Fortnightly Thoughts

March 23, 2017 Issue 118

Cashing in on the future of money

In this edition, we explore whether peak cash is imminent, largely as a consequence of policy
intervention, and consider what this might mean for the payments and cash handling value
chains. Along with pieces from our analysts, we interview Nandan Nilekani, co-founder of
Infosys, and Aakash Moondhra, global CFO of PayU.
Recent action on the part of policy makers in both DMs and EMs,
together with rising consumer expectations around convenience Whats inside
and the proliferation of enabling technologies, suggests that it is
crunch time for cash. Cashing in on the future of money Our lead 2
article on who wins and loses in a less-cash world
Have we reached peak cash? As a medium of exchange, yes;
digital transactions are accelerating, rendering cash as a medium of Interview withNandan Nilekani, co-founder and 7
exchange less important. former co-Chairman of Infosys
Whats driving this? Three things: (1) technology; (2) consumer Indias demonetization, Nupur Gupta & Andrew 9
expectations around convenience; and (3) policy action, which is
Tilton explain the implications of demonetization
most important.
Central banks and peak cash, Lasse Holboell 11
What is changing around policy? Demonetisation in India has
accelerated build out of the digital payment infrastructure. The Nielsen & Huw Pill on the role of cash in monetary
implementation of PSD2 (scheduled for 2018) could further lower policy
transaction costs in Europe.
Alive and growingDaria Fomina & Milou Beunk 13
What are the value chain implications? Rising digital volume is a explore the outlook for cash in circulation
tailwind for certain players in the value chain: card providers,
software and processors (e.g. Wirecard, Worldline, Visa and Interview withAakash Moondhra, Global CFO 15
MasterCard), payment hardware (e.g. Square) and incumbents of Naspers fintech business - PayU
(e.g. PayPal).
What is PSD2? Mohammed Moawalla explains 17
Cash in circulation as a percentage of GDP is not falling, how new regulation can shake up the European
despite digitisation of transactions. Why? The role of cash as a payments landscape
store of value is rising in importance as inflation remains low. This
limits the effectiveness of monetary policy, i.e. negative interest The future of cash payments James Schneider 19
rates are limited by a zero lower bound. explores the path to a cashless society
However, the paradox of cash means that the opportunity for cash
handlers e.g. ATMs and security providers (for example Loomis)
remains relatively resilient from disruptive technologies.

Sumana Manohar, CFA Hugo Scott-Gall Navreen Sandhu Siri Kurada

sumana.manohar@gs.com hugo.scott-gall@gs.com navreen.sandhu@gs.com siri.kurada@gs.com
+44 (20) 7051 9677 +1 (212) 902 0159 +44 (20) 7774 8281 +1 (212) 934 6319
Goldman Sachs International Goldman, Sachs & Co Goldman Sachs International Goldman Sachs India SPL

Goldman Sachs does and seeks to do business with companies covered in its research reports. As a result, investors should be
aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this
report as only a single factor in making their investment decision. For Reg AC certification and other important disclosures, see
the Disclosure Appendix, or go to www.gs.com/research/hedge.html. Analysts employed by non-US affiliates are not
registered/qualified as research analysts with FINRA in the U.S.

The Goldman Sachs Group, Inc. Goldman Sachs Global Investment Research
Fortnightly Thoughts Issue 118

Cashing in on the future of money

In several major economies its crunch time for the future of
cash. This is largely policy-driven: tangible steps are being Cashing out
Share of non-cash transactions as a percentage of the total volume of
taken to wean economies off cash (e.g. India, Europe). At the
transactions (x-axis) vs. increase in non-cash transactions (y-axis),
same time consumer expectations around convenience are 2016
rising and enabling technologies have proliferated in the shape 60%

Increase in non-cash transactions 2002-16

Selected EMs Selected DMs RoW
of contactless cards, mobile wallets, cryptocurrencies and
more. Rising digital payments volumes present an opportunity 50%
Finland
for certain players in the value chain (e.g. card providers, Norway
South Korea
software and payment processors). However, the ongoing
40% Netherlands Denmark
change in the regulatory backdrop heralds greater complexity in Sweden
USA
the long term. China
UK
30%
Does the decline in cash payments imply the demise of cash?
Canada
Not necessarily. Thats because payments is only one Russia
Switzerland
20% France
component of cash usage. Its other primary function is as a Singapore

store of value, which has become increasingly important; cash Italy Portugal
Australia
Germany
in circulation as a percentage of GDP continues to rise in most 10% India
Japan
parts of the world, as very low inflation has reduced the
Non-cash transactions % of total transactions
opportunity cost of holding cash. This paradox of cash means 0% Kenya
0% 10% 20% 30% 40% 50% 60% 70% 80% 90%
that the opportunity for cash handlers e.g. ATMs and security Note: Size of bubble represents volume of total transactions in 2016.
providers remains relatively resilient from disruptive Source: Euromonitor.
technologies.
Its not just about tech
In this essay, we explore the changes in the drivers of these
two uses of cash (government policy, technology and consumer Japan is a striking example of this; lots of tech and lots of cash.
choices etc.) to understand if some economies could become Its high share of cash transactions and cash in circulation as a
cash-less or, at the very least, less-cash societies in an percentage of GDP is unusual for an economy at its per capita
accelerated fashion. We begin with a tour around the world, to GDP level and technology penetration; e.g., as long ago as
identify where the role of cash may be diminishing and where it 2004, Japanese mobile wallet solutions had adopted electronic
remains dominant. We then ask why cash, at least so far, has money cards that were powered by near-field communications
been very difficult to disrupt. Finally, we argue that supportive technology.
policy is key to accelerating the shift away from cash, and More recently, NTT Docomo led the drive to develop a
explain why governments may be increasingly motivated to standardised mobile payments platform by making strategic
implement it. investments in players across the value chain. But despite this,
Have we reached peak cash? cash remains dominant in Japan.

Technology has been an important catalyst for shrinking cash
usage, but it is by no means a new phenomenon. As we wrote
in 2012 (see Issue 42, Fortnightly Thoughts: Money, money,
money in a mobile world, October 2012), the first technological
step-change in the payments arena was the shift from cash to
plastic money, i.e. credit and debit cards, which happened in
the 1960s.
There are many parallels to be drawn between that period and
the ongoing shift to digital money: an initial period of an
increasing number of providers was followed by a consolidation
stage that established a few players (Visa and MasterCard
primarily) as the industry standards, eventually accelerating the
adoption of plastic money.
However, the availability of technology alone has not ensured
the demise of cash. As the following chart shows, there are
several advanced economies in which it is still the dominant
mode of payment in volume terms (surprisingly quite a few
European countries are in the bottom left quadrant).
The US also stands out, and this could at least partly be
attributed to the fact that regulators in the US have explicitly
stated that the market should manage the shift to digital
payments by itself. For instance, despite disproportionately high
levels of card fraud, especially fraud owing to counterfeit cards,
the US has been slow to adopt EMV (named after the founding
companies Europay, MasterCard, and Visa) technology,
relative to the rest of the world.
This is not due to technological constraints. Parts of Europe first
began to implement chip cards in the 1990s, with 99.9% of
European terminals now chip-enabled. Contrast this to the US,
where in the absence of regulatory intervention, EMV adoption
has only taken hold over the last year. Our analysts cautious
view on Ingenico (Sell, last close 87.8) and Gemalto (Sell, last
close 52.4) can be at least partly attributed to the uncertainty
surrounding US EMV adoption.

Goldman Sachs Global Investment Research 2

Fortnightly Thoughts Issue 118

proposed the second Payment Services Directive (PSD2),

A fistful of dollars currently set to be implemented by 2018. On page 17, our
Total value lost to fraud in 2016, USD million
software analysts note that this essentially allows consumers to
5500
Counterfeit Cards Card Stolen/Lost Card not Present
share their bank account information with third parties (including
5000
Card Lost in Post ID Fraud Other retailers and other banks), so that they can directly make a
4500 payment from the bank account, thereby disintermediating
4000 middlemen in the value chain.
3500
Our analysts note that the specifics are not clear yet, and that it
3000
is likely that the implementation date will be pushed, mostly
2500
because many banks need to overhaul their tech infrastructure.
2000
However, directionally, the initiative implies even lower payment
1500 transaction costs. Our point here is that advanced economies
1000 that have managed a step-change in payment behaviour have
500 done so either through collaborative industry effort, or more
0 often, through regulatory initiatives.
Germany
USA

UK

France

China

India

Japan

Italy

Sweden

Norway

Denmark
Around the world in 80 clicks
Source: Euromonitor. In EMs too, we see the outsized impact of government
initiatives and reform on the payments landscape. Nowhere is
On the other hand, Scandinavian countries are on the cusp of
this more evident than in Indias demonetisation measures in
becoming some of the first cashless societies, as a result of
November, when it was announced overnight that
industry-co-ordinated steps and government initiatives. Swish, a
approximately 85% of currency in circulation was no longer to
payment app developed jointly by the major Swedish banks,
be considered legal tender. But that is only part of the story. On
has been adopted by nearly half the Swedish population, and is
page 7, we interview Nandan Nilekani, a proponent of Indias
now used to make over nine million payments a month. About
Unique Identification (UID) number program (roughly the
900 of Swedens 1,600 bank branches no longer keep cash
equivalent of the Social Security number in the US) on how
on hand or take cash deposits and many, especially in rural
creating digital identities for more than a billion Indians could
areas, no longer have ATMs. In conjunction with that, cash
accelerate the growth in non-cash payments, the availability of
transactions were just c.2% of the value and 20% of the volume
credit, and improve the ease of doing business. Wherever we
of all payments made last year (down from 40% five years ago).
look in the world, the shift to a cash-less economy boils down to
Denmarks move to a cashless society is a deliberate result this: while the availability of technology and the willingness of
of policy, with the government removing the obligation for consumers to use less cash are important, whats critical, the
some retailers to accept payment in cash. (MobilePay, a Danish sine qua non, is supportive regulation from policy makers, often
app, was used by half the population to make 90 million a necessary catalyst to accelerate the shift.
transactions in 2015).
The million dollar question

