Understanding Retail Payments — Cash and Cards
The Retail payments scenario, which primarily consists of transactions between consumers and businesses (and predominantly in that order of flow), has undergone a tremendous amount of change in the past few decades. Through this article, we will take a look at the evolution of primary payment methods (in retail) over the years and derive an insight into what the future might hold for us.
Cash and Cards — A History
To start, let us take a brief look over the history of payments and transactions, starting with the Barter system, where people exchanged goods and services for the same. The Barter system worked well, as long as the goods and services being Bartered were limited, addressed the immediate needs of the parties involved and were mutually agreed between them. Any complication or disagreement in any of these factors resulted in a lot of hassle for those involved in the transaction. (Beers, 2021)
As cities expanded and the list of goods and services being traded between people increased, the need for a common currency became ever more important. This took multiple shapes and forms (from cowrie shells to bronze and copper metal pieces to gold and silver coins to paper money) and has evolved over the years to become what we now know as Cash in general. (PBS, 1996)
However, Cash itself is not free of any risks or problems. For one, Cash has a huge cost of holding / carrying, in addition to the risks of theft, damage, and counterfeiting. To tackle this problem, the concept of using a valueless instrument for transactions was explored even in the earlier days of history. This led to the development of multiple instruments that were used as a mode of extending credit to the payee. The modern-day credit card, and by extension, the debit cards, which were introduced around the 1950s were a direct a result of such necessities enabled by the availability of supporting technologies. (Jay MacDonald, 2017)
The Hassle of Transactions
To understand various the processes involved in a payment process, we can consider the entire payment process to happen across a set of layers as follows,
- The Instrument that carries monetary value and is required for the initiation of a payment
- The Interfacing layer, responsible for accepting and relaying payment related information from the users or operators to the backend processing systems and vice versa
- The Backend / Processing layer, responsible for recording and processing the payment transactions between the accounts or banks
Prior to the internet, every transaction and accounting process had to be maintained manually. Cash accounting had to be done manually by Cashiers and accountants. Here, the instrument used is the actual Cash in hand, the interfacing layer is the accountant accepting the payment via Cash and the processing layer is the Account Registry maintained by the accountant or organization and between the banks.
Card transactions above a certain limit had to be handled over a call, connecting to the respective centers that maintained information on the particular cards (say, American Express, Mastercard or Visa). Here, the instrument used is the Card backed by the issuer, the interfacing layer is the accountant / organization accepting the payment and the processing layer is the manual process at call centers verifying and processing the Card transactions.
It is important to notice that the processing layer for these transactions was still dependent on the people operating the systems, i.e., the backend process was still manual at large. Even the interfacing layer for accepting and relaying of payment related information was highly manual, facilitated by the established telecommunication lines, enabling information transfer over large distances, and thus reducing lead times significantly.
The Factor of Convenience
Back when Card payments were introduced, transacting with cards was still a lot less convenient than transacting with Cash. However, what gave Cards the advantage over Cash was the added safety and the access to credit. This provided people flexibility and an increased sense of security in carrying out their payments, which was more desirable in certain situations. Cards did provide a certain set of features which made them the preferred mode for payment for certain situations. However, they were not a direct upgrade over Cash.
Understanding what a user considers while choosing their preferred modes of payment is key to position and improve new payment methods. Some of the key factors are,
- Security: The security a particular mode of payment offers to the user against theft or loss of money whilst holding, carrying, and transacting
- Ease of Use: The extent to which the user finds the particular mode of payment intuitive and easy to use
- Acceptance: The number of counterparties that acknowledge and accept the particular mode of payment. The greater the number, the better is the acceptance
- Access to Money: Access to money for a particular mode of payment can be defined in two aspects — the access it provides to one’s own funds and the access it provides to various lines of credit.
- Protection from Fraud: The amount of protection, a particular mode of payment offers against fraud or misappropriation while transacting
- Accounting: The extent and ease with which the user is able to account for or keep a record of their transactions
Evaluating the different modes of transactions (i.e., Cash and Cards) using these factors, one can see that there are multiple factors that are being assessed by the users on a regular basis. Based on their assessment of their needs and the situation, the user might go forward with any mode of payment as per their preference.
Concluding Notes
As one can see, Card payments are not a replacement for Cash payments, they are a better alternative to Cash payments. Card payments quickly began to gain popularity and traction because of the convenience and the added safety they offered as compared to Cash. In the next few years, Cash and Card came to be the two predominant modes of payments. It continued to be the case, until online banking introduced the first truly digital mode of transaction around the 1990s.
Going forward, we will take a deeper look at how Digital Banking platforms and solutions have revolutionized the Retail payments scenario and their implications on the Future of Payments.
References
- Beers, B. (2021, May 05). What are some examples of barter transactions? Retrieved from Investopedia: https://www.investopedia.com/ask/answers/101314/what-are-some-examples-barter-transactions.asp#:~:text=Bartering%20occurs%20when%20two%20or,regularly%20transpire%20in%20the%20marketplace.
- Jay MacDonald, T. T. (2017, July 11). The history of credit cards. Retrieved from creditcards.com: https://www.creditcards.com/credit-card-news/history-of-credit-cards/
- PBS. (1996, October 26). The History of Money. Retrieved from PBS: https://www.pbs.org/wgbh/nova/article/history-money/
