tag:theconversation.com,2011:/id/topics/retail-banking-15699/articlesRetail banking – The Conversation2016-10-24T04:09:26Ztag:theconversation.com,2011:article/675012016-10-24T04:09:26Z2016-10-24T04:09:26ZWhy companies like Wells Fargo ignore their whistleblowers – at their peril<p><a href="http://www.nbcnews.com/id/11839694/ns/business-corporate_scandals/t/enron-whistleblower-tells-crooked-company/#.WA1Xktzrr_Q">Enron</a>. <a href="http://usatoday30.usatoday.com/money/companies/regulation/2008-02-14-cynthia-cooper-whistleblower_N.htm">Worldcom</a>. The <a href="http://content.time.com/time/business/article/0,8599,1877181,00.html">Madoff scandal</a>. The <a href="http://www.rollingstone.com/politics/news/the-9-billion-witness-20141106">mortgage meltdown</a>. Now <a href="http://www.nytimes.com/2016/10/12/business/dealbook/at-wells-fargo-complaints-about-fraudulent-accounts-since-2005.html?_r=0">Wells Fargo</a>. </p>
<p>High-profile corporate frauds like these all seem to follow the same pattern. First the misconduct is discovered, and then we learn about all of the whistleblowers who tried to stop the fraud much earlier. Congress then tries to enhance whistleblower protections, with varying success. </p>
<p>The <a href="http://www.soxlaw.com">Sarbanes-Oxley Act</a>, passed in 2002 after the Enron and Worlcom scandals, <a href="https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2064061">was supposed to protect whistleblowers</a> who uncovered accounting frauds, but judges <a href="https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2064061">typically rejected</a> their retaliation claims. The <a href="https://www.whitehouse.gov/economy/middle-class/dodd-frank-wall-street-reform">Dodd Frank Act</a>, approved in 2010, <a href="https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2020527">provides financial rewards</a> for certain whistleblowers. Its success is still unclear.</p>
<p>While these laws may protect employees who expose wrongdoing from retaliation and encourage more to do the same, <a href="https://papers.ssrn.com/sol3/papers.cfm?abstract_id=930226">nothing requires employers</a> to take their disclosures seriously. And as we saw with the latest scandal involving Wells Fargo, several former employees say they tried to get the company’s attention <a href="http://www.nytimes.com/2016/10/12/business/dealbook/at-wells-fargo-complaints-about-fraudulent-accounts-since-2005.html?_r=0">in 2005</a> and <a href="https://news.vice.com/story/wells-fargo-bank-scandal?cl=fp">2006</a>, to no avail. </p>
<p>Their ineffectiveness is hardly unique. The <a href="https://berkleycenter.georgetown.edu/publications/2011-national-business-ethics-survey-workplace-ethics-in-transition">2011 National Business Ethics Survey</a> found that 40 percent of employees who reported misconduct believed that their report had not been investigated. When an investigation did take place, over half thought the process was unfair.</p>
<p>So why don’t companies make better use of the information they get from their whistleblowers – especially when ignoring them could expose their company to millions or even <a href="https://www.justice.gov/opa/pr/glaxosmithkline-plead-guilty-and-pay-3-billion-resolve-fraud-allegations-and-failure-report">billions</a> in liability and permanently tarnish their brand?</p>
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<figcaption><span class="caption">Socially awkward whistleblowing in ‘The Big Short.’</span></figcaption>
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<h2>Who looks the part</h2>
<p>For a start, real whistleblowers don’t always match our mental image. </p>
<p>Our idealized image of whistleblowers isn’t doing us any favors. We assume that whistleblowing will come from top employees. But when the company already has a poor ethics culture, those top employees may very well be the ones engaged in the misconduct. </p>
<p>Instead, as I described in a previous <a href="https://papers.ssrn.com/sol3/papers.cfm?abstract_id=930226">research paper</a>, important information might originate from employees who don’t fit in or are labeled as complainers or poor performers. </p>
<p>In other words, we expect the true whistleblower to be Ryan Gosling’s suave character in “The Big Short,” while ignoring the angry insights from Steve Carrell, on account of his bad haircut and terrible social skills.</p>
<p>To take whistleblowers seriously, we need to set aside our judgments about them and their motives and focus instead on the message they convey. In the words of negotiation gurus Roger Fisher and Bill Ury, “<a href="https://books.google.com/books?id=SgONZTjbqpgC&dq=%22getting+to+yes%22&hl=en&sa=X&ved=0ahUKEwjft_uD0ufPAhVJ5WMKHWKiAk8Q6AEIOjAC">separate the people from the problem</a>.”</p>
<h2>Where there’s smoke, is there fire?</h2>
<p>A second problem with whistleblowing is that we tend to assume it’s not an emergency if other people don’t think so. </p>
<p>There is a principle in social psychology known as the “<a href="http://psycnet.apa.org/journals/bul/137/4/517/">bystander effect</a>,” which essentially means that people defer to others on how to interpret ambiguous situations and dread the idea of overreacting to a situation and later being embarrassed. It also means that when you observe others doing nothing in response to an apparent risk, you’re more likely to do the same. </p>
<p>In a <a href="http://psycnet.apa.org/journals/psp/10/3/215/">famous experiment</a>, researchers observed how people reacted to a room filling with smoke, contrasting the behavior of those who were alone to those accompanied by others who were instructed in advance to appear indifferent to the smoke. Of those who were alone, 75 percent reported the smoke to the experimenter. By contrast, only 10 percent of the subjects sitting with the passive seatmates reported the smoke.</p>
<p>The same may be true of whistleblowing. The fact that “everyone knows” about a particular type of misconduct may actually make people less likely to report it. In addition, when a particular type of misconduct becomes prevalent, those investigating may discount the severity of conduct they see frequently and thereby fail to realize that it has reached a crisis level.</p>
<h2>How whistleblowing is like an iceberg</h2>
<p>Another problem is that whistleblowers may not know which information is most important. </p>
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<a href="https://images.theconversation.com/files/142807/original/image-20161023-15950-509mx9.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/142807/original/image-20161023-15950-509mx9.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=237&fit=clip" srcset="https://images.theconversation.com/files/142807/original/image-20161023-15950-509mx9.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=508&fit=crop&dpr=1 600w, https://images.theconversation.com/files/142807/original/image-20161023-15950-509mx9.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=508&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/142807/original/image-20161023-15950-509mx9.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=508&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/142807/original/image-20161023-15950-509mx9.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=639&fit=crop&dpr=1 754w, https://images.theconversation.com/files/142807/original/image-20161023-15950-509mx9.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=639&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/142807/original/image-20161023-15950-509mx9.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=639&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">Good investigators dig below the surface of a complaint.</span>
<span class="attribution"><span class="source">ABA Corporate Compliance Officer Deskbook (forthcoming)</span>, <span class="license">Author provided</span></span>
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</figure>
<p>Whistleblowers, especially those uncovering substantial misconduct, have only one piece of what might be a much larger puzzle. They also aren’t lawyers, so they don’t know whether a piece of information is legally important. They only know that the situation feels wrong. Consequently, the important nugget of information might be buried within a lot of irrelevant information.</p>