Ill swish you for it Without this legislative push, we believe cash is very
Sweden: When asked how did you pay last time you made a difficult to disrupt and substitute. After all, it is a free and
payment? convenient mode of transacting. So far, the selling point of the
70% most broadly used alternatives to cash (cheques and cards) is
2012 2014 2016 greater convenience. But that hasnt been sufficient to
60% meaningfully reduce the market share of cash in countries
outside Scandinavia and Canada. 44% of all transactions
50% globally are still carried out with cash (vs. 52% in 2002), while in
volume terms, card payments are estimated to have overtaken
40% cash payments only last year. Mobile wallets and NFC-enabled
devices certainly allow for even greater ease of payment,
30%
especially for low value transactions, as Jim Schneider writes
on page 19. But it is yet to be seen if they contribute to a faster
20%
share loss for cash.
10% Part of the reason is that convenience for customers has come
at a cost to merchants (i.e. investments in technology and
0%
Swish Credit card Cash Debit Card
interchange fees). In other words, cash is still an integral part of
Source: The Riksbank. commerce in many economies because a non-trivial proportion
of merchants do not accept plastic or digital money. This is not
In the Euro area too, policy makers have taken steps to counter just an EM phenomenon; in London for instance, cabs have
cash, both in terms of circulation and transactions. The ECB only been legally obligated to be equipped with card machines
has stated that it will phase out the 500 note from 2018, with a since November last year, with taxi drivers citing the added
view to making it more expensive or inconvenient to hold on to transaction cost as the main deterrent. When considering
vast reserves of cash. More interestingly, Europe has also whether to introduce this regulation, Transport for London cited

Goldman Sachs Global Investment Research 3

Fortnightly Thoughts
the experience of New York, where taxi drivers are already
required to accept debit/credit cards. The chart below, from our
GS Data Works team, shows the cash share of taxi fares, which
has been declining steadily in NYC, perhaps providing a
prologue for the role of cash in London cabs.
Cash on wheels
Breakdown of NYC taxi fares by method of payment
Source: NYC Taxi and Limousine Commission
The dominance of cash can only be dismantled if the
alternatives are equally, if not more, cost-effective, especially
for smaller value transactions. Regulation is the biggest enemy
of cash.
Competition vs. regulation
Given that key parts of the payment value chain are dominated
by oligopolies (e.g. cards, payment terminals), market
competition has not alone been sufficient to drive down costs.
Instead, in countries where interchange fees have come down
meaningfully, the catalyst has been regulatory intervention. For
example, the Reserve Bank of Australia has proposed that the
interchange fees of debit cards be reduced to 8 cents per
transaction (vs. 12 cents currently) from July 2017. The
regulator noted that it was necessary to intervene because the
industry itself was unable to arrive at a lower cost proposition
through competition.
The European Commission similarly implemented lower
interchange debt and credit card fees in 2015, highlighting that
this would lead to greater merchant acceptance of card
payments. In India, although the system may look very different,
the need for regulatory intervention is still present; Mr Nilekani
notes that in order to boost non-cash transactions, the Indian
government has created a non-profit company (designed to be
a utility and owned by all the banks), that carries out the same
functions as listed, independent payment processors in DMs.
Policy makers can also make a stronger case for non-cash
alternatives indirectly. For instance, limiting the circulation of
large denomination notes increases the cost of storage of large
Goldman Sachs Global Investment Research
Issue 118
amounts of money (the US Federal Reserve stopped printing
the $500 bill in 1945). Limiting the supply of smaller currency
notes and coins can similarly limit the divisibility of money.
Cash-and-carry
Weight of US$1 mn by different denomination bills
$ Weight(pounds) Weight(kg)
1 2205 1000
5 441 200
10 220 100
20 110 50
50 44 20
100 22 10
Source: US Department of the Treasury.
But why do governments want less cash?
The three key stakeholders in this argument, governments,
businesses and consumers, all have varied benefits from
shifting away from cash. For businesses, it should result in
lower cash handling costs, streamlined operational costs (e.g.
accounting, taxes) and increasingly, a better understanding of
their customers and their operations, via data analytics. Our US
financial services analysts argue that customer data, when
combined with loyalty programmes, could deliver a sales lift of
2%-5% for merchants. Leveraging detailed data on individuals,
to precisely target advertising and offers and thereby driving
incremental sales and repeat purchases, is increasingly key to
defend against competition. Starbucks and Ulta Salon are good
examples of two companies that have leveraged loyalty
programs to support top-line growth recently.
The flipside for consumers is loss of anonymity and
privacy. But as Aakash Moondhra of PayU argues on page 15,
these concerns are often compensated for by greater
convenience and, in EMs, greater access to formal financial
services channels. For example, in many African economies, it
is the lack of widespread banking infrastructure and high
remittance costs that have driven the rapid adoption of mobile
transactions. The often cited example, M-Pesa, accounts for
more than 95% of the mobile-money market, with the value of
transactions flowing through its system equivalent to c.40% of
Kenyas GDP. Put simply, in several of its markets in Africa,
consumption growth is being driven not just by growing
disposable income, but more importantly, also by freeing up
frustrated demand via mobile money.
One of the underrated advantages of cash is that it ensures
anonymity; but it is difficult to say how much loss of privacy has
hindered the growth in digital payments. The emergence of
cryptocurrencies may be evidence that there is demand for a
digital medium that ensures privacy, but their adoption remains
very limited.
4
Fortnightly Thoughts Issue 118

For policy makers, another advantage of limiting the use or

Show me the money circulation of cash is becoming increasingly relevant; less cash
M-Pesa value transacted (Ksh bn)
in the economy increases the effectiveness of monetary policy.
Deposits P2P Transfers Withdrawals Other MPesa Active Customers, mn (RHS) Currency and monetary policy are intrinsically linked, as without
6000 18
the ability to set negative rates on currency, rates are limited by
17 the zero lower bound (Ball 2014). Cash provides the opportunity
5000
16 to lock in a 0% nominal rate of return, and as such interest rates
15
cannot become more negative than the cost of storing cash, as
4000
there is the incentive to switch to paper currency to earn a
14
greater return.
3000 13
However, the costs of storing cash are potentially very large,
12
2000
requiring rates to turn significantly negative before the zero
11
lower bound takes hold. As the following chart shows, despite
1000
10 the rate of deposits held at the ECB turning negative in mid
9 June 2014, usage of the deposit facility has actually increased.
0
2011 2012 2013 2014 2015 2016
8 As Lasse Holboell Nielsen and Huw Pill discusses on page 11,
Note: 1000Ksh = c.$9.70 relying on an ad hoc manner to determine the costs associated
Source: Company data. with stockpiling banknotes appears to be inadequate if we are
entering an era of lower average inflation that in the past.
The advantages of moving away from cash are perhaps the
most pronounced for governments. Electronic transactions Divergent
allow for greater transparency, which in turn leads to greater Total deposits held at the ECB vs. deposit interest rate
formalisation of the economy and higher tax revenues. This lies 900000 1.0%
at the centre of Indias demonetisation efforts, when the Deposit facility, EUR millions Deposit rate
800000
government pulled approximately 85% of currency in circulation 0.8%

in order to reduce unaccounted and counterfeit money in 700000

0.6%
circulation. Demonetisation in India was also carried out parallel 600000
to broader measures being taken to encourage households and 0.4%
500000
businesses to electronic and digital transactions, in order to 0.2%
reduce friction costs and improve ease of doing business. 400000
0.0%
On page 9, our Asia Economics team explore the longer-term 300000

impact of demonetisation in India, noting that greater 200000

-0.2%

formalisation of the economy and increased digitisation could -0.4%

100000
lead to efficiency gains over the longer term. They estimate that
if 5% of the informal economy is formalised, and pays the 0 -0.6%
01/2011

10/2011

07/2012

04/2013

01/2014

10/2014

07/2015

04/2016

01/2017
current average tax rate of 29%, overall tax revenues could
increase by 0.35% of GDP. The following chart shows the share
Source: Bloomberg.
of cash transactions vs. the Corruption Perception Index, which
makes a similar case for moving away from cash. The paradox of cash

Dirty cash Stack up the advantages for the different stakeholders and it is
Share of non-cash transactions by value (x-axis) vs. Corruption evident that governments benefit most from lowering cash
Perception Index (y-axis; 0=highly corrupt, 100=very clean) usage. This is why we believe that they will be the biggest
100
catalyst to the shift away from cash. Regulatory intervention will
Denmark Finland
be needed more if the current low nominal interest environment
90
Singapore Sweden
Norway
persists. This is because cash in circulation as a percentage of
Germany Australia
80
Japan USA
UK
Canada GDP is negatively correlated with inflation. High inflation erodes
70 France
the value of currency and increases the opportunity cost of
Spain holding cash.
60

50
Malaysia A good case in point is the UK, where the decline in notes in
Italy
Greece
circulation relative to nominal GDP occurred during the high
40 India Philippines
Thailand
China inflation period of the 1970s and early 1980s; the ratio fell from
Indonesia
30 c.6% in 1970 to c.4% in 1980 as inflation rose from c.6% to
20
Kenya Russia
c.18% over the same period.

10 Lower levels of trust in the banking system can also exacerbate

cash holdings; the ECB has estimated that there was an extra
0
0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% 35 bn in demand for euro banknotes in October 2008 as the
Source: Transparency International, Euromonitor. financial crisis deepened.

