This article first appeared in Personal Wealth, The Edge Malaysia Weekly on February 18, 2019 - February 24, 2019

Cash will continue to play an important role in Malaysia, even as regulators, consumers and retailers join the ongoing movement to become a cashless society. In fact, consumers will increasingly seek convenient access to cash because banks are reducing their physical reach and digitalising their services, says Hari Sivan, founder and CEO of financial technology (fintech) start-up soCash Pte Ltd.

“There is still growing demand for cash. Driven by consumer demand, the total amount of cash in circulation is increasing. This is happening in many countries, including Singapore, Indonesia and India. In any country where there is a growing economy and the growth is happening in the middle and lower-income segments of the population, the demand for cash is increasing because that is the cheapest way to conduct commercial activities,” he adds.

This reality is reflected by data out of several countries that show a rising amount of cash in circulation (CIC). For instance, the Bank of International Settlements’ Quarterly Review published last March highlighted that CIC was up from 7% of GDP in 2000 to 9% on average for many of its member countries, including Singapore, Hong Kong and Japan.

Bank Negara Malaysia data show that CIC increased in the country from 2013 to 2017, albeit at a slower growth rate since 2016. This occurs as e-payment transactions per capita more than doubled to 111 in 2017 from 49 in 2011.

According to a Nielsen report last month, cash is still king among Malaysians when it comes to everyday expenses. While online banking is the preferred method for paying recurring expenses such as phone and internet bills, 93% of those surveyed still use cash when dining out while 90% use it to buy groceries, 89% to pay for public transport and 81% for petrol. Debit cards are only used for ad-hoc offline and online purchases. According to the report, only 8% of respondents used e-wallets.

“In my view, cash is the efficient payment system for low-value transactions because these are free, universally accepted and instantly settled between parties. It would be prudent to review if the promotion of a cashless economy is actually the solution to the problems that it is supposed to solve, or if it is mostly paid propaganda financed by payment intermediaries, who are driven by the potential of recurring revenue and data collection opportunities,” says Sivan.

At the same time, he adds, it is becoming harder for consumers to get access to cash because banks are reducing the number of branches and ATMs to save costs.

“Banks are spending US$300 billion a year just to run the ATM network. Building hardware costs US$25 billion and they have to load the ATM with cash every night with the help of an armoured truck (which adds to the cost of cash logistics),” says Sivan.

According to a report by The Asian Banker, the cost of physical channels (ATMs and cash deposit machines) was 42% of the total operating cost for a few banks in Malaysia that were surveyed by the publication in 2011.

This trend occurs as more cashless payment options become available to Malaysians. PayNet, of which Bank Negara is the largest shareholder and other major banks in the country are joint shareholders, launched DuitNow last December. DuitNow is an instant credit transfer service using mobile phone numbers or other identification numbers. Interoperable QR codes between banks and non-bank players, which allow participating e-wallet services to use a single QR standard for payments, are expected to come online in June.

Force of habit and concerns about security are some of the reasons hindering faster adoption of cashless payments on the part of consumers, according to the Nielsen report. In addition, the cost of adoption may burden merchants, Sivan observes.

That is because merchants may have to pay additional fees to accept cashless payments. So, even if consumers demand more cashless payment options, some small merchants may prefer to only accept cash so they can avoid those extra charges.

“With the current business model, merchants pay for that service with every transaction. For instance, if you use a card to pay, the merchant loses a few per cent of revenue in transaction fees. But if you pay cash, he gets the full amount. For small retailers and businesses, the current payment systems are expensive,” says Sivan.

In some cases, QR code payments, a common cashless payment method for mobile wallets and some banks, may become more expensive in the future, he observes. In Singapore, the transaction and subscription fees for the use of QR payments are only waived until 2020, after which service providers can charge merchants for the use of this service.

From a regulatory perspective, the Malaysian central bank has taken steps to address the costs that merchants have to take on when adopting cashless payment systems. Since 2013, it has capped the cost of credit transfer services, imposed ceilings for interchange fees (which a merchant’s acquiring bank pays for a payment transaction) and established a market development fund to expand the point-of-sale terminal network until 2020, among other initiatives. According to Bank Negara’s Financial Stability and Payment Systems Report 2017, the average merchant discount rate (cost incurred by merchant for accepting debit and credit card payments) had declined from 2014 to 2017.

Setting up soCash

These observations led Sivan to create soCash in Singapore three years ago. Prior to this, he worked at Citibank for 15 years and DBS Bank in Singapore, dealing with mobile and internet banking, wealth management, payments and remittances, among others.

soCash’s business model is simple. It will enable consumers to withdraw or deposit cash from merchants in Malaysia instead of having to look for an ATM.

“My early teammates and I were all from banks. We realised that in Southeast Asia, we were trying to replicate [cashless payment] models from countries such as China or the US, like Alipay and Wechat pay, but it just does not work here because the conditions are different. We realised that we were looking at the wrong direction because if you look at the data, cash continues to be the largest and most-

often-used payment system for the majority of the people. At the same time, there is the operational cost of ATMs that banks are trying to get rid of,” says Sivan.