<p>The <a href="https://news.vice.com/story/wells-fargo-bank-scandal?cl=fp">2006 letter</a> from a Wells Fargo whistleblower – who disclosed that other employees were opening fake accounts – is a good example of this problem. The first page of the letter contains generic complaints about unfair treatment and possibly age discrimination. The second page then talks about how salespeople “gamed” the system to inflate their sales numbers – but apparently with the assistance and consent of the customer involved. Sandwiched between these (somewhat) benign accusations is a story about how a customer complained that accounts were opened without his knowledge or consent.</p>
<p>Wells Fargo apparently ignored the report, to its peril and the detriment of millions of customers. The person reading the letter may have started out feeling suspicious of the whistleblower, confirmed that suspicion based on the first page of the letter and then completely missed the important information on the second page. Like <a href="https://commons.wikimedia.org/wiki/File:Duck-Rabbit_illusion.jpg">this illusion</a>, once the reader forms an initial impression (e.g., that the image features a duck), they became blind to additional data that contradicts the impression (the image could also be a rabbit). </p>
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<img alt="" src="https://images.theconversation.com/files/142804/original/image-20161023-15944-kx09wb.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/142804/original/image-20161023-15944-kx09wb.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=306&fit=crop&dpr=1 600w, https://images.theconversation.com/files/142804/original/image-20161023-15944-kx09wb.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=306&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/142804/original/image-20161023-15944-kx09wb.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=306&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/142804/original/image-20161023-15944-kx09wb.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=384&fit=crop&dpr=1 754w, https://images.theconversation.com/files/142804/original/image-20161023-15944-kx09wb.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=384&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/142804/original/image-20161023-15944-kx09wb.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=384&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
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<span class="caption">Is it a duck? Or a rabbit?</span>
<span class="attribution"><a class="source" href="https://commons.wikimedia.org/wiki/File:Duck-Rabbit_illusion.jpg">J. Jastrow (1899) via Wikimedia Commons</a></span>
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<p>The idea that we “see what we want to see” is not mere conjecture. <a href="http://psycnet.apa.org/journals/psp/91/4/612/">One study</a> found that people literally saw what they wanted to see in a drawing, perceiving an ambiguous drawing as a “B” or the number “13” depending upon which interpretation led to a more favorable result for themselves in the experiment. </p>
<h2>Challenges investigating complaints</h2>
<p>And a final problem: Explosive complaints are as rare as explosive luggage. </p>
<p>Publicly traded companies like Wells Fargo are required under <a href="https://www.google.com/url?sa=t&rct=j&q=&esrc=s&source=web&cd=3&ved=0ahUKEwiyp76i6-fPAhUFx2MKHfakAr0QFggrMAI&url=https%3A%2F%2Fwww.sec.gov%2Fabout%2Flaws%2Fsoa2002.pdf&usg=AFQjCNG1R7ILxKpeO0FzcC-5beXMyCsz9A">Sarbanes-Oxley</a> to have a process for receiving and responding to anonymous whistleblower complaints. Wells Fargo, like many other companies, had a whistleblower hotline. Why didn’t those folks – whose job it was to investigate complaints – uncover the misconduct early enough to stop it?</p>
<p>Investigating corporate complaints is a lot like being a Transportation Security Administration agent. Most of the complaints they are sorting through will be regular luggage, with a few unauthorized bottles of liquid here and there. Take the problem of reading that 2006 letter and multiply it by 100 or 1,000 letters, almost all of which describe an isolated problem or conduct that isn’t illegal. You don’t get much practice at the most important part of your job (identifying explosives) when it virtually never happens.</p>
<p>Like TSA agents, investigators also have the challenge of identifying a new form of misconduct that doesn’t match the mental models of prior bad acts. In other words, Wells Fargo may have been most worried about mortgage fraud when they should have spent more time investigating fraud in retail banking.</p>
<p>Great investigators are like the guys from the History Channel’s “American Pickers” show. They meet the owners, listen to their story, go through the stuff themselves and then make judgments about what to pursue based on their independent judgment and experience. They’re also open to finding the “best” stuff in unexpected places. </p>
<p>Lastly, great investigators keep an eye out for patterns, noticing when seemingly isolated incidents may indicate a larger problem.</p>
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<iframe width="440" height="260" src="https://www.youtube.com/embed/4nMCB4qDHl0?wmode=transparent&start=0" frameborder="0" allowfullscreen=""></iframe>
<figcaption><span class="caption">American Pickers illustrate how to be a skilled investigator.</span></figcaption>
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<h2>An invaluable asset</h2>
<p>Managers and corporate officers responding to complaints need to shed their preconceptions about whistleblowers and instead invest in the information they receive. </p>
<p>Rather than grumbling about the cost of dealing with them, companies should view their information as a valuable corporate asset. Preventative investments like training managers on responding to whistleblowers, maintaining a hotline and hiring investigators and compliance officers to follow their leads ultimately serve a company’s long-term interests.</p>
<p>If the Wells Fargo scandal proves anything, it is that a 164-year-old brand can be tarnished overnight. A whistleblower – however flawed she may be – may be the last person standing between a company and the loss of its reputation.</p><img src="https://counter.theconversation.com/content/67501/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Elizabeth C. Tippett does not work for, consult, own shares in or receive funding from any company or organization that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>The bank’s recent scandal probably would never have happened had senior management only listened to Wells Fargo’s whistleblowers.Elizabeth C. Tippett, Assistant Professor, School of Law, University of OregonLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/637432016-08-10T09:18:43Z2016-08-10T09:18:43ZBanking ‘shake-up’ relies too much on customers shopping around<figure><img src="https://images.theconversation.com/files/133649/original/image-20160810-28926-r8d4eu.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Customers need to switch it up.</span> <span class="attribution"><span class="source">Barry Barnes / Shutterstock.com</span></span></figcaption></figure><p>A report that was billed to transform the UK’s retail banking industry has been <a href="http://www.bbc.co.uk/news/business-37014133">criticised</a> for not doing enough to protect customers. The Competition and Markets Authority <a href="https://assets.publishing.service.gov.uk/media/57a8c0fb40f0b608a7000002/summary-of-final-report-retail-banking-investigation.pdf">report</a> was two years in the making and is geared towards improving competition and the products on offer for individuals and small businesses.</p>
<p>But the government watchdog puts the onus on bank customers to improve market conditions. It said their lack of engagement with the market “weakens banks’ incentives to compete” and contributes to the costs involved for challenger banks to gain a foothold in the market. Therefore its package of remedies focuses heavily on measures aimed at stimulating consumers to shop around and making it easier for them to switch. Even with the new technology it proposes, this will be easier said than done.</p>
<p>Central to the reforms is a requirement that banks make their computer systems accessible to trusted third parties so that, with customers’ consent, their banking data can be transferred and used to drive new online services and mobile apps that compare the best banking deals and recommend switching when cost savings are identified. The aim is to have this part of the remedy up and running by 2018. </p>