Goldman Sachs Global Investment Research 5

Fortnightly Thoughts Issue 118

This apparent paradox of cash falling cash transactions but To conclude, we would argue that as a medium of exchange,
increasing cash in circulation presents a different set of cash has peaked. Why is this? We see three key reasons: (1)
opportunities for players in the cash value chain. On page 13, increasing ubiquity of technology; (2) the willingness of
our Business Services analysts highlight Loomis, the leader in consumers to use less cash and most importantly (3) policy
the global cash handling industry, as a potential beneficiary of action. We believe recent government action (for example in
resilient cash circulation. India and Europe) demonstrates the rising importance of
supportive policy in accelerating the shift away from cash. The
Up, up and away benefits for policy makers are clear electronic transactions
Banknotes and coins as a percentage of GDP, 2005 vs. 2015 allow for greater transparency and better control over monetary
25%
policy transmission mechanisms. But the paradox of banknotes
2005 2015
means that the decline in cash payments does not imply the
death of cash. Cashs other primary function as a store of value
20%
implies that the future path of inflation, interest rates and trust in
the banking system will continue to be vital in determining the
15%
future of cash. What does this mean for profit pools? Falling
cash transactions, and the resulting increase in digital
10% payments volumes, present an opportunity for certain players in
the payments value chain: card providers, software and
5% processors, payment hardware and incumbents. But the
paradox of cash means that the opportunity for cash handlers
e.g. ATMs and security providers remains relatively resilient
0%
from disruptive technologies. We highlight some of these
Brazil
Sweden

Canada

Australia

Turkey

Korea

Mexico

Russia

Euro area

Switzerland

India

Japan
UK

USA

winners in our how to invest stock table below.

Source: Bank for International Settlements.

A penny for our thoughts

How to invest in this

Market
Last Target
Ticker Company Rating cap % Rationale
price Price
($mn)
Well positioned in the payments landscape through its online focus and rapidly expanding Asian
WDIG.DE Wirecard Buy* 6,503 48.75 64 31% footprint (c.40% of revenues), with incremental opportunities from demonetization in India and
optionality in data-centric services.

Increased scale in the European issuer processing market via M&A should enable it to participate
WLN.PA Worldline Buy 4,036 28.22 33 17% in growth and consolidation as banks outsource. Set to benefit from positive market dynamics due
to regulatory changes like PSD2 in Europe and the shift from cash to digital in EMs like India.

Worldpays tech platform, encompassing offline/online merchant processing and value added
Worldpay
WPG.L Buy 7,211 289p 400p 38% services, should enable it to benefit from structural growth in the attractive and rapidly changing
Group
payments arena

Continued outperformance should be driven by increasing ubiquity of PayPal, incremental

PayPal
PYPL Buy* 53,046 $43.19 $50 16% engagement from new product, increasing friction in traditional payment systems, and strategic
Holdings
partnerships.

Industry leader in the global cash handling industry, with a consistent delivery track record. Our
LOOMb.ST Loomis AB Buy* 2,368 Skr277 Skr371 34% analysts believe consensus continues to overestimate medium-term cash risks while circulation
dynamics remain supportive.

Tenpays WeChat Payment and QQ Wallet have been gaining market share in Chinas mobile
Tencent
0700.HK Buy 275,482 HK$225.2 HK$248 10% payment market, with market share increasing from 23% in
Holdings
1Q16 to 38% in 3Q16.

Faster volume growth and market share gains driven by EU payment regulation as fee reductions
V Visa Inc. Buy* 214,307 $88.52 $99 12% cut the cost of card acceptance and as fee unbundling makes Visa more competitive. Our analysts
expect upside in credit volume from latest client wins at Costco and Fidelity.

Multiple long-term drivers, particularly in Europe, where share gains from local competitors are
MasterCard
MA Buy 121,481 $111.45 $122 9% expected to continue post the implementation of EU payment regulations. Should also benefit from
Inc.
expanding opportunities in the B2B and P2P payments space.

Continued growth in payment processing, bolstered by cross-selling subscription and service-

SQ Square Inc. Buy 6,277 $16.41 $17 4%
based products to its base of nearly 3mn merchants.

Naver Pay is the number one mobile payment operator in South Korea with 21mn users vs. the
035420.KS Naver Corp. Buy* 22,070 W849000 W1070000 26% runner-up Kakao Pays 13mn (3Q16). Able to leverage its advantages in data and technology to
monetise consumer services such as Naver Pay.
Source: Goldman Sachs Global Investment Research.
*On the relevant regional Conviction List; Prices as of the close of March 22, 2017. All price targets have 12-month horizons

