that takes more than ten seconds to complete and in the mobile payment world, they are unlikely to give the same application a second chance after deleting. Because transactions tend to cluster (meal time, weekends, holidays, etc.), the technology investment is tremendous,” Asst Prof Hu suggests. “Second, the payment method should be accepted by enough merchants. One needs to offer a low-cost starting kit with competitive rates for commission. Fierce competition can be expected in markets where credit card companies and other alternative payment service providers already establish significant presence.”

The Monetary Authority of Singapore is keen to move the country towards more widespread adoption of cashless payments, and more generally to drive innovation in the financial system.

“In markets where natural monopoly does not happen naturally, or takes a long time to reach, the regulator can facilitate industry consolidation by issuing entry permits, setting industry standards, or unionising players to coordinate and share,” Asst Prof Hu says.

The regulator can also help to cushion the blow to those businesses and sectors that could be disadvantaged by the shift, he adds.

In the case of Singapore, the recent announcement that the PayNow transfer service will be expanded to include businesses, is a significant step forward in shifting business owners and Government agencies towards a wider adoption of cashless transactions.

However, Asst Prof Hu concedes that it is inevitable that there will be losers in the transition. “Ideally, the losers can be compensated by the regulator through transferred wealth from winners. At the new equilibrium, there can only be less financial exclusion than the current situation because technology has reduced the cost of financial service and made it easier to reach customers.”

The real risk, he warns, may come around how the new systems are governed. “Right now, it is the central bank, government, and industry associations that set rules in financial markets. One day, technology may have more say in this industry. Whether the ultimate control is left to the same regulators we face today, or we have to deal with another type of new regulator—and how the newcomers coordinate with the old ones, is a concern with no answer, to me.”