<p>There are some obvious concerns: the security of data passed to third parties, the possible cost of these new services, and the fact that older generations and rural communities in particular often have no <a href="https://www.fca.org.uk/your-fca/documents/occasional-papers/occasional-paper-17">or poor internet and mobile access</a>, so are not necessarily in a position to benefit. A further barrier may be that consumers are simply overloaded with calls to shop around.</p>
<h2>Unrealistic expectations</h2>
<p>A common cry from regulators of everything from <a href="http://www.bbc.co.uk/news/business-36961798">gas and electricity</a> to <a href="https://www.broadbandchoices.co.uk/news/broadband/from-next-week-you-won%E2%80%99t-need-a-mac-code-to-switch-broadband-00480">broadband</a> and <a href="https://www.the-fca.org.uk/about/promoting-competition">insurance</a> is that consumers must engage more actively to make markets work. From all sides, you are urged to shop around and switch regularly to persuade providers to improve quality and cut prices. </p>
<p>But <a href="http://www.open.ac.uk/business-school-research/pufin/sites/www.open.ac.uk.business-school-research.pufin/files/files/WORKING-PAPER-Shopping-around-in-multiple-markets-Lowe-Nov15.pdf">research I’ve conducted</a> suggests how unrealistic it is to expect households to shop around for every service they use. I looked at the shopping and switching habits of more than 1,000 consumers for 12 common household and financial services, including energy, communications, banking, savings and credit cards. Most used ten or 11 of these services, but at best had shopped around for fewer than half (the blue line in the chart below). </p>
<p>Only a tiny proportion of households shopped around for every service they use (the green line in the chart). Households that shopped around prioritised their car, buildings and house insurance, followed by their gas and electricity provider. They were least likely to shop around for their bank account.</p>
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<img alt="" src="https://images.theconversation.com/files/133567/original/image-20160809-18014-a3j0cy.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/133567/original/image-20160809-18014-a3j0cy.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=446&fit=crop&dpr=1 600w, https://images.theconversation.com/files/133567/original/image-20160809-18014-a3j0cy.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=446&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/133567/original/image-20160809-18014-a3j0cy.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=446&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/133567/original/image-20160809-18014-a3j0cy.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=560&fit=crop&dpr=1 754w, https://images.theconversation.com/files/133567/original/image-20160809-18014-a3j0cy.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=560&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/133567/original/image-20160809-18014-a3j0cy.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=560&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
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<span class="caption">Average number of services for which households had shopped around in the last three years as a percentage of services used by the household and percentage shopping for all the services used.</span>
<span class="attribution"><a class="source" href="http://www.open.ac.uk/business-school-research/pufin/sites/www.open.ac.uk.business-school-research.pufin/files/files/WORKING-PAPER-Shopping-around-in-multiple-markets-Lowe-Nov15.pdf">Jonquil Lowe</a>, <a class="license" href="http://creativecommons.org/licenses/by-nd/4.0/">CC BY-ND</a></span>
</figcaption>
</figure>
<p>Across all services, the research found that households who had not shopped around tended to overestimate the time and difficulty of the task. But even among households who did shop around for a bank account, one in five found the process took more than a day and nearly one in ten found the process difficult. So part of the challenge facing regulators is to improve, and instil greater confidence in, the industry’s current account switching service (CASS) – something the CMA and the industry <a href="https://www.bacs.co.uk/documentlibrary/cass_making_account_switching_easier.pdf">is trying to do</a>. </p>
<h2>Making life easier</h2>
<p>My research showed that, for all types of household and financial services, most of those that did not shop around tended to think that all providers offer similar deals and that shopping around would save too little to make the chore worthwhile. The new third-party services that are being proposed may help to make banking differences more visible. In addition, the CMA will require banks to gather, publish and share data on the quality of their services, including whether existing customers would recommend their bank to friends, family and colleagues. </p>
<p>Another finding of my research was that households were most likely to shop around for insurance products. An important feature of these products is that they are annual contracts so there is an automatic, regular prompt to shop around. The CMA measures will try to mimic this for bank accounts by requiring banks to send existing customers prompts, suggesting that they shop around for a new account. These may be on a regular basis and also triggered by events, such as your local bank branch closing down.</p>
<p>While the CMA measures aim to tackle the particular shortcomings of bank customers that it has identified, they nonetheless overlook the wider context of households potentially being overburdened by multiple calls to become active and engaged consumers. My research suggests that, as the number of services you use increases, there may be resistance to taking on yet more shopping around. </p>
<p>Attempts by the government to get people to add bank accounts to this list may be an especially tough challenge and there may be a danger that shopping for bank accounts reduces the time and effort you are able to devote to shopping for other services. Regulators need to wake up to the fact that consumers simply may not be willing to take up the workload of driving the demand side of competition across multiple markets for household and financial services.</p><img src="https://counter.theconversation.com/content/63743/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Jonquil Lowe does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>A common cry from regulators is that customers must shop around for the best deal – but households rarely look for a better banking deal.Jonquil Lowe, Lecturer in Personal Finance, The Open UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/588832016-05-22T10:12:46Z2016-05-22T10:12:46ZHow Capitec Bank overcame high barriers to entry in South Africa<figure><img src="https://images.theconversation.com/files/121368/original/image-20160505-19860-1gs2h8t.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Few banks have successfully entered the retail banking sector in South Africa in the past 25 years.</span> <span class="attribution"><span class="source">Shutterstock</span></span></figcaption></figure><p>The South African retail banking sector is characterised by high barriers to entry. The sector is concentrated, with four of the largest banks – <a href="http://www.standardbank.co.za/standardbank/">Standard Bank</a>, <a href="http://www.absa.co.za/Absacoza">Absa</a>, <a href="https://www.fnb.co.za/">First National Bank</a> and <a href="https://www.nedbank.co.za/content/nedbank/desktop/gt/en/personal.html">Nedbank</a> – accounting for more than 80% of retail deposits. Some of the small players have been operating for some decades – <a href="https://www.grindrodbank.co.za/">Grindrod</a> since 1994 and <a href="http://www.ubank.co.za/">uBank</a> since 1975 – but their deposits have not grown significantly. Few banks have successfully entered the banking sector since the establishment of Absa 25 years ago. </p>
<p>The only successful new entrant into the local market has been <a href="https://www.capitecbank.co.za/">Capitec</a>. </p>
<p>Capitec was formed in 1997 through the acquisition of micro-lending businesses such as Smartfin and Finaid by the founding entity, <a href="https://www.psg.co.za/">PSG</a>, an independent financial services group. It then registered as a bank in 2001.</p>
<p>But the bank only managed to attract a notable amount of deposits in 2006. The infant years – 2001 to mid-2006 – were plagued with challenges that stagnated growth. It nevertheless managed to overcome these.</p>