Goldman Sachs Global Investment Research 6

Fortnightly Thoughts
Interview withNandan Nilekani
Nandan Nilekani is the former Chairman of the Unique Identification Authority of India (UIDAI)
and co-founder of Infosys. He has been a proponent of Aadhaar, India's identity card scheme.
Moreover, he is a philanthropist, entrepreneur and the author of 'Imagining India'.
What steps are being taken to make
India cashless?
To move to a cashless economy, the
underlying infrastructure for digital
payments must be cheap, convenient and
ubiquitous, otherwise people will continue
to use cash. In advanced economies, this
role was performed by debit and credit
cards from companies such as Visa, MasterCard, and American
Express. Similarly, in emerging markets, China implemented a
card system named ChinaPay and India has something called
RuPay. In other EMs, a different digital transaction system was
introduced when mobile operators, especially in Africa,
developed mobile money the most famous example being M-
Pesa in Kenya. Most recently, large internet companies,
especially in China, have been able to enable smartphone-
based payment solutions. Examples include Alipay from
Alibaba and WeChat from Tencent, which together dominate
the internet-based payment business in China.
The digital payment infrastructure now being developed in India
is unique because it is a completely interoperable system, and
is designed to serve a billion people. The first component to this
system is Aadhaar , which is essentially a 12-digit unique
identity number given to every Indian resident. Currently 1.1
billion Indian residents have an Aadhaar number, making it the
only billion-user platform outside of the US. The first shift to
cashless payments within the Indian economy was the use of
Aadhaar to dispense government benefit payments. This is
possible as the system allows a bank account to be linked to
the unique ID. Today, there are c.400 million Indians whose
Aadhaar numbers are linked to their bank accounts.
The second constituent of the digital payment landscape is the
Immediate Payment Service (IMPS), which facilitates the
remittance of money home. This system alone facilitates c.$7
bn transfers per month. The final component of Indias digital
payment system is a new mobile-to-mobile solution called UPI
or Unified Payments Interface, which allows peer-to-peer
transfer of money in real time from bank account to bank
account. This provides the same benefits as the closed loop
digital wallet system, plus the added advantage of
interoperability.
What systems are in place for those who do not have a
smartphone?
India has 250 million smartphone users who can now make
payments to any merchant or any person who also has the
payment app on their phones. However, there are 350 million
people who have older feature phones, rather than
smartphones. USSD was an existing data channel that existed
pre-internet. In response to demonetisation, a UPI based
application was written using this channel that allows feature
phone users to also make payments via the same underlying
Goldman Sachs Global Investment Research
Issue 118
payment protocol (UPI). Therefore, the 250 million smartphone
users and 350 million feature phone users are now on the same
payment system i.e. the 600 million people who have phones
in India can now use them to make mobile payments.
Apart from them, we estimate there are approximately 350
million people, including young adults, who do not have access
to a mobile phone. However, they now have an Aadhaar
number which they can use to open an account at any bank
using Aadhaar eKYC (electronic Know Your Customer). For
them, the government has launched Aadhaar Pay, where
independent and registered merchants (e.g. small store owners
in towns) have biometric devices which can be used for
customer authentication. And the customer can pay for goods
and services by debiting their bank account, and crediting the
merchants account, despite not owning a device of their own.
Think of this as a variant of MicroATMs that can be used for
cashless merchant payments.
Taken together, India now has the infrastructure to enable
digital payments for smartphones, feature phones and those
who do not have access to a phone at all. This is a completely
new payment backbone, which unlike the systems in many
countries, is not reliant on cards. It enables a billion people to
transact digitally and now allows the government and markets
to focus on increasing the penetration of this payment system.
What are the benefits of digitising payments and reducing
the amount of cash in the system?
The benefit of reducing the level of cash in the system is
threefold convenience for consumers, lower friction costs for
businesses and greater transparency for governments. From
the governments perspective, greater transparency comes with
lower tax evasion, higher revenues and faster formalisation of
the economy. It also reduces cash handling costs, which is a
very large implicit cost on the economy, retail banks, the
Reserve Bank and the wider government. Consumers currently
find cash very convenient because there is no transaction cost.
Therefore, one of the goals of the new payments interface is to
reduce transaction costs for digital as much as possible so that
people do not hesitate to change the way they transact. It's only
when digital transactions are very low cost that it will be
adopted in large numbers both by merchants and by
consumers.
However, I think the greatest consumer benefit will be the ability
to build a digital footprint. This can be shared with lenders to
increase the accessibility of credit to the wider economy.
Currently only 3% of Indian businesses receive loans from the
formal economy. In general, India is a very informal economy
there are approximately 60-70 million businesses, but less than
a million incorporated companies. I believe that the informal
economy will start entering the formal economy because digital
footprints will improve the availability of loans. This is going to
be the economic driver for encouraging consumers and small
businesses to join the digital payment system.
7
Fortnightly Thoughts
What are the implications of a long-run shift to digital
systems for the banking sector?
Currently, India is an underserved market for credit. However
over the next ten years, it has been estimated that c.$500 bn of
incremental market capitalisation will be created because of the
expansion of credit. The question is this: how will this new
revenue pool be distributed? And the answer relies on the
response of the incumbents. Although incumbent banks are
currently well positioned, the intensity of competition within the
banking system has increased as a function of lower switching
costs. In other words, consumers and businesses can move
from one bank to a competitor very easily, thanks to the digital
payment systems being introduced. As these switching costs
fall, churn goes up, and new players can enter with superior
technology and aggressive pricing. Although the size of the
overall pie is increasing, the incumbent share will depend solely
on their response to increased competition.
Apart from banks, the implications are interesting for the rest of
the payment value chain as well. For example, in most
advanced economies, companies that provide credit cards and
payment processing services are listed, for profit companies.
However, as an Indian alternative, the government created the
National Payment Corporation of India (NPCI), which plays the
same switching and clearing roles as payment processors do in
traditional payment systems. The key difference is that NPCI is
a non-profit company that is designed to be a utility that is
owned collectively by all the banks. So the payments value
chain can look dramatically different in a place like India.
Does India have a relative advantage in developing this
payment infrastructure because, compared to DMs, India
banks do not have expensive legacy systems to update?
Banks in India do have legacy IT systems, but they do not face
the same challenges as their counterparts in developed
markets. In Europe and the US, a great deal of banking
technology was implemented in the 1960s and 1970s using
mainframe systems; the legacy systems are 40-50 years old. In
contrast, the Indian banking system was mostly implemented in
the 1990s. So although Indian banks have old IT systems, they
are much younger than in DMs. Therefore, although there are
some challenges to integrate these new payment technologies,
the banks have mostly been able to integrate their technology
infrastructure with this next generation payment interface.
How do you think the demonetisation actions have altered
consumer perception of cash?
I do not believe demonetisation has significantly shifted the
share of digital versus cash transactions. Nevertheless, what
demonetisation did achieve was giving many people the
awareness of paying via digital channels. To that end, in terms
of behaviour, a lot more people started using digital wallets and
debit cards. But while there was a big rush towards digital in the
month of December, evidence shows that by January, it started
tapering off as more physical cash entered the economy.
People went back to using cash when they could.
Rather than consumer attitudes, which tend to be slower to
change, I believe that the principal goal achieved by
demonetisation was that it accelerated the development of the
Goldman Sachs Global Investment Research
Issue 118
supply-side infrastructure necessary for digital payments. For
instance, immediately after the demonetisation action, the
government developed an app (BHIM) that could be built on top
of the mobile-to-mobile infrastructure already in place. BHIM
was launched by the government on December 30, 2016, and
has already been downloaded 18 million times. Anyone with
access to a smartphone who wishes to make a cashless
payment can do so via the governments app (BHIM), any of the
alternatives offered by banks like HDFC, ICICI, Axis or
PhonePe (launched by Flipkart and Yes Bank). Private
companies mobile wallet solutions also experienced a rapid
rise in users and transaction value. Now that the supply-side
infrastructure is in place, the system is ready to move to a less-
cash economy when demand does pick up gradually, whether
that is because of market competition, further government
initiatives or a more gradual shift in consumer attitudes.
How do you see consumer attitudes to credit changing?
One metric on which India stands out relative to other countries
is that Indian consumers have a very low credit penetration.
This constrains the ability of the Indian economy to grow
because consumers do not have credit to buy and businesses
do not have access to the credit necessary for investment.
Therefore we face a situation where both buyers and sellers are
constrained to grow. Digital footprints can unlock credit for
consumers and bring forward consumption as they can now buy
with credit rather than just from savings, with similar
implications for business investment. Therefore the
macroeconomic implication of moving from cash to digital
payments, if implemented correctly, is a boost to consumer
expenditure and businesses growth.
What are the current and future use cases of the digital
identity card infrastructure?
There are a lot of use cases for the digital ID and payments
system. It is already used to issue passports, government
benefit payments and in the insurance industry. It is meant to
be used as a platform, within the financial and non-financial
sectors. A good example of a company that has benefitted from
this is Reliance Jio, a new entrant in the Indian Telco market. It
was able to expand to 100 million customers in six months
mainly because the company used the Aadhaar eKYC to issue
a SIM collection within two minutes. This was only possible
because the electronic infrastructure was in place.
What are the security concerns around a system like
Aadhaar, given that so many details, including biometrics,
are linked to one unique ID card?
The biometric details are purely taken to eliminate duplicate
users, and are not included in any transaction. By providing
every resident with a unique identity number, this $1 bn
investment has saved the government roughly $7 bn in
duplicated payments. Nevertheless, the biometric data is only
used for authentication matching, and is not part of payments.
Additional measures have also been taken to increase security,
such as two factor authentication. Therefore, unlike in the US,
where a credit card number is sufficient to make payment, in
India you need two factors such as a phone number plus the
PIN. This system results in much lower levels of fraud.
8
Fortnightly Thoughts
Indias demonetization and its effects
Nupur Gupta and Andrew Tilton, our Asia
economists, explore the implications of Indias
demonetization action
In early November 2016, the Indian government announced a
curb in the circulation of money in the informal economy via the
cancellation of high-denomination notes (widely referred to as
demonetization). Nearly 86% of total currency in circulation
was taken out of the system overnight, leaving households with
no usable currency to make purchases. Such a drastic move is
particularly important in the context of the Indian economy given
that Indias currency in circulation as a percent of GDP is over
1.5 times that of the EM average, and nearly 80% of overall
transactions still take place in cash. During the announcement,
the government mentioned that its intentions were to increase
participation in the formal economy and address counterfeit
notes, among others. The move followed the rollout of several
tax amnesty programs that gave individuals the opportunity to
disclose hidden assets.
The immediate impact of demonetization
The cancellation of notes led to significant disruptions in
economic activity and households queued outside ATMs and
bank branches to obtain new currency notes to facilitate
transactions. As evident from Google Trends, the shortage of
cash led to increased popularity of digital modes of payments.
Pressed for cash
Google searches for terms related to digital payments spiked after
demonetization
Paytm UPI
100
80
60
40
20
0 2013
12-Sep 12-Oct 11-Nov 11-Dec 10-Jan
Note: Shaded area denotes period post-demonetisation. Numbers represent
search interest relative to the highest point for given region and time.
Source: Google Trends.
While the urban economy was swift in adapting to the low-cash
situation and switched purchases to hypermarkets and
supermarkets that accepted credit and debit cards, rural
households found it much more difficult. The barter system re-
emerged in certain rural villages, and small vendors began to
educate themselves on digital payments gradually. Our Current
Activity Indicator suggested that rural economic activity
contracted by 3.5% quarter-on-quarter annualized in the month
following demonetization, mainly due to a significant decline in
consumption. Urban economic activity was relatively less
affected, with most of the impact felt on consumer discretionary
products rather than basic purchases.
Goldman Sachs Global Investment Research
Issue 118
Businesses adapted to the cash-crunch situation, signing up
as merchants to electronic wallet gateways and installing point-
of-sale instruments. Industries saw a significant drop in
demand, daily wage employees were unable to find work,
heavy discounts were being offered, and farmers were selling
produce below minimum support prices.
Indias economy in the aftermath of demonetization
Overall, demonetization appears to have significantly disrupted
economic activities around the end of the calendar year,
particularly for the more cash-based sectors. That said, the
negative effects on consumption are fading rapidly as cash
levels return to normal. As of March 10, total currency in
circulation is back up to 70% of pre-demonetization levels and
business sentiment, as indicated for example by PMI readings,
is gradually improving. Early signs of a consumption recovery
appear to be underway with our India Current Activity Indicator
bottoming out in January (Exhibit 2). In our view,
demonetization has not had a permanent impact on the trend
growth in consumption demand. We therefore expect
consumption activities to return to normal and some of the pent-
up demand, particularly for consumer discretionary products, to
drive consumption growth in coming months. It is interesting to
note that while digital transactions spiked immediately after the
announcement, it appears as though the usage of cash may be
returning as the main form of exchange for daily consumption
needs in particular.
Back from the edge?
Indias Current Activity Indicator shows some recovery after a sharp
drop post-demonetization
% change, qoq sa. Current Activity Indicator Real GDP
ann.
14
12
10
8
6
2
0
2014 2015 2016 2017
Note: Shaded area denotes period post-demonetisation.
Source: Haver Analytics, Goldman Sachs Global Investment Research.
The impact of demonetization beyond the near-term
consumption recovery is less clear at this stage. On the one
hand, the delayed economic recovery could lead to some
negative second-round effects; while on the other, greater
formalization of the economy and increased digitization could
lead to efficiency gains over the longer term. In our base case,
any meaningful acceleration in private investment growth over
the coming year is likely to remain elusive. Demonetization and
the consequent delay in economic activity recovery may
increase the probability of NPL creation, weaken financial
linkages particularly in the informal sector, generate greater
business uncertainty and lead to negative feedback effects due
to falling real estate sales and prices (See Vishal Vaibhaw and
9
Fortnightly Thoughts Issue 118

Nupur Gupta, The aftermath of demonetization, March 14,

2017). The growth pickup that we expect (to 7.5% in FY18 from Vote of confidence
The BJP won the Uttar Pradesh state elections by a large margin
an expected 7.1% in FY17) will therefore be led by consumers,
government capex and external demand. BJP
312 seats
Over the longer run, there are reasons to believe that the Congress
second-round effects could be more positive, and indeed, we 7 seats

expect growth to accelerate further to the range of 7.8%-8.0% SP

over the next 2-3 years. In particular, all cash deposited during 47 seats
demonetization is linked to a unique identity which the income
BSP
tax department may use to match against disclosed income. 19 seats
This could help widen Indias tax net and lead to a permanent
Others
increase in tax revenues. Any support to overall revenues could 18 seats
in turn help fund higher public spending. We estimate that if 5%
Total: 403 seats
of the informal economy is formalized and pays the current
average tax rate of 29%, overall tax revenues could increase by Source: Election Commission of India.

