RSM New Zealand

Money & a changing world

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Money – we all use it.  Most people spend most of their time and most of their lives trying to earn it.  Some call it the root of all evil.  Some say it is a force for good.  “Money makes the world go around” is an apt saying for emphasising the importance of money to the local and global economy. 

As Yuval Noah Harari said in his excellent book Sapiens; “Money has been essential both for building empires and for promoting science.  But is money the ultimate goal of these undertakings, or perhaps just a dangerous necessity?” 

No matter what the answer, it would appear we can’t live without it. 

In many respects we just take it for granted.  Yet there are some potentially seismic shifts in the concept of money as we have known it starting to happen. 

Background

As a Chartered Accountant I have spent my working career in a profession dedicated to accounting for things in monetary terms.  Likewise, money is a primary aim of businesses as well as being a key feature of most not-for-profit entities. 

The alternatives to money are a life of complete self sufficiency or barter.  The former is very hard to imagine now.  The latter is hard to scale.  An economy of favours and obligations simply doesn’t work when large numbers of strangers try to cooperate.  Hence, we have created money as a generally accepted store of value and a medium of exchange.   

Again back to Mr Harari; “Money is not coins and banknotes.  Money is anything people are willing to use in order to represent systematically the value of other things for the purpose of exchanging goods and services.”  

While most of us tend to immediately think of money as cash, or legal tender issued by the Government, it is actually just a mental invention. That is; something that exists in our shared imagination.  It only has value because we all believe it must have value.  Essentially this is the definition of a fiat currency.  This derives from the Latin term fiat whose meaning has been described to me as let it be done, or it must be so.  i.e. money has the value it has only because we all collectively believe it has value.

What’s changing?

So what has got me thinking about this topic of late?  (As for 30 years as a Chartered Accountant I am a tad embarrassed to say I have never previously really stood back and thought too deeply about the concept of money before!).  Three things of late have brought this broader concept of money, and especially the future of money to my attention.

The future of cash use

In June 2019 our Reserve Bank released a surprisingly interesting discussion document exploring the uncertainties around the future of cash in New Zealand.

For clarification cash refers to tangible money being banknotes and coins.Cash has the unique advantage of being “bearer pays” i.e. it can be spent by whoever holds them. This is unlike digital money such as credit cards, bank accounts and mobile wallets which differ in that they require authentication from the owner.

The key issue from the discussion document is: “…despite a trending increase in the overall cash in circulation, New Zealand is becoming a society that uses little cash.New Zealanders are using cash less and less for transactions.As the transactional demand for cash falls, the per–transaction cost of providing the cash infrastructure increases.”

“Just under 2 percent of the broad money holdings in New Zealand is held in banknotes and the rest is held in digital balances.”

The main issue of concern this highlights is that a contraction in the cash network without regard to the wider benefits of cash in society might significantly disadvantage people who rely on the unique role that cash plays in their lives.   Especially the elderly and the digitally excluded.  While the Reserve Bank is the sole issuer of cash in New Zealand there is no agency responsible for overseeing the usability of cash by the public, nor the stability of the cash system in New Zealand.

I found it interesting to learn that legal tender means that cash must be accepted for debt repayment unless there is an agreement stating otherwise.  However, while the concept of legal tender provides some certainty for the usefulness of cash, it doesn’t guarantee that cash will be accepted as payment for sales.

New Zealand is not the only country to be pondering the future of cash.  The UK Treasury has also led some research into this issue of late.  Earlier this year they announced they were committed to keeping cash and coins for at least the near future. 

The Reserve Bank’s discussion document can be found at their website https://www.rbnz.govt.nz/notes-and-coins/future-of-cash/issues-paper-the-future-of-cash  It is well written and well worth a read with feedback requested by 31 August 2019.

The demise of cheques?

We all know that transacting via cheques incurs a level of cost for the convenience.   However, in a surprising development to some, Kiwibank have recently announced that they are going to stop issuing new deposit and cheque books to customers from the end of September 2019 and stop processing all cheques from the end of February 2020. 

This decision is likely to have a significant impact on New Zealand’s:

  • Older population who use cheques for every day and regular transactions, and who rely on cheques as a trusted payment method
  • Non-profit/charitable sector who receive a significant proportion of donations via cheques from older people; and
  • On some small business and traders for whom cheques remain a regular payment method.

I also expect this development will impact the day to day business of many professionals such as lawyers.

Whilst it is clearly evident that cheques as a type of payment method is in global decline, enforcing both an end to processing cheques and an alternative that’s digital only has a huge potential impact on older people’s rights, dignity and financial independence. Particularly as this cohort are the least digitally literate.For the non-profit/charitable sector they are also currently the largest charitable givers.

Kiwibank’s move has not been followed as yet by the other main trading banks but one can only suspect that they are watching and waiting with interest…whilst probably quietly pleased that another bank is the first cowboy up that particular pass.

For comparison, in Australia the move to completely phase out cheques has so far been resisted.While the Reserve Bank of Australia made an announcement around plans to phase out cheques way back in 2011, lobbying by various groups has instead resulted in a regular tracking of the use of cheques as part of a managed decline rather than an enforced decision.

While I am not a luddite, I do think that care needs to be taken with such change that unintended adverse consequences are minimised.

The rise of new payment powerhouses

You may not have seen it so much in your daily life in New Zealand as yet but the future is steadily starting to creep in.  A future I suspect that will fast become mainstream.  In some countries in Asia new personal payment technologies such as Alipay and WeChat Pay are already becoming pervasive. While celebrating my eldest son’s birthday at a local Asian restaurant last week I was intrigued to see a number of new payment options advertised, including one of the former, alongside the traditional credit card options. 

And now with what could be a game changer; social media juggernaut Facebook has entered the fray by announcing their proposed new digital payment option, a cryptocurrency called Libra.  Facebook says Libra is a “global currency and financial infrastructure”. In other words, it is a digital asset built by Facebook and powered by a new Facebook-created version of blockchain, the encrypted technology used by bitcoin and other cryptocurrencies.

It has a number of interesting features such as it’s value being tied to a basket of traditional currencies to avoid it being a highly speculative asset like existing cryptocurrencies such as Bitcoin.  Instead it appears to be aiming to be the payment option of greatest convenience.  What makes this really significant to me is that Facebook already has a devoted community of something over 2 billion users worldwide. That’s a customer base that any bank would salivate over! 

Summary

We all use money in various forms.   However, recent developments such as those above demonstrate that what we have known, and perhaps taken for granted, as money is changing.  

We all need to consider what this may mean to our businesses and personal lives.

How quickly new methods of transacting are adopted as sufficiently convenient to change behaviour by businesses, by other organisations, and the general public, will dictate the speed of change.  And possibly sooner than we expect.  Watch this space!   

 

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Authors

Craig Fisher
Consultant