<p><a href="http://static1.squarespace.com/static/52246331e4b0a46e5f1b8ce5/t/56b4aaaec2ea510a3adf4fe9/1454680756804/CCRED+Working+Paper+12_2015+Barriers+to+entry+_Capitec+case+study.pdf">Capitec’s success</a> can be attributed to a number of factors. The partnership with PSG provided a significant amount of equity capital that enabled the bank to advance its operations. Furthermore, PSG also acted as a shareholder of reference, providing comfort to the market specifically in the early years when the entity was in its infancy. Capitec also benefited from a diversified business model: it offered a simple, affordable and transparent product that could be easily be understood by the market, as well as micro-lending, which ensured profitability from the start. </p>
<p>The competitive environment for Capitec was also enhanced by regulatory and policy changes that sought to make the playing field more open and level. The <a href="http://www.southafrica.to/Banks/news/2008/competition-commission-banking-enquiry.pdf">2008 Banking Enquiry</a> focused attention on retail banking and heightened awareness about competitive behaviour in the sector. The partial, and ongoing, implementation of the enquiry’s recommendations improved the competitive environment for Capitec. </p>
<h2>Why deposits matter</h2>
<p>Deposits are the cheapest way for a bank to raise money for its lending activities as they command relatively low interest rates. The more a bank can command deposits, the better it is able to engage in more lucrative lending and investing activities.</p>
<p>Between 2001 and 2003 Capitec was largely self-funded because consumer and investor confidence in the sector was low. Self-funding is a handicap for new entrants due to the high capital requirements and expensive set-up expenses, such as establishing a branch network.</p>
<p>In Capitec’s case, independent investors contributed 20% of the equity shareholding. The bulk came from two groups: PSG (58%) and management (22%). But Capitec had other challenges too.</p>
<h2>Barriers to entry</h2>
<p>The 2008 South African <a href="http://www.southafrica.to/Banks/news/2008/competition-commission-banking-enquiry.pdf">banking enquiry</a> noted a number of barriers to entry within the retail banking industry. These included:</p>
<ul>
<li><p>Switching bank accounts and fee structures: the enquiry found that major retail banks had taken advantage of various mechanisms to deter customers from switching. These included complex fee structures and a lack of price transparency.</p></li>
<li><p>Regulation: the strong position enjoyed by incumbent banks is reinforced by the regulatory environment. They are strictly regulated to protect the general public from losing money. And to minimise risks, should banks be unable to meet their financial obligations. </p></li>
<li><p>Funding: this remains a major problem in South Africa, especially for small enterprises and new entrants without a track record. Equity investors perceive these firms as unsafe investments whose returns cannot justify the inherent risk.</p></li>
<li><p>Access to debt financing: new entrants cannot issue investment-grade debt instruments given their size and the lack of a track record in most cases. As a result, small banks are limited to the junk market, which is relatively expensive. Equity financing is often not enough, hence institutions tend to use a combination of debt and equity financing. </p></li>
<li><p>Banks cannot operate as silos – their cards have to work at all ATMs. A new bank has to navigate South Africa’s sophisticated and highly regulated payments system. This depends on the cooperation of the other banks. There have been instances where banks have been accused of frustrating each other’s efforts to integrate new products.</p></li>
</ul>
<h2>Overcoming the barriers</h2>
<p>Capitec began as a business that acquired and consolidated a number of small micro-lending businesses. Over time, it has been slowly transforming its clients, who mainly relied on it for loans, into transactional banking clients who deposit their salaries and manage their transactions through their Capitec accounts.</p>
<p>Capitec’s product is a low-cost account. A major part of its success is due to the fact that low-income clients were not well served by the incumbents, which were concentrating on middle- and higher-income segments of the market. </p>
<p>The bank overcame customers’ reluctance to switch by developing an affordable, simple and transparent product that is easily understood. It employed dedicated staff to work on switching clients. Branch personnel were also trained to convert lenders and savers into banking clients.</p>
<p>Initially Capitec’s clients were cash converters who would take out cash soon after their salaries were deposited. But the profile of these clients has changed over time to more mid-market customers who switched from other banks.</p>
<p>Capitec’s infant years were characterised by self-financing, partly reflecting the reluctance of commercial funders to back a small bank. Capitec also had a lower debt relative to equity financing than the incumbents and the industry average.</p>
<p>The lack of access to debt financing during infancy had an impact on Capitec’s ability to expand its operations. It also affected profitability, given low financial leverage. But the partnership with PSG played a pivotal role in ensuring the survival of the entity through providing equity financing.</p>
<p>Capitec also benefited from a diversified business model with a profitable unsecured loan business anchoring the development of transactional capabilities. </p>
<h2>Highly regulated sector</h2>
<p>South Africa’s strict <a href="https://www.resbank.co.za/RegulationAndSupervision/BankSupervision/BankingLegislation/Pages/Regulations%20relating%20to%20Banks.aspx">banking regulations</a> have safeguarded a world-class, healthy and stable retail banking industry. But these regulations have also restricted the proliferation of new entrants and the growth of small and medium-sized banks. </p>
<p>The process of applying for a banking licence is onerous, complex and time consuming. In addition to the R250 million capital requirement, the South African Reserve Bank also scrutinises aspects such as the directors, the business plan, products, risk-management policies, corporate governance, internal auditing, external auditors, anti-money laundering measures and IT capabilities. Only one banking licence, for <a href="http://www.finbondmutualbank.co.za/">Finbond Mutual Bank</a>, has been issued in the past 15 years. Capitec accessed a licence held by PSG for its operations.</p>
<p>There are also prudential laws that include capital adequacy ratios that have to be maintained on an ongoing basis. Capital adequacy is a proportion of a bank’s capital that has to be set aside (in very liquid assets) in case of an unforeseen event that may cause the bank to fail. The funds are meant to protect customer deposits and ensure that banks are able to absorb losses.</p>
<p>For new entrants and other small to medium-sized banks, capital adequacy ratios mean that they need to devote part of their limited capital to meeting capital requirements only. This is a substantial cost for new entrants, given that capital set aside for adequacy requirements has to be in very liquid assets that bear little return.</p>
<p>Regulation therefore presents a conundrum. Easing it enhances competition and promotes efficiency. But strict regulation brings about stability and prevents risky behaviour.</p>
<p>Currently there is no consensus as to which structure optimises both competition (efficiency) and regulation (stability). But it is apparent that neither extreme is ideal. The costs of limiting competition are generally less well understood. There is a danger that the balance is tilted in favour of protecting the established position of incumbents under the rationale of prudence and stability. </p>