0.35% of GDP (according to the World Bank, the informal

economy in India amounts to 23.3% of GDP).
Indias cash-based economy, which currently enables
businesses to under-report or exclude transactions, may slowly
be shifting towards more electronic means post-demonetization.
The government announced several measures to promote
digital transactions in its latest budget including limitations on
the usage of cash for transactions above INR300,000
(USD4,545) and a cash-back scheme for merchants who
accept digital payments. The government has also launched its
own biometric mobile payment application system called the
Bharat Interface for Money. A gradual shift towards greater
digitization may help reduce transaction costs, cut the
opportunities for rent seeking and improve overall productivity
growth. Greater financial flows via the formal banking channel
could also improve the allocation of credit and boost longer
term growth.
How does demonetization impact Indias reform agenda
Demonetization was seen by political analysts as a bold move
by the Modi government as it impacts the governments key
vote bank small and medium-sized traders and mom-and-
pop store owners. In this context, elections in five states, which
took place in February/March 2017, were watched keenly by
market participants seeking to gain an understanding of the
ruling partys popularity post-demonetization. The results of the
state elections, released on March 11, 2017, delivered an
emphatic win for the ruling Bharatiya Janta Party (BJP) in the
key state of Uttar Pradesh which is 80% rural (Exhibit 3). The
outcome is now seen by many as a positive referendum on the
Modi administration post-demonetization.
In our view, these results bode well for the implementation of
economic reforms. Not only does the BJP alliance now rule
states that account for 60% of Indias GDP, the election results
are also likely to strengthen its position in the Upper House
beginning in April 2018 when seats from these states are up for
re-election. The victory should also help speed up any pending
issues related to the Goods and Services Tax (GST)
implementation and allow further progress on power sector
distribution reforms. What is most important for the coming year
in our view, is that the BJP is likely to undertake key labor and
land reforms in these states, easing the ability to do business.
In summary, the negative effects of demonetization on
consumption activities appear to be fading rapidly as cash
levels normalize. We expect growth to improve gradually,
supported by the pent-up consumption demand and
government spending. However, whether India has truly made
a shift towards a less cash-based economy is yet to be seen.
Nupur Gupta
ASEAN and India economist
email: nupur.x.gupta@gs.com Goldman Sachs (Singapore) Pte.
Tel: +65-6654-5438
Andrew Tilton
Chief Asia Pacific economist
email: andrew.tilton@gs.com Goldman Sachs Asia L.L.C.
Tel: +852-2978-1802

Goldman Sachs Global Investment Research 10

Fortnightly Thoughts Issue 118

Central banks and peak cash

Lasse Holboell Nielsen and Huw Pill, explore
the implications of lower banknote demand on
the effectiveness of monetary policy
Few businesses aim to reduce demand for their main product.
But central banks are not like most businesses. Rather than
seeking to maximise returns, they have public policy objectives
in mind: low inflation, financial stability and sustainable
economic growth. In pursuit of these broader goals,
circumstances may emerge where central banks wish to
constrain demand for their most important product banknotes
even if that means lower central bank profits. Two motivations
stand out.
Abolishing cash overcomes the zero lower bound
constraint on monetary policy
First, in a disinflationary or deflationary environment, banks may
need to overcome the zero lower bound on nominal interest
The arbitrage into banknotes is not perfect: banknotes need to
be stored, secured and insured. The larger the cost of
stockpiling banknotes, the more scope that central banks enjoy
to push their policy rates into negative territory (see exhibit).
The higher the fixed costs and the more temporary the period of
negative nominal rates that is expected, the easier it is for
central banks to establish a negative rate. The rate on the
ECBs deposit facility the key instrument to steer overnight
money market rates at present is current set at -0.4% on this
basis. The equivalent rate in Sweden, Denmark and
Switzerland is even lower at -0.50%, -0.65% and -0.75%,
respectively. Such negative nominal rates have allowed real
rates to fall and provided some temporary relief for the
economies concerned.
How low can you go?
Cost structure of stockpiling banknotes determines where lower bound
on nominal policy interest rates lies (illustrative example)
Bank deposits, Eur, Bn
0.00
0 20 40 60 80 100

rates. Real interest rates interest rates adjusted for inflation

-0.25
determine private consumption and investment decisions, by
setting the terms on which households and firms trade off
CB lower rate bound, %

-0.50
consuming goods today versus saving or investing today in
order to consume goods tomorrow. When real rates are low or -0.75
Implied cash yield curve
negative, it is better to consume now rather than consume w. half the fixed cost of
ware-housing
tomorrow since the real return to delaying consumption is poor. -1.00
Implied cash yield
w. base-case fixed
Spending is brought forward. Demand in the broader economy cost of ware-housing
cash
is stimulated. Such intertemporal substitution represents an -1.25

important channel for the transmission of monetary policy to the

-1.50
real economy.
Duration of deposits, days
Yet when inflation is negative, it can be difficult for central 0
0 100 200 300 400 500 600 700
banks to engineer low real rates. If central banks set a negative
-0.5
nominal rate to drive real rates lower when inflation has already
fallen towards or through zero, then households and firms will
CB lower rate bound, %

-1
switch from financial assets bearing this negative nominal rate
into banknotes that offer a zero return. Zero might not be much.
-1.5
But it is better than paying to hold a financial instrument, as a
negative rate implies. -2

If central banks cannot push nominal rates into negative

territory owing to this arbitrage into banknotes, then they may
face situations where they cannot reduce real rates in order to
bring consumption and investment forward. Central banks
ability to stimulate aggregate demand is curtailed. To the extent
that inadequate aggregate demand is the cause of the initial low
level of inflation, then attempts at monetary policy stabilisation
are likely to prove inadequate: the economy can be caught in a
self-sustaining deflation trap.
Lower inflation generates higher real yields given the central
banks inability to lower nominal rates further. Higher real yields
weigh on demand. Disinflationary pressure intensifies. Real
rates rise further, adding to the shortfall in demand and
intensifying the disinflationary pressure. Drawing on experience
from the Great Depression and during Japans lost decade(s),
concerns of this nature were heightened during the recent
global and European financial crises. In that context, we argued
that central banks enjoyed some leeway to set negative rates,
notwithstanding the considerations outlined above.
-2.5
Max bank deposit: Eur 10bn Max bank deposit: Eur 25bn
Max bank deposit: Eur 100bn
-3
Source: Goldman Sachs Global Investment Research.
But if we are entering an era of lower average inflation than in
the past, the need for central banks to set negative nominal
rates in order to stabilise the economy may become more
frequent. Relying in an ad hoc manner on the costs associated
with stockpiling banknotes appears inadequate in this context. It
has therefore been suggested that central banks should abolish
banknotes and replace them with electronic accounts or
payment cards. Negative rates could be applied to cash held in
this manner.
By eliminating banknotes, the arbitrage to zero yielding
banknotes is eliminated at a stroke. The zero lower bound
disappears and central banks can steer market rates in a
symmetric manner so as to stabilise inflation at target.

Goldman Sachs Global Investment Research 11

Fortnightly Thoughts Issue 118

and cuts tax avoidance and crime in the black economy
One distinctive characteristic of banknotes is that they are
bearer securities: their holders are not registered or recorded,
and thus retain their anonymity. This feature has made
banknotes attractive ways of financing transactions or holding
wealth below the radar of the authorities. Banknotes are an
important vehicle for tax evasion, criminal behaviour, terrorism
and other illegitimate activities. Banknotes are thus central to
the financing of the so-called black economy. Whether paying
a tradesman in cash to avoid VAT or running an organised
crime syndicate or terrorist cell, the use of banknotes facilities
the avoidance of regulations and/or taxes in a way that distorts
economic incentives and creates welfare costs aside from the
obvious adverse broader moral and legal implications of such
behaviour.
To avoid these distortions, some economists have advocated
the abolition of banknotes to reduce the size of the black
economy and hinder criminal activities. Recently, Harvard
professor and former IMF chief economist, Kenneth Rogoff,
published an influential book titled (tellingly) The Curse of Cash
that analysed this approach. To illustrate his concerns, in an
production of 500 banknotes, the largest available
denomination (see exhibit). Although these remain legal tender
and continue to circulate for now, the expectation is that over
time they will slowly fall out of circulation as, once existing
stocks are exhausted, 500 notes are not replaced when they
wear out. The Swedish Riksbank has recently discussed
whether to issue e-Krona.
Despite being publicly motivated as a means to hinder criminal
activities, this announcement was nonetheless met with
concern by some constituencies (particularly in Germany),
which saw it as a step towards creating the environment where
ECB policy rates could be pushed further into negative territory.
This reaction illustrates the interplay among the various pros
and cons of banknotes discussed above.
A licence to print
500 banknotes were the ECBs best seller from the outset of
monetary union
13.5%
Average 5-50 (lhs) Average 100-200 note (lhs) EUR 500 note (rhs)
38%
13.0% 36%

article in the Financial Times, Prof. Rogoff refers to a recent

12.5% 34%
example: In arresting Mexican drugs lord Joaqun El Chapo
Guzmn, authorities found more than $200mn in cash. 12.0% 32%

Yet banknotes serve a useful function for many people 11.5% 30%

Despite these arguments for abolition, banknotes still serve a

11.0% 28%
useful purpose. For many day-to-day transactions, banknotes
are a simple and reliable means of payment. The experience of 10.5% 26%
a credit card machine failing to work remains familiar and
10.0% 24%
disruptive. Libertarians argue that the anonymity afforded by
Jan-03
Jul-03
Jan-04
Jul-04
Jan-05
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Jan-07
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cash can be important to the protection of civil and property
rights. Card-based system for cash-like payments would allow Source: ECB, Goldman Sachs Global Investment Research.
the authorities to trace the movements and spending of
individuals very closely, something that is uncomfortable for More profound economic consequences came from the so-
societies with a history of government surveillance and human called de-monetisation in India that took place in November
rights abuses. Banknotes offer a way for individuals to protect 2016 (see page 9 for further discussion). In that episode, the
wealth from overspending governments that seek to seize or Indian authorities withdrew and cancelled high denomination
block bank deposits. notes a much more aggressive approach than adopted by the
ECB or other European central banks with more significant
These arguments are the mirror-image of those made by
adverse economic consequences, but also a more rapid impact
advocates of banknote abolition. For example, those who see
on cash holdings and thus on forcing the black economy into
the anonymity of banknotes as a protection against an invasive
the formal sector. Summing up, central banks are unlikely to
government mirror those who see that anonymity as a cloak
abolish banknotes completely, even if they may attempt to
preventing governments from halting criminal activity. Which
hinder their use for undesirable activities. At the same time,
side of this argument one takes derives not from the
central banks will not be overly concerned that we may have
characteristics of banknotes, but rather from ones views about
reached peak cash, even if that implies demand for their most
whether government or unregulated private activity poses a
important and visible product starts to fall. Technological
greater threat to society.
innovation and changing payment behaviour led by the private
and central banks are unlikely to abolish banknotes sector that reduces the demand for banknotes will likely be
completely, while reducing their appeal accommodated, not resisted, by central banks. In our view,
monetary policy makers remain more concerned about retaining
Given that there are arguments on both sides, central banks are
their ability to steer market interest rates the key instrument of
unlikely to pursue the outright abolition of banknotes any time
monetary policy, at least in normal times than whether they
soon. Instead they will seek to reduce the abuse of currency,
steer the stock of banknotes held by the public.
seeking a less cash society rather than a cash-less society.
One measure in this direction would be the withdrawal from
Huw Pill / Lasse Holboell Nielsen
circulation of high denomination banknotes, which because of
their convenience as an anonymous store of wealth have been Chief European / Scandinavia and Euro area economists
favoured by criminal gangs, terrorists and drug dealers. Central email: lasseholboell.nielsen/huw.pill@gs.com Goldman Sachs International.
banks have already taken a number of actions in this direction. Tel: +44-20-7774-8736 / +44-20-7774-5205
In May 2016, the ECB announced that it would cease the