They looked to the business models of Uber and Grab for inspiration. Instead of having ATMs and bank branches, they envisioned having retail merchants — such as restaurants and shops — perform simple banking functions with the assistance of a technology platform. With this solution, banking transactions could be more convenient and banks would be able to improve their cash distribution and liquidity management.

“Right now, the demand for cash is growing and the network [of banks] is shrinking. So, we are filling that gap,” says Sivan.

According to him, their service is 30% cheaper than what banks currently use. Users do not have to pay to use the soCash service, so they can save on the charges that would have come from using another bank’s ATM or debit and credit cards.

It is a model used in countries such as Japan and the US. For instance, Seven Bank — a subsidiary of the company that owns 7-Eleven Japan — has more than 24,000 ATMs at Japanese convenience stores, shopping centres and train stations, as well as 8,000 ATMs in US convenience stores, according to reports. Meanwhile, the major banks in Japan have reduced the number of ATMs over the past decade.

soCash was officially launched last March in Singapore. It had been given a grant by the Monetary Authority of Singapore and funding from Vertex Ventures, a subsidiary of Temasek Holdings. Since then, the start-up has expanded to 1,300 locations on the island republic.

soCash has formed partnerships with banks such DBS Bank, Standard Chartered Bank, POSB Bank and Industrial and Commercial Bank of China Ltd. It also has merchant partnerships in Singapore with 7-Eleven, Haomart and iEcon as well cafés, restaurants and convenience stores. It is currently expanding to hotels.

“We are the largest network for cash now because there are only 800 ATM locations in Singapore and 3,000 ATMs. But in 10 months, we have exceeded the number of ATM locations,” says Sivan.

He plans to launch soCash in Malaysia by the end of this year. According to him, the start-up already has approval from Bank Negara to operate in the country. soCash is currently in talks with several big banks and retailers in Malaysia to strike up partnerships. The retailers that the company is targeting are those with low-value but frequent transactions.

“Malaysia is a good place to expand because more than 90% of the people are banked but do not have access to banking services because their network is reducing. We are not competing with other cashless players. We are only competing with ATMs and cash logistics companies,” says Sivan.

How the service works

After users download the soCash app, they can input the amount that they want to withdraw or deposit. It will then direct users to their bank’s app, where they have to go through authentication procedures set by their respective banks. Once the process is done, the soCash app shows users the nearest location where they can withdraw or deposit cash through a QR code. They will also be shown offers from merchants.

The maximum amount for withdrawals and deposits is set by the bank. Only the withdrawal function is available in Singapore, where some shops require purchases before withdrawals are allowed. The minimum amount required for withdrawals from some shops are S$30.

“We use the banks’ authentication and the transaction goes through the bank. So, it is more secure than putting your card in a mobile wallet. When a user withdraws cash, the money goes to the merchant’s account automatically. We take care of the movement of money, the settlement and the backend integration of the accounts,” says Sivan.

At the backend of the app, the soCash system checks the availability of cash with the retailers through an integrated merchant platform. It then uses machine learning to estimate the total amount of cash the retailers want to deposit throughout the day and matches it with customers who want to withdraw cash.

“All the merchants need is an Android phone or a point-of-sale machine. There is no need for them to ‘report’ their total cash in hand. If the retailer does not have enough cash, it can just go offline like a Grab driver,” says Sivan.

Meanwhile, it saves retailers the trouble of having to deposit their cash in the bank. “Only retailers who are cash heavy will join the network. Most of them have low-value and high-frequency transactions. For them, the problem is depositing cash. So, we match the demand for cash from consumers, who usually withdraw amounts like RM300 or RM400, with retailers who have RM10,000 to deposit, for example. Instead of sending personnel to deposit cash at a bank branch, soCash users will come in and withdraw money from them,” says Sivan.

He foresees the amounts withdrawn and deposited to be small but frequent due to the convenience of access. “As your access becomes faster and nearer, people will withdraw smaller amounts. People used to withdraw large amounts like RM500 because they did not want to make multiple trips to the ATM. But if our service is close by, they can just withdraw RM100 at a time. Then, there will be more money in the bank, which hopefully can give you more interest,” he says.

This also promises a certain level of security for both the users and merchants as the amounts withdrawn and deposited are expected to be lower. The app, on the other hand, is built with bank-grade security and does not store user information, says Sivan.

“We have to meet all the standards in terms of engineering, stability, scalability and preventing information leakages. Every platform can be hacked, but it is much more difficult [to hack us] than current systems, where you can just steal information from the card,” he points out.

In the initial stage, soCash plans to target the outskirts of the Klang Valley where ATMs are not as concentrated. “It is exactly the same as what we did in Singapore, where there is an existing ATM network in the city. However, the city continues to grow. So, the community, grocery shops and clinics are set up in the outskirts before banks are. Our target customers are 18 to 35-year-olds who are digitally active and already use some form of shared economy services and do not want to pay RM1 to use another bank’s ATM,” says Sivan.

The start-up also wants to expand to Indonesia and Hong Kong before entering Vietnam and Myanmar. Future iterations of the product could assist tourists who want to withdraw cash in other currencies as well.

Save by subscribing to us for your print and/or digital copy.

P/S: The Edge is also available on Apple's AppStore and Androids' Google Play.