<p><em>This is<a href="http://static1.squarespace.com/static/52246331e4b0a46e5f1b8ce5/t/56b4aaaec2ea510a3adf4fe9/1454680756804/CCRED+Working+Paper+12_2015+Barriers+to+entry+_Capitec+case+study.pdf"> an extract from a paper</a> titled “Competition, Barriers to Entry and Inclusive Growth – Capitec case study”, authored by Trudi Makhaya and Nicholas Nhundu.</em></p><img src="https://counter.theconversation.com/content/58883/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>The authors do not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and have disclosed no relevant affiliations beyond their academic appointment.</span></em></p>How did a small South African bank manage to rise through the ranks at a time when consumer and investor confidence was at a low?Trudi Makhaya, Associate Researcher, University of JohannesburgNicholas Nhundu, Junior Researcher, University of JohannesburgLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/528822016-01-08T14:26:48Z2016-01-08T14:26:48ZAround the world in 80 payments – global moves to a cashless economy<figure><img src="https://images.theconversation.com/files/107639/original/image-20160108-3317-wc5xd0.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">
</span> <span class="attribution"><span class="source">epSos.de</span>, <a class="license" href="http://creativecommons.org/licenses/by/4.0/">CC BY</a></span></figcaption></figure><p>Ever since computers were first introduced into the retail banking system in the late 1950s, there has been the vision of a future world <a href="http://www.bloombergview.com/articles/2012-03-29/visions-of-a-cashless-society-echoes">where cash is obsolete</a>. The near death of personal cheques, increase in debit and credit card use, and innovations such as PayPal, Square, Apple Pay and Bitcoin, have led us to believe the cashless society is well within our reach. </p>
<p>But <a href="https://www.linkedin.com/pulse/cashless-payments-growing-rapidly-cash-remains-felix-kronabetter?trk=prof-post">data from Retail Banking Research</a>, one of the most authoritative sources in the area, suggests that even though cashless payments are growing rapidly across the world, hard currency remains resilient. This trend was corroborated by a study commissioned by the ATM Industry Association of a panel of 30 countries. It suggested that global demand for cash <a href="https://www.atmia.com/news/atmia-publishes-new-global-cash-demand-study/2632/">grew 8.9% between 2009 and 2013</a> (when the latest figures were available).</p>
<p>So 50 years into the journey and we are still not there yet. However, a number of innovations have taken place around the world. Here’s how different continents stack up.</p>
<h2>Europe</h2>
<p>One in ten card payments were contactless <a href="http://www.fstech.co.uk/fst/UKCA_Contactless_Milestone_Oct_2015.php">for the first time in 2015</a> in the UK. By making small payments easier and quicker, contactless marks a major threat to cash. London is also fast becoming the world’s fintech capital, despite having substantially fewer resources <a href="http://paymentweek.com/2015-10-6-is-london-the-fintech-capital-of-the-world-8492/">available for investment than the US</a>. </p>
<p>Next summer Copenhagen will host Money 20/20, the world’s major annual event for emerging payment technology. It will be the first time the forum convenes <a href="https://www.money2020europe.com/">outside the US</a>, bearing witness to the increasing importance of Europe when it comes to innovation in payments and financial technology. In countries like the Netherlands there are cafes and even supermarkets <a href="http://letstalkpayments.com/which-countries-are-close-to-a-cashless-world/">that no longer accept cash</a>.</p>
<p>Many have pointed to the <a href="https://www.credit-suisse.com/uk/en/news-and-expertise/banking/articles/news-and-expertise/2015/03/en/sweden-we-dont-accept-cash.html">slow death of cash in Scandinavia</a>, but cash is unlikely to completely die out – few may develop a mobile app suited to the needs of refugee migrants there, for example.</p>
<figure class="align-center ">
<img alt="" src="https://images.theconversation.com/files/107631/original/image-20160108-3348-19u12na.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/107631/original/image-20160108-3348-19u12na.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/107631/original/image-20160108-3348-19u12na.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/107631/original/image-20160108-3348-19u12na.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/107631/original/image-20160108-3348-19u12na.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=503&fit=crop&dpr=1 754w, https://images.theconversation.com/files/107631/original/image-20160108-3348-19u12na.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=503&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/107631/original/image-20160108-3348-19u12na.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=503&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">Contactless payments are on the up in Europe.</span>
<span class="attribution"><span class="source">shutterstock.com</span></span>
</figcaption>
</figure>
<h2>North America</h2>
<p>Despite playing host to the world’s top technology firms and research centres, the US lags behind when it comes to implementing some of this tech. Chip and pin payment cards were only launched in October 2015 and do not seem to have done well over the Christmas holiday season, with reports of large retailers bypassing card readers and <a href="http://www.forbes.com/sites/kateashford/2015/12/27/chip-cards-take-too-long/">going back to signatures</a>. This might seem backward but it’s important to remember that chip and pin cards are as much a protocol to determine who will <a href="https://theconversation.com/chip-enabled-cards-may-curb-fraud-but-consumers-will-be-picking-up-the-tab-48410">bear the cost of fraud</a> as a security feature. </p>
<p>And, while the US has been slow to introduce chip and pin, there have been developments in smartphone payments. The bank <a href="https://next.ft.com/content/ef690e8e-7c42-11e5-98fb-5a6d4728f74e">JP Morgan Chase</a> and retailer Walmart have both launched rivals to Apple Pay, which shows how retailers, banks and <a href="http://www.pymnts.com/news/faster-payments/2016/who-is-making-payments-faster-in-the-u-s/">regulators</a> are innovating to bring about faster payments and a potential cashless society.</p>
<h2>Africa and the Middle East</h2>
<p>The success of the mobile payments system, M-Pesa, in increasing financial inclusion in Kenya <a href="https://theconversation.com/bitcoin-fuels-africas-banking-revolution-16044">is well known</a>, with the majority of the population able to transfer money using their phones, despite not having a bank account. And there has been similar growth of mobile payments <a href="http://www.worldbank.org/en/programs/globalfindex">in Botswana and South Africa</a>. But Safaricom (the telecom company behind M-Pesa) has failed to replicate its model in neighbouring countries such as Tanzania. The jury is also out regarding the <a href="http://www.cenbank.org/cashless/">Cash-less Nigeria Project</a> by its central bank, which aims to reduce the the amount of physical cash circulating in the economy.</p>
<figure class="align-center ">
<img alt="" src="https://images.theconversation.com/files/107630/original/image-20160108-3309-v3vjr9.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/107630/original/image-20160108-3309-v3vjr9.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/107630/original/image-20160108-3309-v3vjr9.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/107630/original/image-20160108-3309-v3vjr9.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/107630/original/image-20160108-3309-v3vjr9.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=503&fit=crop&dpr=1 754w, https://images.theconversation.com/files/107630/original/image-20160108-3309-v3vjr9.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=503&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/107630/original/image-20160108-3309-v3vjr9.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=503&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">M-Pesa enables users to complete basic banking transactions through mobile phones.</span>
<span class="attribution"><a class="source" href="https://www.flickr.com/photos/rosenfeldmedia/7171804334/in/photolist-bzhs6B-9WyJYw-bmnzwj-dmijzz-e7xSFA-9yvoQ2-9yypdS-9yvocV-9yyoyY-bCptw5-5JKYSx-jg3aYz-6jqorc-ppJ7Xq-dmfAJj-arwXQt-7MxK3Z-7MBJiW-7MxJDZ-7MBHVU-7MxJoV-6jqoPp-6juyGA-6juyzm-6jqoiX-6jqoaz-kuVG7a-9WyEuL-CHzZ8Z-bVKnyS-dUzm55-bnYk3T-95BG7d-5D7nvg-oec2FX">Rosenfeld Media</a>, <a class="license" href="http://creativecommons.org/licenses/by/4.0/">CC BY</a></span>
</figcaption>
</figure>
<p>Africa and the Middle East remain the areas with the lowest global numbers of adults with a bank account while MENA countries (as well as China and other Asia Pacific nations) have been and will continue to be the worlds’ growth markets <a href="http://www.rbrlondon.com/reports/global">for ATM manufacturers</a>. This suggests the high use of banknotes in the everyday life of people in these regions.</p>