Goldman Sachs Global Investment Research 12

Fortnightly Thoughts Issue 118

Alive and growing

Daria Fomina and Milou Beunk, our European
Business Services analysts, on cash in
circulation
Technology development has made mobility and convenience a
key driving force of consumer preferences for different payment
methods. Card payment solutions have become increasingly
popular, thanks to improved security, and consumer
acceptance has consequently increased. Hence share of cash
payments by consumers fell from over 90% at the beginning of
the century to c.70% in FY16.
Importance of cash as a payment method is declining
Percentage of total consumer payment transactions, by method
Cash
2000
Electronic Direct
The demand for cash varies depending on the income class of
the country with low income countries only at the early stages of
demanding less cash to catch up with most developed ones.
While most of the growth of cash circulation is coming from
Emerging Markets and LatAm, more mature European
economies are still seeing growth, though at more moderate
rates.
Cash is still easier, cheaper and safer payment method
Cash remains the most universal, resilient and cost-efficient
means of payment; hence demand for cash, or cash circulation,
continues to grow, despite representing a declining share of
total transactions. Why? We identify three reasons:
Accessibility. Half of global population still has no access to a
bank account, hence cash remains the most accessible means
of payment. In more advanced economies 30% of the
Cards population have no access, while in more emerging markets the
percentage is even higher.
Resilience. Fraud is four times less likely with cash than with
other payment methods and regardless of internet quality,
power cuts, or a natural disaster shop owners always accept
cash. According to Federal Reserve data a majority of people in
the US still rely on cash as a main back up option, even if they
by default prefer other payment methods.
Privacy remains one of the main advantages of cash versus
other payment methods. Cash settlements leave no electronic
trace and hence provide higher privacy levels versus electronic
payments, effectively allowing consumers to keep their
consumption habits private. Not surprisingly we see a
correlation between corruption perception of the economy and

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

2019

2020

2021

volume share of cash among consumer transactions. Countries

Source: Euromonitor.
like Sweden and Australia which already started to see declines
However, cash has two functions, and therefore, despite the in cash circulation volumes or even ATM cash withdrawals, are
among the highest ranked by Transparency International. On
development of new payment solutions, cash is alive. The total
the contrary countries like Russia, Brazil and China, which
value of dollars and euros in circulation almost doubled over the
screen poorly on transparency, prefer to pay with cash, driving
past decade even as inflation has been close to zero. In fact in
absolute cash consumption up as the size of the economy
absolute terms, cash in circulation volumes continue to grow in grows.
the vast majority of currencies. At the same time we also see a
growing number of ATM transactions globally - the compound
annual growth rate was 6% over the past ten years and is Shadow economy is an important driver of demand for cash
expected by Euromonitor to grow at a CAGR of 3% in the next Share of cash transactions vs. Corruption Perception Index (CPI:
five years. 0=highly corrupt, 100=very clean)
100%
Countries with lower
though Euro/USD circulation has more than doubled over the 90% CPI tend to have
past decade higher share of
80% cash transactions
EUR/USD circulation data
70%
USD EUR
Share of cash(%)

60%

50%
CAGR : +9%
40%

30%

20%

CAGR : +6% 10%

0%
0 20 40 60 80 100
Corruption Perception Index
Source: Transparency International, Euromonitor
2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

Source: Federal Reserve, ECB.

Goldman Sachs Global Investment Research 13

Fortnightly Thoughts Issue 118

Governments earn from printing money when cash volume started to decline. This was achieved
through improvement in broadband access among enterprises,
Away from concerns over privacy and the inability to track
levels that many emerging markets will reach only in 2030
sources of cash, governments actually generate profit by
according to Euromonitor.
issuing currency, through the difference between the face value
of coins and notes and their production costs. Additionally, the
stock of paper money (which is currently c.10% of GDP in the Younger population is still using cash
Payment instrument use by age, 2015, US
Euro area) is not included in the calculation of national debt,
which generates an interest saving for the government. Cash Check Credit Debit Electronic Other
100%
Mobile phone-based money services so far did not affect 90%
cash volumes and preferences for payment methods
80%
Since M-Pesa (mobile phone-based money transfer, financing 70%
and microfinancing service) was launched in 2007 by
60%
Safaricom, emerging markets (primarily in Africa) saw a great
50%
demand for the service, as the population that lacked access to
bank accounts was now able to use mobile phones to do 40%

money transfers, pay via phone or store/withdraw/deposit 30%

money. 20%

Interestingly, a decade post its introduction, c.80% of 10%

transactional value on M-Pesa are still simple money 0%
remittances or deposits/withdrawals. The service is still largely 18-24 25-34 35-44 45-54 55-64 65 +

used for moving money rather than for payment. More Source: Federal Reserve.

importantly despite a pick-up in the M-Pesa subscriber base

So who is best placed to benefit?
over the past decade, share of cash in payment methods
remained stable in Kenya. Similar trends have been observed While cash continues to play an important role in societies and
in other African countries where Vodacom or MTN rolled out circulation volumes are growing, cash handling companies are
mobile money solutions. expanding to adjacent markets. Over the past few years we
saw security companies expanding into retail automation, ATM
though some markets experienced circulation decline
management/bank branch automation, and added value
In the US the younger populations still have a preference outsourced services (AVOS, which are incremental to the cash
towards cash, however some of the developed markets have handling market) expanding their potential addressable
started to see erosion of cash volumes or ATM withdrawals, markets.
which we attribute to high levels of regulation/financial system
Loomis (CL Buy, last close Skr371): We see Loomis as well
transparency and developed tech infrastructure. We found two
positioned to benefit from this trend; the company has grown
main examples from different regions: Sweden, which started to
EPS c.16% organically over the past five years despite
see circulation declines in 2008, and Australia, which started to
developed market exposure and the absence of inflationary
face declines in ATM withdrawals:
support.
Both countries screen in the top quartile of Transparency
International Corruption Perception Index leaving technology as Daria Fomina
the main differentiating factor from developed countries still European Business Services analyst
exhibiting growth in cash volumes. While the highest share of
cash is actually among micro payments (share of cash in email: daria.fomina@gs.com Goldman Sachs International.
Tel: +44-20-7552-0438
payments of less than 30 is over 70%) we see the ability for
consumers to seamlessly process the transaction as the key Milou Beunk, CFA
driver for growth in card payments. For both countries the pick European Business Services analyst
up in POS terminal penetration happened between 2007-09,
email: milou.beunk@gs.com Goldman Sachs International.
Tel: 44-20-7774-2365

