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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
+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 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%
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
the long term. China
Does the decline in cash payments imply the demise of cash?
Not necessarily. Thats because payments is only one Russia
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
in circulation as a percentage of GDP continues to rise in most 10% India
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.
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 The US also stands out, and this could at least partly be
usage, but it is by no means a new phenomenon. As we wrote attributed to the fact that regulators in the US have explicitly
in 2012 (see Issue 42, Fortnightly Thoughts: Money, money, stated that the market should manage the shift to digital
money in a mobile world, October 2012), the first technological payments by itself. For instance, despite disproportionately high
step-change in the payments arena was the shift from cash to levels of card fraud, especially fraud owing to counterfeit cards,
plastic money, i.e. credit and debit cards, which happened in the US has been slow to adopt EMV (named after the founding
the 1960s. companies Europay, MasterCard, and Visa) technology,
relative to the rest of the world.
There are many parallels to be drawn between that period and
the ongoing shift to digital money: an initial period of an This is not due to technological constraints. Parts of Europe first
increasing number of providers was followed by a consolidation began to implement chip cards in the 1990s, with 99.9% of
stage that established a few players (Visa and MasterCard European terminals now chip-enabled. Contrast this to the US,
primarily) as the industry standards, eventually accelerating the where in the absence of regulatory intervention, EMV adoption
adoption of plastic money. has only taken hold over the last year. Our analysts cautious
view on Ingenico (Sell, last close 87.8) and Gemalto (Sell, last
However, the availability of technology alone has not ensured close 52.4) can be at least partly attributed to the uncertainty
the demise of cash. As the following chart shows, there are surrounding US EMV adoption.
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).

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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
Counterfeit Cards Card Stolen/Lost Card not Present
share their bank account information with third parties (including
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.
Our analysts note that the specifics are not clear yet, and that it
is likely that the implementation date will be pushed, mostly
because many banks need to overhaul their tech infrastructure.
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.









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,
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
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
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

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Fortnightly Thoughts Issue 118

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

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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
16 to lock in a 0% nominal rate of return, and as such interest rates
cannot become more negative than the cost of storing cash, as
there is the incentive to switch to paper currency to earn a
greater return.
3000 13
However, the costs of storing cash are potentially very large,
requiring rates to turn significantly negative before the zero
lower bound takes hold. As the following chart shows, despite
10 the rate of deposits held at the ECB turning negative in mid
9 June 2014, usage of the deposit facility has actually increased.
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
government pulled approximately 85% of currency in circulation 0.8%

in order to reduce unaccounted and counterfeit money in 700000

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

impact of demonetisation in India, noting that greater 200000


formalisation of the economy and increased digitisation could -0.4%

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%








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
catalyst to the shift away from cash. Regulatory intervention will
Denmark Finland
be needed more if the current low nominal interest environment
Singapore Sweden
persists. This is because cash in circulation as a percentage of
Germany Australia
Japan USA
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.

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

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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
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
implies that the future path of inflation, interest rates and trust in
the banking system will continue to be vital in determining the
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
from disruptive technologies. We highlight some of these







Euro area





winners in our how to invest stock table below.

Source: Bank for International Settlements.

A penny for our thoughts

How to invest in this

Last Target
Ticker Company Rating cap % Rationale
price Price
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
WPG.L Buy 7,211 289p 400p 38% services, should enable it to benefit from structural growth in the attractive and rapidly changing
payments arena

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

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

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
0700.HK Buy 275,482 HK$225.2 HK$248 10% payment market, with market share increasing from 23% in
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
MA Buy 121,481 $111.45 $122 9% expected to continue post the implementation of EU payment regulations. Should also benefit from
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

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Fortnightly Thoughts Issue 118