<h2>Asia, Latin America and Oceania</h2>
<p>In China, the mobile app WeChat is one to watch. WeChat, part of digital behemoth Tencent, has grown from its original service as a messaging app in 2011 to include cab-hailing, food-ordering <a href="https://www.techinasia.com/wechat-allows-money-transfers-between-friends">and money transfers</a>. WeChat ranks as <a href="http://www.scmp.com/tech/apps-gaming/article/1896648/wechat-trends-expect-2016-virtual-reality-more-ads-global-expansion">China’s most popular app</a> with 650m users and is used to send <a href="http://www.pymnts.com/news/social-commerce/2015/wechat-rings-in-chinese-new-year-with-bitcoins/.VQo6cBDF_PE">both RMB and cryptocurrencies</a> like Bitcoin between users.</p>
<p>Technology as a promoter of financial inclusion is the name of the game in poor economies where the bottom third of the population hardly have any access to the financial sector and mobile money is seen as the potential solution. <a href="https://theconversation.com/cash-remains-king-in-chile-but-its-days-could-be-numbered-37952">Chile</a> is a notable example of successful government initiatives in this direction. But the one to watch is the Indian government’s drive to replace money with mobile payments on top of a growing <a href="http://www.thehindubusinessline.com/money-and-banking/apgvb-bagsaward-for-financial-inclusion/article7318539.ece">private network</a> made up of 140,000 private business and public sector bank correspondents. </p>
<p>The challenge for mobile money, however, is that it sits at the intersection of finance and telecommunication and so faces regulations from both. On top of that, India and other countries in Asia and Latin America have a significant number of transactions that take place outside the formal financial sector and typically, an over-regulated telecommunications sector. At the same time, those at the “bottom of the pyramid” are fearful of and distrust established financial institutions. </p>
<figure class="align-center ">
<img alt="" src="https://images.theconversation.com/files/107661/original/image-20160108-3323-bfewx3.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/107661/original/image-20160108-3323-bfewx3.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/107661/original/image-20160108-3323-bfewx3.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/107661/original/image-20160108-3323-bfewx3.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/107661/original/image-20160108-3323-bfewx3.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=503&fit=crop&dpr=1 754w, https://images.theconversation.com/files/107661/original/image-20160108-3323-bfewx3.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=503&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/107661/original/image-20160108-3323-bfewx3.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=503&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">No cash needed.</span>
<span class="attribution"><span class="source">shutterstock.com</span></span>
</figcaption>
</figure>
<p>Australia offers a much brighter outlook. The introduction of contactless payment cards in 2010 has proven hugely successful and as a result plastic has significantly <a href="ww.smh.com.au/national/about-us/australians-are-using-less-cash-and-more-card-to-pay-and-play-every-day-20150124-12xi8b.html">eroded the use of cash and ATMs</a>. Indeed, a recent <a href="http://www.rba.gov.au/publications/annual-reports/psb/2014/trends-in-ret-pay.html">study by the Reserve Bank of Australia</a> found that the use of banknotes and coins fell from 69% in 2007 to just 47% in 2013. That decline took place across all age and income groups, with people in rural locations more likely to be using cash than those in major cities.</p>
<p>While some countries have embraced mostly electronic forms of payment, this does not mean that others still using banknotes and coins are less efficient or backward as some might seem to think. Differences between countries and between rich and poor within them remain partly due to custom, culture and regulation. But also because new technology has failed to make its case to users. </p>
<p>There is more innovative technology looking for a market than consumers looking for alternative ways to pay. And there is nothing wrong with existing forms of payment – they, and cash in particular, work well in most countries, for most consumers, 99% of the time. Of course, people change their habits and financial technology start-ups may one day disrupt the status quo.</p>
<p>**</p>
<p><em>An earlier version of this article referred to a study commissioned by the ATM Industry Association incorrectly, saying it used a panel of 13 countries, not 30, and suggested that global demand for cash grew 4.5% instead of 8.9% between 2009 and 2013.</em></p><img src="https://counter.theconversation.com/content/52882/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Bernardo Batiz-Lazo has received funding to research ATM and payments history from the British Academy, Fundación de Estudios Financieros (Fundef-ITAM), Charles Babbage Institute and the Hagley Museum and Archives. He is also active in the ATM Industry Association, consults with KAL ATM
Software and is a regular contributor to <a href="http://www.atmmarketplace.com">www.atmmarketplace.com</a>.</span></em></p><p class="fine-print"><em><span>Leonidas Efthymiou received scholarships from the Cyprus Tourism Organisation; Louis Group and the University of Derby. </span></em></p><p class="fine-print"><em><span>Sophia Michael does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Do innovations like PayPal, Square, Apple Pay and Bitcoin spell the end of cash? How different countries are adopting new forms of financial tech.Bernardo Batiz-Lazo, Professor of Business History and Bank Management, Bangor UniversityLeonidas Efthymiou, Lecturer in Management and Strategy, Intercollege LarnacaSophia Michael, Languages Department Coordinator/Lecturer of English, Intercollege LarnacaLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/389302015-06-16T10:08:02Z2015-06-16T10:08:02ZAs cash becomes quaint, are ATMs on path to obsolescence?<figure><img src="https://images.theconversation.com/files/84014/original/image-20150604-3400-1roofm0.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Is it time for the ATM's requiem?</span> <span class="attribution"><span class="source">Old ATM via www.shutterstock.com</span></span></figcaption></figure><p>Before the advent of the internet, the <a href="http://www.theatlantic.com/technology/archive/2015/03/a-brief-history-of-the-atm/388547/">greatest gain</a> in customer convenience within retail banking came from the creation of automated teller machines (ATMs). </p>
<p>ATMs led to significant advances in how customers access financial services because – coupled with the direct deposit – they freed workers from so many routine tasks. No more depositing a paycheck in person, inquiring about balances or paying utilities solely during banking hours. ATMs enabled impromptu dinners and last-minute shopping over the weekend.</p>
<p>But now that we have so many other alternatives to fulfill our banking needs – we can deposit a check with a snap from our smartphones – do we really need ATMs? Why do we require physical cashpoints given that mobile payments and e-commerce <a href="http://www.chyp.com/denmark-shows-us-the-mobile-way">continue to grow</a>, heralding the “<a href="http://news.sky.com/story/1487879/payment-trends-mark-slow-death-of-cash">death of cash</a>”?</p>
<p>Claims that the ATM is a passing technology are almost as old as the <a href="http://www.bloomberg.com/news/articles/2012-03-29/visions-of-a-cashless-society-echoes">idea of a cashless society</a>, and for a variety of reasons it’s probably premature to predict its demise. </p>
<p>The rapid embrace of the digital and resistance to the traditional by today’s youth may eventually bring about the ATM’s end, but for a long time to come, the ATM will likely remain central to our relationship with money. </p>
<h2>Slow pace of change</h2>
<p>First off, banknotes and ATMs are two of the most <a href="http://countingoncurrency.com/news-item/the-plastic-banknote-from-concept-to-reality/">ubiquitous</a> products in the world. Whereas banknotes have social meaning, cashpoints recede to the background of everyday life. Most urbanites typically stick to the same <a href="http://econpapers.repec.org/paper/pramprapa/9316.htm">three to five</a> cash machines for most transactions.</p>
