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November 15, 2019

Finance Norway

Cash – an inefficient and

outdated means of

payment

Contents

▪ Cash is outdated, inefficient and bad for your health

▪ What needs to be done to encourage, optimize and replace?

3McKinsey & CompanySOURCE: BIS, central banks; ECB; Euromonitor: RBR; McKinsey Payments Practice, McKinsey Global Payments Map

Cash is outdated: As countries discover alternatives, decrease in cash usage accelerates

Payments markets fall into five clusters based on their cash usage

▪ Cash is 70-80%, but trends in

digitisation suggest these

countries may join

mature markets in a few

years’ time

▪ Cash accounts for >80% of

transactions1. Growth in

volume and value linked

to growth in branch and ATM

networks

▪ Cash is 40-60% of total

transaction volumes; value of

cash in circulation is growing;

over-abundance of ATMs

lowers efficiency

▪ Cash transaction volumes are

resilient, despite growth in

electronic payments; highly

developed branch and ATM

networks suggest importance

of cash to local banks

▪ Technological innovation and

industry action have driven

cash usage below 40%; cash

is a commodity and banks

face challenge to reduce fixed

costs of banks and ATMs

Initial trans-

formation

markets

Emerging

markets

Mature

markets

Mature,

cash-

intensive

markets

Markets

at the

vanguard

“Cash h

eavy”

“Avera

ge c

ash u

sers

”

“Cash a

nd

Mobile

paym

ents

”

CAGR of cash usage (2006-18E)

Slowest reduction Average reduction Fastest reduction

Norway

Denmark

Sweden

UK

Netherlands

Estonia

Finland

Luxembourg

Korea

France

US

Australia

Belgium

Switzerland

Singapore

Hong Kong

Canada

Ireland

Brazil

Germany

Japan

Czech RepublicPortugalLatvia

SloveniaAustriaSpain Chile

Taiwan SlovakiaLithuania Poland

ArgentinaRussia Saudi Arabia

MalaysiaHungary

Turkey

Bulgaria

Romania

Peru

Indonesia

Italy

China

Thailand

India

2018E cash usage proportion

1 As a share of all transactions

-146

30

-2 -10

90

-13

75

-15

85

-12-6

10

-11

50

-90 -8-7

40

35

2

45

55

100-51 -4

95

-3

60

-13

65

70

45

80

15

20

25

Germany

Belgium

Denmark

China

Taiwan

Australia

Chile

Czech Republic

Indonesia

Austria

Hungary

Argentina

Brazil

Norway

Bulgaria

Canada

Colombia

Thailand

EstoniaFrance

Greece

Hong Kong

India

Ireland

Italy

Japan

Korea

Latvia

Finland

Luxembourg

Malaysia

Mexico

Morocco

Netherlands

PeruPhilippines

Poland

Portugal

Romania

Lithuania

Singapore

Slovakia

Slovenia

South Africa

Spain

Sweden

Switzerland

Turkey

UKUnited States

Russia

4McKinsey & CompanySOURCE: McKinsey Global Payments Map

1 Number of retail transactions made in cash per person per year. Retail transactions include consumer-to-consumer and consumer-to-business transactions.

Cash is outdated: People across the globe complete fewer and fewer cash payments each year

Number of retail cash payment transactions per capita,1 2006-2018E Comments

▪ Clear “inflection points” in

other countries have resulted

from a regulatory

intervention, e.g.:

– Bank of Korea removing

coins from circulation

– Swedish banks launching

Swish in collaboration with

Riksbank

– Vipps launched by DNB in

Norway

▪ The UK has not

demonstrated a clear

inflection point, and cash is

declining at similar rates to

Nordic countries known for

cash-light economies

▪ Further acceleration is

unlikely without active

intervention

CAGR, % (13-18E)

-4%

-9.4%

-25.2%

-6.8%

-3.3%

-17.2%

Bank of Korea announces plan to move

to cashless society by 2020, including

removing all coins from circulation

300

09

450

350

150

250

50

0

100

1311

200

400

15

500

16141008 17 20182006 1207

550

Instant Payments system

(‘Straksclearing’) launches in

Denmark

Swish payments is launched

-16.7%

Vipps launched in Norway

5McKinsey & CompanySOURCE: McKinsey Global Payments Map, Press

1. ACH and RTGS 2. Includes Charge cards 3. Includes Prepaid cards

NOTE: Data for non-cash transactions represents all domestic transactions (consumer, business, and government), triangulated from a number of sources incl. Bank of International Settle-ment, Central Banks, and Retail