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 payment protocol (UPI). Therefore, the 250 million smartphone
India cashless? users and 350 million feature phone users are now on the same
payment system i.e. the 600 million people who have phones
To move to a cashless economy, the
in India can now use them to make mobile payments.
underlying infrastructure for digital
payments must be cheap, convenient and Apart from them, we estimate there are approximately 350
ubiquitous, otherwise people will continue million people, including young adults, who do not have access
to use cash. In advanced economies, this to a mobile phone. However, they now have an Aadhaar
role was performed by debit and credit number which they can use to open an account at any bank
cards from companies such as Visa, MasterCard, and American using Aadhaar eKYC (electronic Know Your Customer). For
Express. Similarly, in emerging markets, China implemented a them, the government has launched Aadhaar Pay, where
card system named ChinaPay and India has something called independent and registered merchants (e.g. small store owners
RuPay. In other EMs, a different digital transaction system was in towns) have biometric devices which can be used for
introduced when mobile operators, especially in Africa, customer authentication. And the customer can pay for goods
developed mobile money the most famous example being M- and services by debiting their bank account, and crediting the
Pesa in Kenya. Most recently, large internet companies, merchants account, despite not owning a device of their own.
especially in China, have been able to enable smartphone- Think of this as a variant of MicroATMs that can be used for
based payment solutions. Examples include Alipay from cashless merchant payments.
Alibaba and WeChat from Tencent, which together dominate
Taken together, India now has the infrastructure to enable
the internet-based payment business in China.
digital payments for smartphones, feature phones and those
The digital payment infrastructure now being developed in India who do not have access to a phone at all. This is a completely
is unique because it is a completely interoperable system, and new payment backbone, which unlike the systems in many
is designed to serve a billion people. The first component to this countries, is not reliant on cards. It enables a billion people to
system is Aadhaar , which is essentially a 12-digit unique transact digitally and now allows the government and markets
identity number given to every Indian resident. Currently 1.1 to focus on increasing the penetration of this payment system.
billion Indian residents have an Aadhaar number, making it the
What are the benefits of digitising payments and reducing
only billion-user platform outside of the US. The first shift to
the amount of cash in the system?
cashless payments within the Indian economy was the use of
Aadhaar to dispense government benefit payments. This is The benefit of reducing the level of cash in the system is
possible as the system allows a bank account to be linked to threefold convenience for consumers, lower friction costs for
the unique ID. Today, there are c.400 million Indians whose businesses and greater transparency for governments. From
Aadhaar numbers are linked to their bank accounts. the governments perspective, greater transparency comes with
lower tax evasion, higher revenues and faster formalisation of
The second constituent of the digital payment landscape is the
the economy. It also reduces cash handling costs, which is a
Immediate Payment Service (IMPS), which facilitates the
very large implicit cost on the economy, retail banks, the
remittance of money home. This system alone facilitates c.$7
Reserve Bank and the wider government. Consumers currently
bn transfers per month. The final component of Indias digital
find cash very convenient because there is no transaction cost.
payment system is a new mobile-to-mobile solution called UPI
Therefore, one of the goals of the new payments interface is to
or Unified Payments Interface, which allows peer-to-peer
reduce transaction costs for digital as much as possible so that
transfer of money in real time from bank account to bank
people do not hesitate to change the way they transact. It's only
account. This provides the same benefits as the closed loop
when digital transactions are very low cost that it will be
digital wallet system, plus the added advantage of
adopted in large numbers both by merchants and by
What systems are in place for those who do not have a
However, I think the greatest consumer benefit will be the ability
to build a digital footprint. This can be shared with lenders to
India has 250 million smartphone users who can now make increase the accessibility of credit to the wider economy.
payments to any merchant or any person who also has the Currently only 3% of Indian businesses receive loans from the
payment app on their phones. However, there are 350 million formal economy. In general, India is a very informal economy
people who have older feature phones, rather than there are approximately 60-70 million businesses, but less than
smartphones. USSD was an existing data channel that existed a million incorporated companies. I believe that the informal
pre-internet. In response to demonetisation, a UPI based economy will start entering the formal economy because digital
application was written using this channel that allows feature footprints will improve the availability of loans. This is going to
phone users to also make payments via the same underlying be the economic driver for encouraging consumers and small
businesses to join the digital payment system.

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Fortnightly Thoughts Issue 118

