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Digital Payments

Five central banks have adopted the negative interest rate (NIRP), including those of Denmark and Sweden as well as the European Central Bank. A negative interest rate increases productivity and spurs growth as it, at least theoretically, causes money to depreciate if it is kept with the banks. At the same time, cashless payments are widely adopted in the Nordic region, supported by a high level of private and public digitisation. But where does this leave the marginalised groups in society?

An interview with Robert J. Kauffman, Professor of Information Systems and Associate Dean (Faculty) at the School of Information Systems, Singapore Management University.


"Any kind of solution that does a better job for the mass of society is likely to have rough edges that need to be fixed for everybody else," says Robert J. Kauffman, Professor of Information Systems and Associate Dean (Faculty) at the School of Information Systems, Singapore Management University.


He follows the rapid development of Scandinavia into a next to cashless society closely as parallels can be drawn to the transition currently undergone by Singapore, with the National Campaign to Minimise Cash Transactions launched in 1985 to encourage Singaporeans to carry out their transactions electronically.


"I think Scandinavia and Europe will set the example for the rest of the world. Keep in mind that many of the Asian countries are still the 'carry-cash' kinds of society, though this has been diminishing in Hong Kong, Singapore, South Korea and Japan. My late father-in-law, who was Chinese, never carried a credit card – instead he would carry enough cash to be able to take care of any contingency that could arise for the group of people that he was with. We live in an increasingly different world in Asia today though."


The Nordic region is the most digitised part of Europe, according to the European Commission, and already in 2014, research carried out for Nets by Danish research institute Wilke showed that 73% of all payments made in the Nordic region were card-based, with as much as 77% in Denmark. Cashless payments have been adopted equally by both men and women so far, with a majority of seniors, as much as 29% of the cashless segment, adopting cashless payments.


Meanwhile, most of Asia today is on an accelerated journey towards electronic transactions, according to Professor Kaufman:


"Today, many people believe that China is going to leapfrog what we think of as the norm for payments – they have many ways of transacting with mobile phones, especially with various forms of peer-to-peer payments as the next innovation of their time."


A more directly competitive market

While compelling arguments for a cashless society have been made - such as transparent transactions leading to lower crime rates, paired with greater convenience for consumers and merchants alike - it can nonetheless be argued that, once the cash alternative is gone, banks and other payment providers may wish to raise interest charges or fees per transaction, rendering cashless payments more expensive for consumers down the line.


 "I'm not sure I buy that – it'll be a more directly competitive market, and having more alternatives creates the basis for greater diversity. Say, if I don't want to buy furniture from a craftsman, I can go to a very large company and get their high quality, prefab furniture and make it myself. And it's cheaper when I go to that route. But once upon a time there wasn't that option - you could only go to the craftsman to get the furniture. Now think about the banking world: how many situations are there where I want go to a banker because the person is likely to know me and perhaps be kinder in terms of re-evaluation of my credit? Yet the reality may be that, over a larger population, I would get an even better deal by having a machine 'credit score' me. It happens behind the scenes anyway."


Part of the deal is consumers having to give up more and more information about themselves in order for the lender to assess their credit worthiness, so the institution can run less of a financial risk.


"The point is that someone else controls your private information. And yet, these days it's what makes for the reduction in friction so that I can get a second credit card or try to get another loan from another company without having to provide all my information once again," says Professor Kauffman, adding that there are issues about how much information one should share:


"There will indeed be groups of people who will fall through the safety net, unable to share basic and relevant information such as a work address."


Exception handling in retail banking services

The question is how a society handles the needs of the marginalised in a digitised society. The elderly, the poor and the homeless   – how will they be able to perform transactions without notes or coins in hand? How will they be able to provide sufficient data to make their way in a digital world?


Recently, an Icelandic school served a slice of pizza to every kid whose parents had transferred money electronically. A girl, whose family were refugees and had recently arrived to the country, was not on the list and was turned down in the queue, spurring a heavy debate on the inclusion of the underprivileged in a digitised society.


As Professor Kauffman points out, solutions that meet the needs of the majority – society-at-large – are bound to have aspects for which not everyone's needs are met. It is rarely due to a lack of understanding the problem, he argues, but rather through a failure to create actions to reflect that the net has been cast widely enough. Most citizens and regulators would like payment solutions in society to be efficient and low-cost, working on a subliminal level without anyone having to worry about it. The question thus becomes: what would be a social cost bearable to tax payers?


"As an economist, I often think about efficiency. Is something equally good for everyone involved?  Oftentimes you won't have perfection – instead you may settle for what is perceivably better, reasonable and workable – like sharing a bigger pie," says Professor Kauffman and points to the necessity of exception handling.


"My attitude toward issues related to the digital divide is that you cannot let important groups of people, particularly the elderly, have problems with this – you cannot marginalise them. They are too important a group in modern societies. This, then, becomes the business of segmentation, and the banks will have to find solutions to that, and it will cost them some additional effort to work things out to everyone's benefit."


It is likely that exception handling, i.e. when a company handles any abnormal conditions or errors, will not be profitable, explains Professor Kauffman and mentions  the notion of 'hook up or lose out,' an important concept in financial services and many other industries.


"If you don't cater to the needs of certain customer groups, they will quickly learn where to go, and they may take others with them. At a bank, management will need to figure that out as an occasional exception cost rather than a way to generate profitability. You have to do things in your business to remain in business and have a good reputation, even if it's not the main thing that you do," says Professor Kauffman.


Inherently, marginalised groups are unable to take their business elsewhere, raising the  question of what, then, to do as an individual and as society – of what, indeed, would be a social cost bearable to taxpayers?


Companies must create control to avoid 'known unknowns'

"So my solution would not be to solve every problem right at the outset. Instead, I would encourage management to figure out how to make decisions and balance all the different issues," says Professor Kauffman. He underlines that while it is rarely economical to work out everything in great detail for the smallest segments of an organisation's business, banks and society still bear some responsibility to work towards creating control to avoid things going wrong, especially when these are the 'known unknowns'.


 "I view all of these developments that move us towards a cashless society to be a reduction in the friction costs of the lives that we lead," concludes Professor Kauffman.


And those on the "wrong" side of the digital divide? Exception handling would still involve sound judgement with the aim not to disenfranchise special interest groups, or even individuals from time to time. If it means handing out a slice of pizza to a child, whose parents have not paid electronically, to avoid excluding the child in a social setting, then so be it. This is not a cost in the usual sense of the word –rather, not doing so would probably involve an even greater social cost.



“If you don’t cater for the needs of certain customer groups, they will quickly learn where to go, and they may take others with them,” says Professor Kauffman




'Is S'pore ready to go cashless with NIRP', The Business Times, p8, 7 April 2016.