Digital payments and a move away from a cash economy

Vietnam is still a cash economy. It’s so cash driven that Vietnamese buy houses with gold bars and cash. And people still hoard hard currency like euros and dollars. According to one statistic, Vietnam’s non-cash transactions are less than 5%. But lots of people are working to move Vietnam to a non-cash economy, including the government that sees a lot of benefits to moving away from cash. These include:

SOURCE: WORLDBANK

It is much harder to audit businesses that are cash based. The government likes this, because it can make sure that it is getting the taxes it likes. But businesses also benefit because their records are more transparent and can be used for loans, etc.

Second, it does cost money to print bills. I couldn’t find costs for VND, but for the USD, it costs 5.5 cents for $1 and $2 bills, but that jumps to around 11c for $5-50 notes. And the $100 bill costs 14c. Now, this is all profit in the US. But profits on non-cash are much higher for the Fed - they just add numbers to their ledger, and voila, they’ve created money with no real cost.

In Vietnam, given that many bills aren’t worth that much, the seniorage profit isn’t as large. For a VND1,000 note, if it costs 5 cents to print, the bank loses money since it’s only worth 4 cents. Of course, it probably costs less, and most bills are worth more. But still, printing money is supposed to be super profitable. When it is just a ledge at the central bank, then that’s the best.

SOURCE: E-CONOMY SEA 2018 BY GOOGLE TEMASEK

Third, cash is a temptation for thieves. Like I wrote yesterday, having lots of cash lying around attracts criminals. Plus, you have people making multiple trips to the bank to deal with all this cash. Sometimes I hear small store operators complain about credit card fees (which are unconscionably high in the US), but there is a cost to cash as well: tracking it, getting it from the bank, making sure you have the right change, etc.

Fourth, so much of modern day electronic commerce needs to be done cashless. In some parts of the Middle East, they still use cash for things like purchasing goods or Uber, but it is a real limiting factor because cash just makes every transaction more fraught. It’s just easier to get the payment digitally. Once everything can be done electronically, then so many transactions open up.

How fast is the move away from cash happening?

The government is working hard to change this by requiring a move to digital payments. But it is going to be a tough slog. Only 31% of people above 15 had a bank account or account with a mobile-money service provider in 2017, according to the World Bank. Only around 25% of people in Vietnam have adopted some digital service according to a report by Google and Temasek from late last year. It isn’t a lack of access: 70% of all young people have smartphones, so that isn’t stopping them - it really seems to be culture. Because of that, I think it is important to talk about the opportunity once the economy converts away from cash.

The government has really been pushing the conversion.

The prime minister is directing banks to reduce cash transactions to less than 10% by the end of 2020. E-commerce is being promoted at malls and supermarkets in major cities and the government wants at least 70% of Vietnamese aged 15 and older to have bank accounts…A new regulation in January [2019] mandated providers of public services -- from hospitals to schools -- to stop accepting cash by December.

If they reach these milestones, then the electronic payments space is going to be gigantic.

Everyone is trying to get into this space

Because of the government support and the massive potential, we have everyone and their mother working on a solution, from banks to cryptos. This has led to significant fragmentation. And growth, but it is still minuscule. As I said above, less than 5% of all transactions are non-cash, including bank transfers and credit cards as well as mobile payments.

It will be interesting to see how mobile payments and credit cards fill this gap. Banks are trying hard on all fronts. But it seems to me that mobile is going to be the way forward. In developed markets, there is already such a large base of credit card companies. But in developing markets, a system can be built from the ground up that is more secure and easier.

The big event last year was Momo, an digital payments company, closed something like $100m in a Series C round. They are now the gorilla, but there are a lot of competitors. I counted over 20. The top three appear to be: Momo, Nganluong and VTC Pay.

Solutions like Momo allow users to load their eWallet by connecting it to their bank account or loading it in any one of its 4000+ retail locations. Nganluong already works with more than 10,000 e-commerce merchants and supports over 500,000 eWallet customers and partners. VTC Pay has over 22 million active eWallet users and is accepted by over 30,000 businesses.

It is highly contested space. Because it is so immature, companies have really focused on the main urban centers, but that leaves out a large portion of the rural population. The needs there are great: “60% of the rural population is unbanked and face difficulties in accessing financial services.”

In the future, I am going to dive into these fintech startups, but I wanted to do a quick write up about the environment in Vietnam first. The problem is that cash is dominant. Someone will come in and fill this gap, helped by government support. The question is: will it just be a few players, or will it be a winner-takes-all? My first guess is that it will likely be one or a few major players, but that will likely depend on regulations. It will be interesting to watch.