[From CGAP Technology blog, 11 January 2012 (co-authored with David Porteous)]
Sarah Rotman blogged recently about yet another breathless announcement about the imminent arrival of the cashless society. She said and we agree that “cashless seems a bit naïve; cash lite seems more realistic although still a big challenge.” The very first part of the challenge is actually to visualize what a “cash lite” world looks like. Is it simply an ill-defined way station on the road to cashlessness, or is there a meaningful state or goal that goes with it?
We think the latter, and for us the defining characteristic is not the amount of cash (let cash do what it will!), but the availability of alternatives for the bulk of the population. It’s freedom from cash, not absence of cash. We have coined a word which encapsulates key elements of a cash lite society: LiFi (see baptismal paper here). Like WiFi, which provides retail connectivity at the edge of the internet cloud, LiFi is about connecting people to an electronic payments grid which provides Liquidity withFidelity. WiFi is open, general-purpose broadband; LiFi is secure, special-purpose narrowband.
A LiFi world is therefore one in which every person has an electronic store of value which they can easily use to make and receive payments in real time. Just like in places with reliable on-grid electricity, we can turn on a light on-demand, knowing that it will work and that the cost of flicking the switch will be small in relation to the benefits.
Because there is no precedent for cashlessness by fiat and cash can be counted on to still be an option for a long time to come, the key challenge of LiFi is getting people to trust and want to use the LiFi payment mechanism…because it is robust, because it is safe and because it is useful. All these attributes take time to demonstrate to the satisfaction of risk- (and change-) averse users. A LiFi approach recognizes that in two ways.
First, transactions are electronified gradually, starting with those for which cash presents the biggest drawbacks. Such payments are larger (cash handling puts you at risk), remote (cash is costly to move), or business- or government-related (cash leaves no record). In contrast, in a dash to cashlessness, providers often focus on in-store merchant payments as the key battleground. But these types of electronic payments will always be difficult to push from the outset because acceptance of electronic money in every store everywhere requires both customer willingness to switch and a strong business case for the merchants.
Second, LiFi payment mechanisms need to connect to “last mile” liquidity sources (networks of stores acting as cash merchants or agents, ATMs and branches), so that the electronic money sent or received via the payment grid can be exchanged for cash conveniently and reliably.
The LiFi strategy is indeed to infiltrate cash: make cash more efficient by supplementing it with an electronic remote payments capability and propagating cash merchants in remote villages and neglected neighborhoods. Use of cash will be slowly relegated to the edge of the network – and eventually we can push it over the edge.
To achieve this, the payments grid in developing countries has to function more like a utility. Business models and even regulation have to change to recognize this. This does not imply that running the grid must be a government function—private utilities may be more efficient in many cases—but the effective oversight of such a grid falls to payments regulators.
In enabling LiFi, regulators will need to consider much more carefully tradeoffs between competitive approaches and scale efficiencies. They will have a strong interest in ensuring that the grid provides new customers with the support they need to address questions and problems as they arise—in other words, putting the “Fi” in LiFi.
In a LiFi world, transactions costs are reduced and convenience is enhanced. The payments grid provides the essential “wiring” to support the emergence of new generation business models—from private schools and hospitals collecting fees for service, to e-commerce vendors in developing countries selling downloads. Unlocking this wave of entrepreneurial energy to address some of the developing world’s pervasive needs seems to us to be one of the most compelling features of a connected LiFi world.To be sure, in every country, there are challenges in reaching this state. However, ongoing advances in mobile data technology have already enabled pervasive connectedness. A LiFi world ought now to be on the horizon for forward-looking policy makers and regulators.