Goldman Sachs Global Investment Research 14

Fortnightly Thoughts
Interview with Aakash Moondhra
Aakash Moondhra is the global CFO of PayU, Naspers fintech business. Previously, he
worked as the CFO of Snapdeal, where he was also responsible for Legal, Corporate Affairs,
Internal Controls and Risk. Over the last 20 years, Moondhra has worked with ANZ Grindlays
Bank, Andersen Consulting, AT&T and Bharti Group in various roles and even spent time as
an entrepreneur selling readymade kitchens in India.
How far along are emerging markets in
adopting digital payments?
From a broad perspective, cash usage in
emerging markets is still very high overall,
although we are seeing a trend towards a
higher percentage of transactions moving
towards digital payments. This is a result of
the growth in e-commerce, which as an industry is growing
much faster than GDP in these countries, propelling digital
payments.
The growth in e-commerce can be attributed to a number of
structural factors, for example the removal of distribution
bottlenecks in EMs or the ability of digital transactions to bridge
the demand and supply gap. In many of these markets, e-
commerce is enabling supply to fulfil the demand requirements
that are present but were historically unmet. Additionally, within
e-commerce more broadly, the percentage of cash on delivery
(COD) transactions has decreased and the percentage of digital
payments has gone up across the board.
Another driver of digital payments in emerging markets is
demographics. Younger generations are more willing to use
mobile systems, which in turn is driving the whole digital
payments ecosystem.
The third driver of digital payments is increasing levels of trust.
In many of these markets, consumers have historically been
reluctant to trust the online payment system. However, with
greater emphasis on security, for example through two-factor
authentication and 3D secure mechanisms, openness to digital
transactions is now much higher.
Trust can also be viewed from a buyer-seller standpoint
customers are now more and more willing to make a payment
in advance without physically viewing the product beforehand.
This is where payment platforms now have an even greater
responsibility in terms of security as they are the ultimate
conduit between buyers and sellers, acting as an intermediary
and as a source of trust.
What do you believe are the main catalysts behind this
shift towards digital payments in EMs?
I believe there is a combination of factors in play here. Firstly,
the shift to online of larger, trusted retailers has to some degree
solved the chicken and egg situation that previously existed.
Previously, it was not feasible for smaller retailers to have e-
commerce optionality without demand from customers while
simultaneously there were not enough options to pay online for
customers who wished to do so. The shift to online of larger
retailers has broken this existing bottleneck.
I believe another factor is companies such as Facebook
integrating payments into their vertical to create a platform
Goldman Sachs Global Investment Research
Issue 118
where small retailers can sell their products. Additionally, the
emergence of marketplace businesses across EMs is providing
distributional capabilities to small and medium-sized retailers
which are located in one city but wish to access a consumer in
another. Given the infrastructure bottlenecks that exist in many
of these locations, marketplace models can overcome these
distributional challenges and create an ecosystem which is
supported by a broader payments ecosystem.
How different are EMs in their stages of digital payment
adoption?
Emerging markets are at very different levels. I think the
primary drivers in different levels of adoption are access,
convenience and choice, which differ by country. Levels of
adoption are also a function of where the e-commerce industry
is in its evolution both from the penetration of e-commerce
and the rate of growth.
Markets such as India are still witnessing very high double-digit
growth in e-commerce. In contrast, many Eastern European
economies such as Poland do not have such fragmented
markets and organised e-commerce penetration is already very
high. I believe India is growing significantly faster in terms of
digital payments because there is greater opportunity for factors
such as access, convenience and choice, but also because of
the recent demonetisation reform and macroeconomics. It is
this access to the many necessary market ingredients required
for payments innovation which provides India with the
opportunity to leapfrog countries with more established
infrastructure.
Do you think the demonetisation action was significant
enough to change the attitudes of Indian citizens towards
cash?
Empirically, overall offline retail transactions were 10% digital
vs. 90% cash pre-demonetisation, rising to 60% digital
immediately post-demonetisation before stabilising at 25%-30%
four months after the measures were first introduced. At PayU,
we saw our daily transaction volume skyrocket by 80%
immediately after the announcement was made. It then settled
to a 25% increase compared with pre-demonetisation still a
significant number. This uptick in the number of digital
transactions has been primarily driven by debit cards, as credit
card penetration is very low.
Moving forward, I am of the view that the digital medium will see
a higher share of transactions, or at least remain stable, relative
to today, rather than go back to where it was before the action
was taken. This is due to measures such as the Payment of
Wages Act, which has allowed states to specify the industries
that will have to pay wages to workers only through cheques or
crediting it to their bank accounts. As more people have access
to, and make use of, their bank accounts, the higher the
chances that the ecosystem will force more and more digital
payments.
15
Fortnightly Thoughts
Do you think the shift in e-commerce and digital payments
has changed consumer behaviour?
I believe that the shift to online can be partly attributed to new
incentives, which in turn is impacting consumer behaviour. If
vendors provide offers and discounts for using digital rather
than physical payment methods, then consumers are more
likely to try the platform. This could ultimately alter consumer
behaviour if it builds a level of trust in the system.
I also believe C2C payment platforms can have an impact on
behaviour, providing solutions to geographical limitations. If
products are available on a platform, with an escrow service in
between to provide a guarantee on the payment, this will
increase transaction velocity on the platform.
Goldman Sachs Global Investment Research
Issue 118
It is also worth noting that Indian consumers and payment
providers alike are supported in this digital platform ambition by
a progressive regulator that is open to adopting a legislative
framework to promote innovation.
How important are privacy concerns to EM consumers?
Unlike security, I think privacy concerns are lower in emerging
markets than developed economies, although I believe at some
point it will catch up. Currently, emerging market consumers
want to fulfil the aspirations that they could not previously, and
therefore privacy is not a large factor. Security on the other
hand is probably better in emerging markets, with the US being
more prone to credit card fraud than countries such as India
due to differences in their prevention systems (for example two
factor authentication in India).
16
Fortnightly Thoughts
What is PSD2?
New regulation could further shake up the
payments landscape in Europe, writes
Mohammed Moawalla, our European
software analyst.
The European payments industry landscape is all set for
transformation given structural and regulatory changes.
Historically, industry IT systems have been built on the
foundation of local payment methods and local currencies.
Following the introduction of a single currency (euro in 2002) in
the EU, an additional layer of systems was overlaid on the
legacy. The result has been an infrastructure of systems that
are convoluted, antiquated, inflexible and inefficient, and
expensive to run and operate.
This setup has also resulted in an extremely fragmented
landscape of payments technology providers, spanning new
disruptive players to recently spun-off bank platforms as well as
national bank owned platforms. This, in our view, is set for a
revamp as a more modern infrastructure is required to ensure
that the intricate systems specific to various regions in Europe
are harmonized into an integrated system.
These newer systems will have to comply with new regulation
notably PSD2, facilitating real-time electronic payment
acceptance with a variety of payment methods (including local
ones). We believe this will result in continued growth of
electronic payments (at the expense of cash), provide greater
security and vastly reduce the cost of processing these
transactions, resulting in lower costs for the consumer and also
spur further innovation in payments.
Payment regulations like PSD2 are evolving to protect consumers
and support growth in electronic payments
Key features of Revised Directive on Payments Services (PSD2)
A Lowerentrybarriersforonlinepaymentservice/solutionprovidersby
proliferation establishingregulationsforthem
ofchoices Consumerswillhavecheaperandmorepowerfulsolutions
Lower Bansurchargesforcardpaymentsin95%oftransactionsintheEU,saving
charges 730mnforconsumersannually
Better
protections Lowerthelossesconsumersincurincaseofunauthorisedtransactions
against
Alegislativebasistotheunconditionalrefundright
Enhanced Betterprotectionwhentransactionamountisnotknowninadvance
rights Increasedtransparencyinmoneytransfers/remittancesoutsideEUorinnon
EUcurrencies
Better Paymentserviceproviderswillhavetocarryoutannualassessmentofthe
security operationalandsecurityrisks
Source: Goldman Sachs Global Investment Research.
PSD2 is a proposal by the European commission to revise the
Payments Services Directive (PSD - legislation adopted in 2007
providing the legal foundation for a single EU market for
payments with safer and more innovative payment services. It
is also the major regulatory initiative in Europe facilitating this
transformation.
The main objectives include contributing to a more integrated
and efficient European payments market, and ensuring
increased security, consumer protection and lower prices.
Goldman Sachs Global Investment Research
Issue 118
PSD2 is also aimed at taking into account new types of services
like payment initiation services (PIS) and account information
services (AIS). These services have brought innovation and
competition, providing more, and often cheaper alternatives for
internet payments which were previously unregulated. Bringing
them within the scope of the PSD has also boosted
transparency, innovation and security in the single market and
created a level playing field between different payment service
providers. In terms of timeline, member states will have to
implement the PSD2 into their national regulations by January
13, 2018.
Under PSD2 banks will also be required to open up customer
account data (with consent of the individual) to third parties
(including other banks). These third parties can then provide
financial services such as payments or other aggregation
products. In our view, this implies that banks will need to
significantly upgrade their IT infrastructure, creating a tailwind
for IT suppliers including software, services and payment
infrastructure providers.
It should also facilitate alternative payment highways that
bypass existing systems such as the four party scheme. For
example, a customer who has a payment to a service provider
(e.g. utility bill payment) could now provision the service
provider to deduct the amount directly from their account,
thereby bypassing the traditional payment rail. This would
invalidate the need for a card scheme and the payment can be
processed as a direct debit (for a minimal charge).
In our view a good example of such a system that exists today,
but is limited to one country, is IDEAL in the Netherlands. In a
PSD2 world, consumers using IDEAL would be able to transact
across EU nations. However, a whole range of new systems
could emerge that cost less and are accepted more widely
across the EU.
The implication is potentially negative for existing card
networks, merchant acquirers and payment processors, and in
the long-run could put pressure on take rates. The positive
implication is that payment volumes should continue to rise as
more cash is replaced by electronic payments and in the short-
term processors may benefit as there is yet another payment
method to support.
We believe regulatory initiatives like PSD2 and payment
infrastructure transformation projects should be unaffected by
political events in various European countries, as their
transformative nature would give consumers more choice and
innovation and thus lower industry costs. However, our
research with payment providers suggest banks are not well
prepared with only a handful of 6K banks in Europe
commencing working groups to be compliant with the January
2018 deadline.
As a result, we believe the timeline is likely to pushout as banks
commence projects. Furthermore we believe it will take time for
customers to be comfortable with security and access issues
around giving 3rd parties access to their bank accounts and
they will also seek assurances and consumer protection around
misuse. Therefore, implementation and activation will likely take
longer than the specified time frame of January 2018.
While the economics of these new processes are not clear at
the moment as direct bank-to-bank settlement is unlikely to
incur a fee, future value-added services could be a pool of new
17
Fortnightly Thoughts Issue 118

revenue. Specifically, banks have already been feeling pressure All in, we believe that regulations will play a vital role in shaping
on revenues from interchange reductions and given their high the payments landscape as they ensure that a robust system is
cost bases, the requirements to conform to PSD2 initiatives in place for various payment services to thrive and therefore
such as offering instant payments, opening up bank accounts to move closer to a cashless economy.
competitors and new entrants (Fintechs) - will require additional
work and thus cost. Further, shortages of skilled personnel and
the need to be compliant will likely create a favourable
environment for IT vendors.

Growth in alternative payment methods such as eWallets add to payment complexity

Global payments methods breakdown

2015 2020E
Pre-Paid E-Invoices, Other, 2% Pre-Paid E-Invoices,
PrePay, 3% Card, 3% 0% Other, 1%
Card, 6% 1%
PostPay, 2% PrePay, 4%
PostPay, 1%

Cash on Credit card,

Credit card, 20%
Delivery, 7% 25% Cash on
Delivery, 8%
Bank
Transfer,
10%
Bank Debit card,
Transfer, 13% 16%
Debit card,
17%
eWallet, 31%

eWallet, 30%

Source: Global payments report, Worldpay, November 2016.