Banking Research reports; cash estimates are calculated as a remainder from non-cash payments and average number of transactions per capita

Cash is outdated: Cash use has declined from 27% of transactions

in Norway in 2013 to 10% in 2018, and is forecast to fall to 7% by 2023

Payment transactions in Norway by instrument, million transactions

▪ xx

27

10 7

48

5857

2023

24

59 12

2023F

0

18E2013

0 0

100% = 3,156 3,328 3,484

Cheques

Credit cards2

Transfers1 Cash

Debit cards3

“Use of physical money is incredibly

rare in the Scandinavian nation, with

fewer than 10% of transactions

including cash and this could

completely disappear within the next

decade. In many ways, we are

already becoming a cashless

society”

- Deputy Governor, Norges Bank

(2018)

6McKinsey & Company

v

v

SOURCE: McKinsey Global Payments Map

Norway

319Finland

Denmark

UK

150

Sweden

Netherlands

61

80

327

Luxembourg

Ireland

96

Slovenia

BelgiumPortugalSwitzerland

78

RussiaPoland

Spain

147

Austria

245

Czech RepublicGermanySlovakiaHungaryItalyRomaniaGreece

France

416

76

108

289251

186184

164

353

10398

81

2719

104

Usage of cards – transactions per capita, 2018EShare of cash transactions

67%

37%

10%

Cash is outdated: Significant differences in cashless maturity between European top

economies

-81%

Debit1

Credit2

-55%

1. Includes Prepaid cards 2. Includes Charge cards

7McKinsey & Company

Sorting and

handling

Cash in

transit (CIT)

2-4

(15%)

7-10

(50%)

1-2

(5%)

Unearned

interest

4-7

(30%)

Insurance

7-137-10Total

Cash handling and inventory management

constitutes 5-10% of a bank’s operational

cost base

The challenge is to meet customers’ need for

cash at the lowest possible cost

Challenges:

• Ownership

Costs are typically fragmented across the

organization with no clear owner

• Optimisation

30-50% of banks globally, do not use any

tool to manage inventory instead relying on

experience

• Execution

Inefficient work flow and coordination

between relevant stakeholders e.g.

branches, cash vaults

Major cash cost components1, USD bn Context

SOURCE: McKinsey Global Payments Map, McKinsey Payments Practice

1 Includes bank transfers and direct debits 2 Estimated based on available benchmarks of bank size of 1,000 branches and 1,000 ATMs

Cash is expensive: Cash handling and inventory management is an operational challenge and

estimated annual cost of 5-10% of operational costs

Equivalent to 5-10% bank

operational costs

▪ Cash overstocking or cash out due to gut-based,

decentralized decision making

▪ Lack of visibility of end-to-end cash levels and

misaligned KPIs in managing cash inventory

▪ High cash transportation cost due to lack of

optimization balancing costs

▪ Sub-optimally priced CIT vendor contracts without

assessing cash needs and economics

▪ High insurance costs due to static limits set at

individual ATM/branch level based on historical cash

demand

▪ FTE costs due to inefficient work flow, overstaffing

in branches, cash vaults

Typical challenges

Less relevant

in low interest

situation

Cash is bad for your health !

Contents

▪ Cash is outdated, inefficient and bad for your health

▪ What needs to be done to encourage, optimize and replace?

10McKinsey & CompanySOURCE: “European B2C e-commerce Report 2016” – e-commerce Foundation; company websites; press search; World Bank

Encourage: Well executed digital solutions are enthusiastically accepted by the public

1 2016 figures

2 Based on number stated by players/number of downloads

5.5

2.6

3.4

0.5

3.3

3.0

0.3

1.5

1.9

1.4

1.3

1.0

7.0

4.1

5.6

7.3

60.6

60.6

6.9

45.4

71.9

50.6

50.6

50.6

60.7

63.0

6.8

5.4

78.6

4.9

4.3

3.3

2.7

2.8

2.6

2.0

Leading SolutionFoundingyear

Number of solution users2

2017, millions Number of mobile users, 2017, millions

E-wallet penetration in mobile users, %

Successfully established

2013

2012

2015

2014

2012

2015

2015

2014

2014

ESTIMATES

2011

2013

2017

11McKinsey & Company

Optimize: Further steps will be required to create sustainable situation

Example: The Netherlands

Current situation is not sustainable …

▪ Accessible: coverage will stay at more than 99 percent, with equal or reduced queue lengths