What are the implications of a long-run shift to digital supply-side infrastructure necessary for digital payments. For
systems for the banking sector? instance, immediately after the demonetisation action, the
government developed an app (BHIM) that could be built on top
Currently, India is an underserved market for credit. However
of the mobile-to-mobile infrastructure already in place. BHIM
over the next ten years, it has been estimated that c.$500 bn of
was launched by the government on December 30, 2016, and
incremental market capitalisation will be created because of the
has already been downloaded 18 million times. Anyone with
expansion of credit. The question is this: how will this new
access to a smartphone who wishes to make a cashless
revenue pool be distributed? And the answer relies on the
payment can do so via the governments app (BHIM), any of the
response of the incumbents. Although incumbent banks are
alternatives offered by banks like HDFC, ICICI, Axis or
currently well positioned, the intensity of competition within the
PhonePe (launched by Flipkart and Yes Bank). Private
banking system has increased as a function of lower switching
companies mobile wallet solutions also experienced a rapid
costs. In other words, consumers and businesses can move
rise in users and transaction value. Now that the supply-side
from one bank to a competitor very easily, thanks to the digital
infrastructure is in place, the system is ready to move to a less-
payment systems being introduced. As these switching costs
cash economy when demand does pick up gradually, whether
fall, churn goes up, and new players can enter with superior
that is because of market competition, further government
technology and aggressive pricing. Although the size of the
initiatives or a more gradual shift in consumer attitudes.
overall pie is increasing, the incumbent share will depend solely
on their response to increased competition. How do you see consumer attitudes to credit changing?
Apart from banks, the implications are interesting for the rest of One metric on which India stands out relative to other countries
the payment value chain as well. For example, in most is that Indian consumers have a very low credit penetration.
advanced economies, companies that provide credit cards and This constrains the ability of the Indian economy to grow
payment processing services are listed, for profit companies. because consumers do not have credit to buy and businesses
However, as an Indian alternative, the government created the do not have access to the credit necessary for investment.
National Payment Corporation of India (NPCI), which plays the Therefore we face a situation where both buyers and sellers are
same switching and clearing roles as payment processors do in constrained to grow. Digital footprints can unlock credit for
traditional payment systems. The key difference is that NPCI is consumers and bring forward consumption as they can now buy
a non-profit company that is designed to be a utility that is with credit rather than just from savings, with similar
owned collectively by all the banks. So the payments value implications for business investment. Therefore the
chain can look dramatically different in a place like India. macroeconomic implication of moving from cash to digital
payments, if implemented correctly, is a boost to consumer
Does India have a relative advantage in developing this
expenditure and businesses growth.
payment infrastructure because, compared to DMs, India
banks do not have expensive legacy systems to update? What are the current and future use cases of the digital
identity card infrastructure?
Banks in India do have legacy IT systems, but they do not face
the same challenges as their counterparts in developed There are a lot of use cases for the digital ID and payments
markets. In Europe and the US, a great deal of banking system. It is already used to issue passports, government
technology was implemented in the 1960s and 1970s using benefit payments and in the insurance industry. It is meant to
mainframe systems; the legacy systems are 40-50 years old. In be used as a platform, within the financial and non-financial
contrast, the Indian banking system was mostly implemented in sectors. A good example of a company that has benefitted from
the 1990s. So although Indian banks have old IT systems, they this is Reliance Jio, a new entrant in the Indian Telco market. It
are much younger than in DMs. Therefore, although there are was able to expand to 100 million customers in six months
some challenges to integrate these new payment technologies, mainly because the company used the Aadhaar eKYC to issue
the banks have mostly been able to integrate their technology a SIM collection within two minutes. This was only possible
infrastructure with this next generation payment interface. because the electronic infrastructure was in place.
How do you think the demonetisation actions have altered What are the security concerns around a system like
consumer perception of cash? Aadhaar, given that so many details, including biometrics,
are linked to one unique ID card?
I do not believe demonetisation has significantly shifted the
share of digital versus cash transactions. Nevertheless, what The biometric details are purely taken to eliminate duplicate
demonetisation did achieve was giving many people the users, and are not included in any transaction. By providing
awareness of paying via digital channels. To that end, in terms every resident with a unique identity number, this $1 bn
of behaviour, a lot more people started using digital wallets and investment has saved the government roughly $7 bn in
debit cards. But while there was a big rush towards digital in the duplicated payments. Nevertheless, the biometric data is only
month of December, evidence shows that by January, it started used for authentication matching, and is not part of payments.
tapering off as more physical cash entered the economy. Additional measures have also been taken to increase security,
People went back to using cash when they could. such as two factor authentication. Therefore, unlike in the US,
where a credit card number is sufficient to make payment, in
Rather than consumer attitudes, which tend to be slower to
India you need two factors such as a phone number plus the
change, I believe that the principal goal achieved by
PIN. This system results in much lower levels of fraud.
demonetisation was that it accelerated the development of the