<p>Banknotes and coins still represent 9% of the eurozone’s economy and 7% in the US, according to the <a href="http://thefinanser.co.uk/fsclub/2012/10/the-future-of-the-cash-machine-.html">Bank for International Settlements</a>. Even in almost cashless Sweden, cash still makes up 3% of the economy. </p>
<p>Secondly, people like the freedom to choose between alternative <a href="https://www.kansascityfed.org/PUBLICAT/RESWKPAP/pdf/rwp06-04.pdf">payment options</a>. So even as we use smartphones more often to make purchases at the grocery store, credit cards are still how we buy most things online, and we keep cash in our wallets for smaller items.</p>
<p>Thirdly, changes in retail payments have proven to be very slow rather than disruptive, and their path differs from country to country, suggesting it’ll be a while before the ATM is displaced. </p>
<p>To illustrate this long-winded process of innovation, consider that the first cash machine <a href="http://www.theatlantic.com/technology/archive/2015/03/a-brief-history-of-the-atm/388547/">emerged in 1967</a>, yet the device became mainstream only in the 1980s. </p>
<p>Today, most of the 2.6 billion bank ATMs currently in operation still <a href="http://www.atmmarketplace.com/articles/atms-left-behind-as-windows-xp-support-ends/">run</a> on Windows XP – an operating system Microsoft <a href="http://windows.microsoft.com/en-ca/windows/end-support-help">stopped</a> supporting last year. The industry plans to upgrade and even make the switch to non-Microsoft systems, but that change may not take place until around 2020. That’s largely because the average life of an ATM hovers around <a href="http://www.atmmarketplace.com/news/atmia-survey-5-years-is-average-atm-depreciation-period/">six years</a>. </p>
<p>Another example is the contactless ATM, which is beginning to slowly take hold with the rise of smartphones. It could make the transaction more secure and reliable by reducing possibilities for card skimming as well as offering the advantage of “client present.” Yet <a href="http://www.amazon.com/Cash-Box-The-Invention-Globalization/dp/1935497626">my own research</a> came across references to ATM manufacturers considering devices that would interact wirelessly with customers as early as the 1990s. So it’s an open question why it took so long for this functionality to emerge.</p>
<h2>Industry growth</h2>
<p>In the meantime, the global market for ATMs continues to expand, but this growth is increasingly skewed and uneven. Global shipments of new ATMs reached a record 466,000 in 2014, up 5% from the previous year, according to London-based <a href="http://www.rbrlondon.com/newsletters/b337e.pdf">Retail Banking Research</a>. </p>
<p>On a regional level, the picture is much more varied. Double-digit gains in the Asia-Pacific market contrast with double-digit declines in North America and Central and Eastern Europe. </p>
<p>Allied Market Research <a href="http://www.prnewswire.com/news-releases/atm-market-is-expected-to-reach-219-billion-global-by-2020---allied-market-research-285811541.html">expects</a> that growth to accelerate in the coming years. The US-based group forecasts the number of ATMs to surge 11% a year through 2020. </p>
<h2>A fragile future?</h2>
<p>Despite that optimistic forecast, the future of the ATM may be fragile as its once cutting-edge functionality becomes ubiquitous through other devices. </p>
<p>Back in 1975, technology companies IBM and NCR promised customers that ATMs would, in the not too distant future, be a one-stop shop for all their banking needs, from making deposits and dealing with account inquiries to <a href="http://econpapers.repec.org/paper/pramprapa/9316.htm">making</a> account transfers. Today all of that can be done online, while the functionality of most ATMs in developed countries has been cut down to the bone. </p>
<p>Despite this, the ATM still appears to have a home within banks’ self-service strategy, which is based on greater complementarity rather than <a href="http://www.atmmarketplace.com/static_media/filer_public/5b/fe/5bfe332d-af4a-4d1d-9d3a-04f48d7944a0/auriga_atm_futuretrends_2015_final.pdf">cannibalization</a> among delivery channels and means of payment. </p>
<p>The “<a href="http://omnichannel.me/what-is-omnichannel/">omnichannel</a>” is the buzzword that will dominate the industry over the next five to seven years. It envisions enabling customers to do their banking and <a href="http://www.atmmarketplace.com/news/report-omnichannel-banking-lessons-learned/">interact</a> with their financial institutions however they like — at the branch or ATM or via the internet or a mobile device. </p>
<p>And even as banks strive to make customer interactions more seamless, they’re also slow to push full automation too quickly because it <a href="http://econpapers.repec.org/paper/pramprapa/9316.htm">reduces</a> opportunities to engage in high-margin sales – think mortgages and other loans and services. </p>
<p>The process of balancing convenience through automation with maximizing sales opportunities involves reorganizing the ATM fleet to ensure high availability and an enhanced customer experience to retain, and even increase, customer loyalty while not losing customer <a href="http://www.atmmarketplace.com/articles/the-fis-opportunity-in-a-mobile-payments-world/">trust</a>. </p>
<h2>Millennials and the future of banking</h2>
<p>Perhaps the biggest issue shaping ATMs in the near future will concern the choices of millennials, those for whom the internet, mobile phones and plastic cards are a fact of life, checks are unknown and cash is quaint. </p>
<p>They <a href="http://www.atmmarketplace.com/articles/gen-y-and-the-next-gen-atm">challenge</a> financial institutions and their business models to do more faster because they have easier and faster access to better technology than offered by the banks’ legacy systems through the multitude of apps on their smartphones, wearables, tablets and elsewhere.</p>
<p>Left to their own devices, millennials could spell the end of the ATM by 2035 or thereafter.</p>
<p>But that’s still a long way off, and cash – the <em>raison d’etre</em> for the ATM – is still king. Even for most advanced economies, cash <a href="http://www.wsj.com/articles/reports-of-the-death-of-cash-are-premature-1417480600">represents</a> about half of transactions below US$50. </p>
<p>So it will be a while before we see the end of the crisp paper bill and the coins that fill jars across the globe. In other words, “Long live the ATM!” – so long as there remains a need for after-hours and quickly dispensed cash.</p><img src="https://counter.theconversation.com/content/38930/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Bernardo Batiz-Lazo has received funding to research ATM and payments history from the British Academy, Fundación de Estudios Financieros (Fundef-ITAM), Charles Babbage Institute and the Hagley Museum and Archives. He is active in the ATM Industry Association and is a regular contributor to <a href="http://www.atmmarketplace.com">www.atmmarketplace.com</a>.</span></em></p>Devices we keep in our pockets can now do most of the functions once the dominion of the automated teller machine – or banker – but it may be premature to pronounce the end of the ATM.Bernardo Batiz-Lazo, Professor of Business History and Bank Management, Bangor UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/379522015-03-25T12:21:53Z2015-03-25T12:21:53ZCash remains king in Chile but its days could be numbered<figure><img src="https://images.theconversation.com/files/75957/original/image-20150325-14500-1a0f05a.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">In short supply.</span> <span class="attribution"><a class="source" href="https://www.flickr.com/photos/saucef/4800116106/in/photolist-8jaRhw-BqbUa-81w9gz-8y4p1t-8y4kVk-8y49TK-8y73KJ-8y4bwn-8y7hjL-8y7q9S-8y7rJm-8y6VSG-8y78t5-8y47xi-4pbmrr-7KkZ5B-8y4aLx-8y48vn-8y4iq8-8y4non-4jPBbL-4jPBvL-4jPAB7-4jKy8D-4jPB2y-4jKzM6-4jKA8k-4jPAN9-4jKzpT-4jKz4e-5iK5a3-ddjHbB-esVp9Y-aFbzjK-oQdUeU-8y4dfD-8y4dZM-8y4grv-8y44rv-EM4e5-EM4dJ-EM4dL-EM4du-8y42KX-8y4152-9dQcJR-hyMTWQ-41rxkp-b9vQQ8-hhxrY">Sauce Babilonia</a>, <a class="license" href="http://creativecommons.org/licenses/by-nc/4.0/">CC BY-NC</a></span></figcaption></figure><p>For more than a year now, Chileans have endured a crisis of cash access. Despite global moves toward new forms of payment such as contactless and mobile transfers, the crisis in Chile highlights the continuing importance of ATMs in today’s payment ecosystem for many people worldwide – particularly those with lower incomes.</p>