▪ Available: customers from all participating banks will be able to withdraw and deposit at all ATMs

▪ Affordable: cost per transaction reduced to level of other European countries

▪ Secure: geo-optimization allows removal of ATMs at least secure locations

and migration to a single system creates a tighter security loop

▪ Number of cash withdrawals decreases at ~10% per year

▪ Additional investments required in safety

▪ Longer term, keeping cash widely available and accessible while

affordable not feasible anymore for individual banks

▪ Only two relevant players (G4S and SecurCash) remain in cash

distribution market

Accelerated

from ~5%

before

… though pooling temporarily solves the main issues

11

12McKinsey & Company

Optimize: By consolidating resources, banks can save up to 35 percent in ATM costs

Cost after per-bank

optimization1

Combining

bank activities

5-10%

Cost after

nation-wide

optimization

Geographical

optimization

5-10%

65-80%

10-15%Standardization

100%

-20-35%

▪ Remove ATMs with low traffic in

areas adequately covered by other

ATMs

Example measures

▪ Consolidate IT development, fraud

handling, etc.

▪ Increase standardization of

hardware, software, security

infrastructure, etc.

Cost reduction opportunity resulting from creation of a combined network

Indexed, cost before ATM pooling = 100

1. Not including the cost savings from pooling cash counting facilities

Pooling of

resources by ATMs

by banks allows to

maintain and

improve service to

customers, even if

volume reductions

make it unfeasible

for individual banks

to maintain a high-

quality, affordable

network

13McKinsey & Company

Replace: Why Central Bank issued Crypto Currencies could be a game changer

Central Bank Crypto Currency

(CBCC)

As a policy tool

▪ Additional tool for monetary

policy

▪ Disciplining effect on banks

…but what about additional

volatility

For consumers

▪ Direct access to

(safe) central bank

money

▪ Protection of privacy

…but what about

resulting

intransparency?

For Financial Services

industry

▪ Ultimate “stablecoin”

▪ A clear standard

▪ Partially existing

infrastructure

▪ Great opportunity to

replace aging

technology

…but what about unfair

competition?

Central Bank

SOURCE: McKinsey

14McKinsey & Company

Nevertheless, cash won't go away even in tech-savvy countries

as the example of Sweden shows

SOURCE: “Swedish Markets in Transition,” The Route Toward a Cashless Society - The Case of Sweden,”

1 http://www.theguardian.com/world/2014/nov/11/welcome-sweden-electronic-money-not-so-funny

2 http://www.computerweekly.com/news/450280077/Swedens-central-bank-puts-break-on-cash-free-society

Perceived risks when going "cashless"

1 Exclusion

▪ Fear of exclusion of residents who might not have

access to digital methods of payments, especially the

elderly, those in rural areas, homeless, and immigrants

2 Vulnerability

▪ An electronic system is vulnerable to attacks and

hacking, whereas cash is not prone to attacks and

retains its value inherently

3 Privacy

▪ Electronic transactions can be traced, losing the

anonymity and privacy that cash can offer – without

cash as an option, there is growing perception of an

infringement on privacy

4 Fraud

▪ Card payment fraud cases have been steadily

increasing, with 140,000 cases cited in 2014, double the

number from a decade prior1

▪ Though consumers reap benefits from electronic

payments, there is a perception that banks are pushing

the shift from cash to electronic payments to maximize

profits

5

Concentration

of benefits to

banks

Reaction by central bank

▪ Due to governmental and central

bank's support, Sweden was fast

moving towards a cash-lite society

▪ Banks and merchants started

refusing cash and dominance of

cashless payment forms increased

▪ Central bank decided to slowdown

this development as parts of the

population couldn't adapt fast

enough to cash-lite society

[Cashless advances] have been

beneficial, but as with every

change there are certain groups

who experience problems. We

see the supply of cash services

being too small, and that is what

we want to address with this

proposal2

– Björn Segendorf, adviser at

Riksbank’s financial stability

department (March 2016)

CASE EXAMPLE