Goldman Sachs Global Investment Research 8

Fortnightly Thoughts Issue 118

Indias demonetization and its effects

Businesses adapted to the cash-crunch situation, signing up
Nupur Gupta and Andrew Tilton, our Asia as merchants to electronic wallet gateways and installing point-
economists, explore the implications of Indias of-sale instruments. Industries saw a significant drop in
demand, daily wage employees were unable to find work,
demonetization action heavy discounts were being offered, and farmers were selling
produce below minimum support prices.
In early November 2016, the Indian government announced a
curb in the circulation of money in the informal economy via the Indias economy in the aftermath of demonetization
cancellation of high-denomination notes (widely referred to as Overall, demonetization appears to have significantly disrupted
demonetization). Nearly 86% of total currency in circulation economic activities around the end of the calendar year,
was taken out of the system overnight, leaving households with particularly for the more cash-based sectors. That said, the
no usable currency to make purchases. Such a drastic move is negative effects on consumption are fading rapidly as cash
particularly important in the context of the Indian economy given levels return to normal. As of March 10, total currency in
that Indias currency in circulation as a percent of GDP is over circulation is back up to 70% of pre-demonetization levels and
1.5 times that of the EM average, and nearly 80% of overall business sentiment, as indicated for example by PMI readings,
transactions still take place in cash. During the announcement, is gradually improving. Early signs of a consumption recovery
the government mentioned that its intentions were to increase appear to be underway with our India Current Activity Indicator
participation in the formal economy and address counterfeit bottoming out in January (Exhibit 2). In our view,
notes, among others. The move followed the rollout of several demonetization has not had a permanent impact on the trend
tax amnesty programs that gave individuals the opportunity to growth in consumption demand. We therefore expect
disclose hidden assets. consumption activities to return to normal and some of the pent-
The immediate impact of demonetization up demand, particularly for consumer discretionary products, to
drive consumption growth in coming months. It is interesting to
The cancellation of notes led to significant disruptions in note that while digital transactions spiked immediately after the
economic activity and households queued outside ATMs and announcement, it appears as though the usage of cash may be
bank branches to obtain new currency notes to facilitate returning as the main form of exchange for daily consumption
transactions. As evident from Google Trends, the shortage of needs in particular.
cash led to increased popularity of digital modes of payments.

Back from the edge?

Pressed for cash Indias Current Activity Indicator shows some recovery after a sharp
Google searches for terms related to digital payments spiked after drop post-demonetization
% change, qoq sa. Current Activity Indicator Real GDP
Paytm UPI ann.
100 14


60 8



0 2013 2014 2015 2016 2017
12-Sep 12-Oct 11-Nov 11-Dec 10-Jan
Note: Shaded area denotes period post-demonetisation.
Note: Shaded area denotes period post-demonetisation. Numbers represent Source: Haver Analytics, Goldman Sachs Global Investment Research.
search interest relative to the highest point for given region and time.
Source: Google Trends.
The impact of demonetization beyond the near-term
While the urban economy was swift in adapting to the low-cash consumption recovery is less clear at this stage. On the one
situation and switched purchases to hypermarkets and hand, the delayed economic recovery could lead to some
supermarkets that accepted credit and debit cards, rural negative second-round effects; while on the other, greater
households found it much more difficult. The barter system re- formalization of the economy and increased digitization could
emerged in certain rural villages, and small vendors began to lead to efficiency gains over the longer term. In our base case,
educate themselves on digital payments gradually. Our Current any meaningful acceleration in private investment growth over
Activity Indicator suggested that rural economic activity the coming year is likely to remain elusive. Demonetization and
contracted by 3.5% quarter-on-quarter annualized in the month the consequent delay in economic activity recovery may
following demonetization, mainly due to a significant decline in increase the probability of NPL creation, weaken financial
consumption. Urban economic activity was relatively less linkages particularly in the informal sector, generate greater
affected, with most of the impact felt on consumer discretionary business uncertainty and lead to negative feedback effects due
products rather than basic purchases. to falling real estate sales and prices (See Vishal Vaibhaw and

