De-Cashing: Desirable for Some, Feared by Others

De-Cashing

Desirable for some, Saunting for others.

“It would be better to target actions that use personal choices based on cost-effectiveness considerations without any anti-democratic suggestions to control people’s lives.” The marcoeconomics of decashing, IMF Working paper by Alexei Kireyev

We pay cash.

The idea of paying with a piece of paper rather than with a metal coin that holds its own value is very ancient, it probably appeared in China in the 7th century. But the invention of the modern banknote, as we still know it today, dates back to the 17th century and is credited to Sweden. Four centuries later, this same country may be on the verge of completely eliminating them, and with them, the very concept of physical currency.

As for Tunisians, they love cash. To better analyze the evolution of fiduciary circulation and the behavior of economic agents towards cash in Tunisia, this ratio has significantly evolved, from an average of 8.8% or 8.2% over the period 2005-2010 to 10.4% or 10.1% after 2011, while it was 8% or 7.7% during the period 2000-2004. It should be noted that the behavior of banknotes and coins in circulation (BMC) has experienced two exceptional variations: the first in 2011 when the BMC on average recorded a very significant growth of 1,231 MDT, representing an increase of 22.4% compared to 2010, following the repercussions of the revolution and the environment of instability and uncertainty that characterized the post-revolution period, and the second, in 2013, marked by a decrease of 253 MDT, reflecting a decrease of 3.4% compared to 2012, following the decision of the Central Bank of Tunisia to change certain banknote denominations.

This means that cash circulation is increasing faster than nominal GDP, probably reflecting a change in the behaviour of economic agents and reflecting a clear preference for the use of cash.

What are you allowed to do with your currency?

The volume of cash transactions is very difficult to determine, mainly because of its anonymity. According to estimates, in 20 EU countries, cash settlements account for more than 50% of all payment transactions and vary greatly from one Member State to another. In countries like Greece, Bulgaria and Romania, households pay almost exclusively in cash. In Denmark and Sweden, cards are the most used, while in Luxembourg, online shopping is the most widespread.

Today, in the name of the fight against corruption, illicit enrichment and terrorism, several countries dream of abolishing cash by adopting several measures.

Various European countries have set limits on the amount allowed to pay in cash as the flagship and most widespread measure.

In this context, the relevance of potential maximum cash payment limits could also be explored through the table below summarizing cash payment limits and ceilings in 27 EU Member States and Tunisia.

We have to innovate again.

Although these limits exist, cash is still the most accessible means of payment and in some Member States it is deeply embedded in the public image of individual freedom. A policy change is therefore a sensitive issue that would affect everyone.

It is for this reason that the time has come when nations must, or have thought of measures, certainly of a fiscal nature, but with a pure financial dimension including financial sophistication.

Today we are talking about Cryptocurrency, e-money and for what is left of it, we are radically changing our currency.

When your phone becomes your bank account

Mobile money services, a phenomenon that emerged just a few years ago, is one of the most crucial actions against cash payment. Today, as never before, countries must take advantage of the growing number of mobile phones in developing and developed countries, and the potential of the mobile platform to help meet the needs of individuals and small businesses is gaining momentum. 

«Mobile Money»; The term electronic money is used here in the broad sense to designate the sums of money stored in mobile phones using as identifier the SIM card of the phone, rather than an account number like traditional banking.

These sums of money are issued in virtual form by an entity (a mobile network operator, in this case) and are kept in an electronic account on the mobile phone SIM card, which is also used to transmit transfer or payment orders, while the cash counterpart is kept elsewhere, in a safe place, normally in a bank. The user can access the balance of his electronic account from his mobile phone, to instantly transmit transfer or payment orders.

Mobile money services offer new opportunities to better ensure access to financial services around the world and beyond. Unlike traditional banking and financial service providers, telephone operators have invested heavily in the creation of increasingly large networks, which penetrate deep into previously marginalized rural areas, to address the lack of financial inclusion and change the order of things.

Mobile money services can be divided into three broad categories:

a) Transfers: A sum of money is transferred from one user to another, not usually accompanied by an exchange of goods or services. We also talk about transfers from individual to individual (P2P) and these transactions can be national or international;

b) Payments: a sum of money is transferred from one user to another and the transfer is associated with an exchange of goods or services;

c) Financial services: the user’s mobile wallet can be linked to a bank account to offer the full range of transactions (savings and credit, for example) that the user could normally make in a bank branch.

The overall value of mobile currency transactions in sub-Saharan Africa reached $19.9 billion in 2017, up 14.4% from 2016, according to a report by the World Association of Mobile Operators (GSMA).