Mohammed Moawalla
European Software analyst
email: mohammed.moawalla@gs.com Goldman Sachs International
Tel: +44-20-7774-1726

Goldman Sachs Global Investment Research 18

Fortnightly Thoughts Issue 118

The future of cash payments

James Schneider, our US payments analyst, Break the bank

Adults with an account at a formal financial institution
examines the future of cash in payments

The way we pay is changing and more consumers are

electing the convenience of electronic payments over paper .

than ever before. We believe we are only in the third inning in

.

the global progression toward a cashless society, although

many developed economies are further along in this transition
relative to emerging economies. Although we think it is unlikely
that we achieve a fully cashless society in the near future, we
Adults with an account at a formal
financial institution (%)

0 - 15

believe significant steps are already being taken to reduce the 16 - 30

31- 50

use of cash globally, including: (1) increasing global 51 - 80

81+

participation in the banking system; (2) government policies like No data

fiscalization and de-monetization; and (3) increasing the Source: World Bank.
penetration of electronic payments for small-ticket items using
P2P and mobile apps.
In the US, the mix shift in consumer payments has seen Pay in plastic
relatively steady, consistent trends (see exhibit). From 2010 to Transaction by payment type
2015, cash transactions made by consumers declined 7% to Credit Card Transactions Debit Transactions ATM transactions
$47.3 bn, while card payments grew more than 40% to $95.2 100%
Pre-Paid Card Transactions Other

bn according to data from Nilson. Today, checks and cash 90%

make up less than 40% of consumer transactions in the US 80%
and this compares with many emerging economies with over 70%
90% of their payment transactions made in cash. Ultimately, we 60%
expect cash to be used less frequently in these economies, as 50%
many governments including India, Thailand, and Indonesia 40%
are actively driving consumer adoption of electronic payments 30%
through policy action. 20%

10%

Cash flow 0%
S Korea

Brazil
Canada

Turkey

Australia

Switzerland

Indonesia

France

Spain

India

Netherlands

Italy

Germany
US
Japan

UK
China

Mexico

Russia

Saudi Arabia
Cash penetration by market
Developed markets Emerging markets All markets
100%
Source: Eurostat.

90%
In general, demand deposit and checking accounts form a basis
for a robust electronic payment system. Ultimately, we believe
80% income dictates consumer payment preference more than other
demographic factors. Most consumers experience an
electronic payment evolution which begins with consumers
70%
opening a bank account to access deposit and checking
services, followed by the periodic use of ATMs for cash
60% withdrawal. Over time, consumers begin to access credit
(including credit cards) to make larger purchases while still
50%
using cash for smaller items. The final step tends to be the use
2006 2007 2008 2009 2010 2011 2012 2013 2014 of debit cards to make frequent, everyday purchases.
Source: MasterCard investor presentation.
Fiscalization policy You cant tax what you cant see

Global penetration of banking systems
There is high degree of correlation between the use of
electronic payments and the penetration of an economys
banking system (see exhibit). As expected, economies with a
high adoption of electronic payments including the US and
Europe have a relatively high share of adults who have an
account with a formal financial institution, while emerging
economies in Asia and Africa show meaningfully lower rates of
penetration. As nearly half of the world population is without
access to financial services, sizeable shadow economies exist
which operate entirely in cash and are generally outside of
government control and taxation.
As mentioned above, shadow economies have become an
increasing focus for governments in emerging economies,
which are comprised of legal activities including retail sales
and employment which are unreported or under-reported for
the purposes of tax avoidance. For example, construction and
restaurant workers are often paid in cash, especially in
developing economies. In Europe alone, the size of the shadow
economy was estimated at $2.1 trillion or 18.5% of GDP with
most countries in Eastern and Southern Europe running well
above this average at 19%-31% of GDP. The shadow
economy translates to significant lost tax revenue and cannot
be completely eliminated. In an attempt to boost electronic
payment volume acceptance and payment convenience,

Goldman Sachs Global Investment Research 19

Fortnightly Thoughts Issue 118

fiscalization offers governments an opportunity to raise tax expect rapid growth in this segment to continue, helping
revenue and reduce the size of these shadow economies. displace cash usage in every day purchases.
Governments have found success with purpose-built mandates
in converting cash payments to electronic form, including the Splitting the bill
Venmo total payment volume ($mn)
subsidization of point-of-sale terminals. Recently, we have seen
positive action being taken by governments in emerging Venmo TPV ($mn) YoY growth (RHS)
6,000 500%
economies to encourage the adoption of electronic payments.
In November, the Indian government took to an overnight effort
5,000
to demonetize its primarily cash-based economy. The two 400%

largest cash denominations (Rs.500 and Rs.1,000 or

4,000
~$7.50/$15.00) were outlawed, effectively voiding c.85% of 300%
cash in circulation at the time. The result was somewhat
3,000
encouraging for companies in our coverage: both Visa and
200%
MasterCard noted a 75% increase in its India purchase volume 2,000
with an even larger decline in ATM cash withdrawals, while
mobile wallet provider Paytm saw triple digit increases in traffic 1,000
100%

and transactions.
0 0%
Increasing electronic payments for small-ticket items

1Q13

2Q13

3Q13

4Q13

1Q14

2Q14

3Q14

4Q14

1Q15

2Q15

3Q15

4Q15

1Q16

2Q16

One of the most stubborn and persistent uses of cash, even in
developed economies, remains the purchase of small-ticket
items. Typically, these purchases are under $20 and tend to be
habitual - which makes the shift to electronic payments in this
category particularly difficult. Payment disruptors like Venmo
and mobile wallets including Apple Pay have made active
efforts to penetrate this category to displace cash-based
payments. Convenient and accessible payment options like
these allow consumers to complete simple transactions using
an app with just a few clicks such as paying a babysitter or
splitting a check.
3Q16
Source: Company data.
Ultimately, we are on the path to becoming a cashless society,
and wealth and technology will help drive the continued shift to
electronic payments as emerging economies develop and
consumers look to bank with financial institutions. Although
many regions are still in the very early stages of this transition,
we expect a combination of new technology, global participation
in the banking system, and government fiscalization policy to
drive this transition in the next decade.

These players continue to gain traction among consumers; James Schneider, Ph.D.
Venmo processed nearly $18 bn in payment transfers during
US Payments & IT Services analyst
2016 which more than doubled from $8 bn in 2015. Given the
convenience and ease of use of many of these methods, we email: james.schneider@gs.com Goldman, Sachs & Co.
Tel: +1-917-343-3149

Goldman Sachs Global Investment Research 20

Fortnightly Thoughts Issue 118

Six of the best our favourite charts

In our six of the best section, we pull together a potpourri of charts that we hope you will find
interesting. They will be different in each edition but hopefully always of note.

Droning on China by a mile

Number of robotics-related companies that received funding by Number of self-made female billionaires by country
application area globally, 2016
Unmanned aerial systems
China
Agriculture industry
Miscellaneous US
Self-driving vehicles
Software & A.I. UK
Vision Systems
Service Robots BTB Singapore
Service Robots B2C
Spain
Mobile Robotics
Mobile Robotics/AGVs Brazil
Machine systems
Materials handling Nigeria
Surgical device
Consumer prodicts Italy
Educational robots
India
Sensors manuf.
Component manuf. Germany
Integrator
Defence & Space Australia
RaaS Robotics
Rehab robotics & prosthetics Denmark

0 5 10 15 20 25 30 0 10 20 30 40 50 60
Source: The Robot Report. Source: Hurun Research Institute 2017.

Trade frictions Bitcoin not up a bit, but a lot

No. of anti-dumping measures imposed on China by country Bitcoin price in USD (LHS) versus Chinese Yuan per USD (RHS)
1995- 2014 2015-2016 Bitcoin (per coin) CNY (RHS)
250 1,400 7.2

7
1,200
200
6.8

1,000 6.6
150
6.4
800
100 6.2

600 6

50 5.8
400
5.6
0
200 5.4
Argentina

Turkey

Australia

S. Africa
USA

EU

Brazil

Mexico
India

Canada
Colombia

Jan-14

May-14

Jan-15

May-15

Jan-16

May-16

Jan-17
Nov-13

Mar-14

Jul-14
Sep-14
Nov-14

Mar-15

Jul-15
Sep-15
Nov-15

Mar-16

Jul-16
Sep-16
Nov-16

Mar-17

Source: WTO. Source: Bloomberg.

Northern headlights Slow-balisation

Top-5 electric vehicles market share in respective country, 2017 YTD 100 largest multinational enterprises, foreign operations as a % of total
2004 2008 2010 2015
Norway 70%

60%
Iceland

50%

Sweden
40%

Switzerland
30%

Belgium 20%

10%
Europe

0%
0% 5% 10% 15% 20% 25% 30% 35% 40% Assets Sales Employment
Source: EAFO. Source: UNCTAD.

Goldman Sachs Global Investment Research 21

Fortnightly Thoughts Issue 118

Disclosure Appendix

Reg AC
We, Sumana Manohar, Hugo Scott-Gall, Navreen Sandhu, Siri Kurada, James Schneider, Mohammed Moawalla, Daria Fomina and Milou
Beunk, hereby certify that all of the views expressed in this report accurately reflect our personal views about the subject company or
companies and its or their securities. We also certify that no part of our compensation was, is, or will be, directly or indirectly, related to the
specific recommendations or views expressed in this report.
We, Nupur Gupta, Andrew Tilton, Lasse Holboell Nielsen and Huw Pill, hereby certify that all of the views expressed in this report
accurately reflect our personal views, which have not been influenced by considerations of the firm's business or client relationships.
Unless otherwise stated, the individuals listed on the cover page of this report are analysts in Goldman Sachs' Global Investment Research
division.

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GS SUSTAIN
GS SUSTAIN is a global investment strategy aimed at long-term, long-only performance with a low turnover of ideas. The GS SUSTAIN
focus list includes leaders our analysis shows to be well positioned to deliver long term outperformance through sustained competitive
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companies covered by the Global Investment Research Division of Goldman Sachs and referred to in this research.
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Goldman Sachs Investment Research global coverage universe
Rating distribution Investment Banking Relationships

Buy Hold Sell Buy Hold Sell

Global 32% 54% 14% 64% 60% 51%

As of January 1, 2017, Goldman Sachs Global Investment Research had investment ratings on 2,902 equity securities. Goldman Sachs
assigns stocks as Buys and Sells on various regional Investment Lists; stocks not so assigned are deemed Neutral. Such assignments

Goldman Sachs Global Investment Research 22

Fortnightly Thoughts Issue 118

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Compendium report: please see disclosures at http://www.gs.com/research/hedge.html. Disclosures applicable to the companies included
in this compendium can be found in the latest relevant published research.

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Ratings, coverage groups and views and related definitions

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Fortnightly Thoughts Issue 118

Buy (B), Neutral (N), Sell (S) -Analysts recommend stocks as Buys or Sells for inclusion on various regional Investment Lists. Being
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Fortnightly Thoughts Issue 118

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Goldman Sachs Global Investment Research 25