<p>Cash is used by the majority of Chileans to pay for most things – from everyday necessities like food, drink and transport to monthly rent and the odd weekend treat for the family. So a lack of cash prevents Chileans at the base of the economic pyramid in particular to go on with their daily lives. Borrowing money <a href="http://www.imtfi.uci.edu/files/blog_working_papers/2014-3_Ossandon_Working%20Paper%202.pdf">through someone else’s credit card</a> is also a common practice, where the money loaned on credit is repaid in cash. </p>
<p>Also, ATMs function as more than just a hole in the wall cash dispenser in Chile. According to a study by Bain & Company in 2013, 25% of all retail interactions with banks took place through an ATM (while 55% were through a computer or mobile phone, 12% in a bank branch and 8% through a land line or other means). This is why an 11% reduction in the number of ATMs, or a decrease of 1,100 machines since 2012 has <a href="http://www.atmmarketplace.com/articles/atms-lose-their-charm-in-chile/">led to social unrest</a> – ATMs are crucial to the wider cashflow ecosystem.</p>
<h2>Cashflow problems</h2>
<p>The huge decrease in ATMs in the last couple of years is a result of many banks’ unwillingness to assume the increasing <a href="http://www.bbc.co.uk/mundo/noticias/2014/12/141215_chile_cajeros_automaticos_comisarias_polemica_lv">costs of tighter security</a> and <a href="http://www.biobiochile.cl/2014/12/25/sbif-estudiara-propuestas-para-nueva-regulacion-de-cajeros-automaticos-que-operara-desde-2015.shtml">new guidelines</a> stipulating that they be in operation 95% of the time. The government has also put a freeze on the <a href="http://static.pulso.cl/20141118/2035330.pdf">interchange fee</a>, which helps banks cover their costs.</p>
<p>Whatever the reason, Chileans are not happy about it. Complaints mounted across the country throughout 2014, particularly from low-income earners on the periphery of large cities such as Santiago, Valparaíso and Concepción. These are people that don’t have access to a computer, tablet, smart phone and, in some cases, even the internet. </p>
<figure class="align-center ">
<img alt="" src="https://images.theconversation.com/files/75959/original/image-20150325-14488-p7roww.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/75959/original/image-20150325-14488-p7roww.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=337&fit=crop&dpr=1 600w, https://images.theconversation.com/files/75959/original/image-20150325-14488-p7roww.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=337&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/75959/original/image-20150325-14488-p7roww.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=337&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/75959/original/image-20150325-14488-p7roww.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=424&fit=crop&dpr=1 754w, https://images.theconversation.com/files/75959/original/image-20150325-14488-p7roww.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=424&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/75959/original/image-20150325-14488-p7roww.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=424&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">People on the periphery of cities like Valparaíso are worst affected.</span>
<span class="attribution"><a class="source" href="https://www.flickr.com/photos/mariano-mantel/13835953834/in/photolist-n5CT3b-7bKW32-iwqMgS-b7VX56-AG4xQ-5NVy1X-6sosB1-mQ284-KeTqZ-Htd6g-BMGdG-xpcSP-7aG35c-m256oz-dr1hxx-85L5Ui-61BVKy-5H5KR4-kkCGT-9tVvvE-4J1WBE-bpminN-nkffRx-naUtLM-7vKTPP-6LCiXH-HyrDc-dSosza-a1TcQv-KxnGM-q4TNGD-ds84PX-bvT1JU-3iBjdH-HmPvG-Kncuh-j7Bv3L">Mariano Mantel</a></span>
</figcaption>
</figure>
<p>Faced with increasingly large numbers of inoperative or empty machines as well as banks’ unwillingness to replenish cashpoints in the evenings or at night due to a series of robberies, people were reduced to only being able to access cash and the other services provided by ATMs during banking hours – very inconvenient for people with day jobs.</p>
<p>Politicians jumped on the bandwagon – the topic was headline news almost every day by November and has remained at the top of the political agenda since then. Banks eventually responded to the public outcry by pointing to the rising cost of operating and replacing machines, due to repeated attacks by gangs of thieves that empty the machines and render them inoperative. </p>
<h2>Increased access</h2>
<p>Chile has done a great deal in recent years to improve access to financial services for its citizens. In 2007 the government made simple current accounts easily available to all the adult population, linked to a debit card and each person’s tax reference number. <a href="http://www.elquintopoder.cl/economia/cuenta-rut-banco-estado-no-mas-cobros/">Recent estimates</a> show there are more than 4m of these accounts in active use in a country with 16m inhabitants. </p>
<p>Almost half of these account users are without access to any other banking product; these are typically low-income individuals, <a href="http://www.elquintopoder.cl/economia/cuenta-rut-banco-estado-no-mas-cobros/">73% of whom earn, on average, US$320 or less per month</a> and many of whom live in remote rural locations. </p>
<p>This scheme was largely made possible by Chile’s proliferation of ATMs. The country was once a Latin American hotspot for the machines. In 1995, banks doubled the number of cashpoints to 1,032 units – and growth continued until reaching a peak of 9,238 devices in 2012. </p>
<h2>A long-term trend?</h2>
<p>According to London-based Retail Banking Research, other countries where the number of ATMs fell more than 10% between 2008 and 2013 included Denmark, Greece, Norway and Spain; while the Netherlands and Sweden lost between 5% and 10% of total units in the same period. It is not clear whether these losses are part of a long-term trend, but use of cash in Nordic countries is so low that they are been heralded as <a href="http://www.reuters.com/article/2015/01/09/us-nordic-cashless-idUSKBN0KI1AA20150109">cashless societies</a> while Spanish banks have suffered a steep <a href="http://uk.reuters.com/article/2012/04/04/uk-spain-economy-idUKBRE8330JU20120404">consolidation</a>. All these countries have very different economies to Chile. </p>
<p>Other payments forms <a href="http://www.fastmr.com/prod/952187_atm_cards_in_chile.aspx?afid=301">are on the rise</a> in Chile. While cash transactions increased by 1% in 2014, card payments increased by 3% and electronic transactions increased by 14%. Nonetheless, cash remains vital for <a href="http://www.ministeriodesarrollosocial.gob.cl/resultados-encuesta-casen-2013/">57.2%</a> of the population. </p>
<p>And, even if transaction volumes decrease from current levels, for the foreseeable future the ATM will remain a focal point for many commercial establishments in Chile as everyone takes cash. Not only does it constitute around 3.4% of <a href="http://www.bcentral.cl/publicaciones/politicas/pdf/Gestion_Pasivos_2012.pdf">Chile’s GDP</a> (as opposed to less than <a href="http://www.ft.com/cms/s/0/63a21dcc-6f68-11e1-9c57-00144feab49a.html#axzz3U6KLijnU">2% of GDP</a> for the European Union), but it is the payment method of choice for the <a href="http://facultades.unab.cl/economiaynegocios/files/2012/11/DOCUMENTOTRABAJONRO1.pdf">country’s poor</a>. And there will be a need for a cashpoint as long as this is the case.</p><img src="https://counter.theconversation.com/content/37952/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Bernardo Batiz-Lazo has received funding to research ATM and payments history from the British Academy, Fundación de Estudios Financieros (Fundef-ITAM), Charles Babbage Institute and the Hagley Museum and Archives. He is also active in the ATM Industry Association and is a regular contributor to <a href="http://www.atmmarketplace.com">www.atmmarketplace.com</a>.</span></em></p><p class="fine-print"><em><span>Juan Felipe Espinosa had contributed to <a href="http://www.atmmarketplace.com">www.atmmarketplace.com</a></span></em></p>An 11% reduction in the number of ATMs in Chile has been a nightmare for the majority of the country’s citizens.Bernardo Batiz-Lazo, Professor of Business History and Bank Management, Bangor UniversityJuan Felipe Espinosa, Lecturer in Management, Pontificia Universidad Catolica de ValparaisoLicensed as Creative Commons – attribution, no derivatives.