Globally, the mobile money industry processed $1 billion a day last year and generated revenues of more than $2.4 billion, up 34 percent from 2016. Mobile money is now available in 90 countries around the world, where there are a total of 690 million registered accounts (+25% compared to 2016) according to the same source.

The offer begins to settle in homes, families and culture. Mobile money could reduce corruption and tax evasion, as mobile money is more easily traceable than cash.

Today, the offer presented to households limits transaction thresholds, including:

• a) The minimum or maximum amount of each transaction;

• b) The maximum amount of transactions per day (regardless of the number of transactions);

• c) The maximum amount of transactions per month (regardless of the number of transactions);

• d) The maximum value of the electronic money account balance.

And day after day, the Corporate offer will come with more flexibility and fewer limits for companies to trace all flows and transfers of funds.

Mobile money certainly faces some challenges. Mobile money cannot work without a telephone signal. Liquidity problems have already occurred in the past. That is to say, agents sometimes have difficulty in quickly converting cash into e-money or vice versa. The laws of each country also affect the use of mobile money.

And if your currency becomes obsolete.

The most significant experience in history is that of India. The idea of demonetization of large bills was beginning to consider that cash is worth corruption. India like many countries, even after capping cash withdrawals, the problem of the omnipresence of cash in daily life persists. So you had to dare. Daring to radically change, to set up «a surgical strike» against corruption and black money by removing overnight all value of the major banknotes in circulation. A demonetisation initiative as revolutionary as it is risky, having made obsolete more than 86% of the total value of banknotes in circulation, fuel the bulk of commercial transactions in an economy that relies on cash and is often the only source of savings for unbanked populations. Households were asked to come and exchange old notes at bank counters for new ones.

These deposits were monitored by the tax authorities. Beyond 3,400 euros deposited, it will be necessary to demonstrate the origin of the funds. In the absence of clear evidence, this money will be considered revenue that has been withheld from the tax system and will be taxed with penalties of an additional 200% - enough to make most of the money disappear.

Piano, piano in Tunisia.

According to the Italian adage, things are moving slowly in Tunisia. Tunisians still prefer to pay in cash.

Note that the Central Bank has launched a national strategy to promote financial inclusion aimed at a better allocation of financial resources to the benefit of the organized economy fighting against informal activities and illicit financial practices, through the reduction of cash in the economy and the development and promotion of electronic payment systems and means and digital finance.

This strategy has given rise to four commissions whose entry into activity remains formidable. They are as follows:

• A Commission to optimise existing electronic payments;

• A Commission for the development of means of payment;

• A Commission to upgrade the digitalisation of financial services, and;

• A steering committee on the role of the State in promoting a financial culture that promotes de-cashing.

Indeed, the nerve of war is cultural. All macroeconomic indicators amply demonstrate that Tunisia has not managed to reduce the volume of cash in circulation even with all the tax provisions brought by the 2014 Finance Act (Article 34 and 35 LF2014) and following. The LF2014 excluded for the determination of the income tax or corporate tax base, the deduction of operating expenses and depreciation of assets with a value greater than or equal to 20,000 dinars excluding VAT ((5,000 dinars from 1 January 2016) and whose value is paid in cash.

Today, the budget bill for the year 2019 brings modest proposals. Article 43 of the bill stipulates that the method of payment of contracts for the transfer of immovables or business assets concluded between its parties (with the exception of the State, local authorities and public institutions of an administrative nature (EPA)) is explicitly mentioned. The law does not prohibit cash payment. This is simply to mention it from 1 June 2019 for contracts whose amounts paid in cash are greater than 10 billion.

More than ever urgent, actions of «quicks wins» must be put in place to tackle this misalignment of judicial circulation. For illustrative purposes;

• Public administration and services must lead by example (the largest consumers of cash in the economy);

• Link the legalization procedure to the registration formalities;

• Immediately target the 4 million Tunisians who do not have bank accounts;

• Make payment by credit card or post-compulsory current household expenses (fuel, phone charges, etc.)

• Immediately launch an agreement between the state mobile operators to integrate Mobile Payment, and;

• Many others

—no more loopholes.

According to AMI expert Kireyev, 'The complete release of cash should be arranged in degrees. Faced with people’s attachment to cash, the radical measures of imposing by decree de-cashing should be avoided. The International Monetary Fund stresses the importance of adopting a gradual migration without «anti-democratic» suggestions in order not to mention any attempt to control all aspects of people’s lives, including the use of money, or control bank savings. Actions that use personal choices based on profitability considerations should be targeted. Source: The marcoeconomics of decashing, IMF Working paper by Alexei Kireyev