Goldman Sachs Global Investment Research 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
tax department may use to match against disclosed income. 19 seats
This could help widen Indias tax net and lead to a permanent
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). In our view, these results bode well for the implementation of
economic reforms. Not only does the BJP alliance now rule
Indias cash-based economy, which currently enables states that account for 60% of Indias GDP, the election results
businesses to under-report or exclude transactions, may slowly are also likely to strengthen its position in the Upper House
be shifting towards more electronic means post-demonetization. beginning in April 2018 when seats from these states are up for
The government announced several measures to promote re-election. The victory should also help speed up any pending
digital transactions in its latest budget including limitations on issues related to the Goods and Services Tax (GST)
the usage of cash for transactions above INR300,000 implementation and allow further progress on power sector
(USD4,545) and a cash-back scheme for merchants who distribution reforms. What is most important for the coming year
accept digital payments. The government has also launched its in our view, is that the BJP is likely to undertake key labor and
own biometric mobile payment application system called the land reforms in these states, easing the ability to do business.
Bharat Interface for Money. A gradual shift towards greater In summary, the negative effects of demonetization on
digitization may help reduce transaction costs, cut the consumption activities appear to be fading rapidly as cash
opportunities for rent seeking and improve overall productivity levels normalize. We expect growth to improve gradually,
growth. Greater financial flows via the formal banking channel supported by the pent-up consumption demand and
could also improve the allocation of credit and boost longer government spending. However, whether India has truly made
term growth. a shift towards a less cash-based economy is yet to be seen.
How does demonetization impact Indias reform agenda
Demonetization was seen by political analysts as a bold move Nupur Gupta
by the Modi government as it impacts the governments key
vote bank small and medium-sized traders and mom-and- ASEAN and India economist
pop store owners. In this context, elections in five states, which email: Goldman Sachs (Singapore) Pte.
took place in February/March 2017, were watched keenly by Tel: +65-6654-5438
market participants seeking to gain an understanding of the
Andrew Tilton
ruling partys popularity post-demonetization. The results of the
state elections, released on March 11, 2017, delivered an Chief Asia Pacific economist
emphatic win for the ruling Bharatiya Janta Party (BJP) in the email: Goldman Sachs Asia L.L.C.
key state of Uttar Pradesh which is 80% rural (Exhibit 3). The Tel: +852-2978-1802
outcome is now seen by many as a positive referendum on the
Modi administration post-demonetization.

Goldman Sachs Global Investment Research 10

Fortnightly Thoughts Issue 118

Central banks and peak cash

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

rates. Real interest rates interest rates adjusted for inflation

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

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
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
is stimulated. Such intertemporal substitution represents an -1.25

important channel for the transmission of monetary policy to the

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
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, %

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

Goldman Sachs Global Investment Research 11

Fortnightly Thoughts Issue 118

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

The demand for cash varies depending on the income class of
Daria Fomina and Milou Beunk, our European the country with low income countries only at the early stages of
Business Services analysts, on cash in demanding less cash to catch up with most developed ones.
While most of the growth of cash circulation is coming from
circulation Emerging Markets and LatAm, more mature European
economies are still seeing growth, though at more moderate
Technology development has made mobility and convenience a rates.
key driving force of consumer preferences for different payment
methods. Card payment solutions have become increasingly Cash is still easier, cheaper and safer payment method
popular, thanks to improved security, and consumer Cash remains the most universal, resilient and cost-efficient
acceptance has consequently increased. Hence share of cash means of payment; hence demand for cash, or cash circulation,
payments by consumers fell from over 90% at the beginning of continues to grow, despite representing a declining share of
the century to c.70% in FY16. total transactions. Why? We identify three reasons:
Accessibility. Half of global population still has no access to a
Importance of cash as a payment method is declining
bank account, hence cash remains the most accessible means
Percentage of total consumer payment transactions, by method
of payment. In more advanced economies 30% of the
Cash Electronic Direct 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






















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)
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
Share of cash(%)


CAGR : +9%



CAGR : +6% 10%

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















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
Mobile phone-based money services so far did not affect 90%
cash volumes and preferences for payment methods
Since M-Pesa (mobile phone-based money transfer, financing 70%
and microfinancing service) was launched in 2007 by
Safaricom, emerging markets (primarily in Africa) saw a great
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:
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: 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: Goldman Sachs International.
Tel: 44-20-7774-2365

Goldman Sachs Global Investment Research 14

Fortnightly Thoughts Issue 118

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 where small retailers can sell their products. Additionally, the
adopting digital payments? emergence of marketplace businesses across EMs is providing
distributional capabilities to small and medium-sized retailers
From a broad perspective, cash usage in
which are located in one city but wish to access a consumer in
emerging markets is still very high overall,
another. Given the infrastructure bottlenecks that exist in many
although we are seeing a trend towards a
of these locations, marketplace models can overcome these
higher percentage of transactions moving
distributional challenges and create an ecosystem which is
towards digital payments. This is a result of
supported by a broader payments ecosystem.
the growth in e-commerce, which as an industry is growing
much faster than GDP in these countries, propelling digital How different are EMs in their stages of digital payment
payments. adoption?
The growth in e-commerce can be attributed to a number of Emerging markets are at very different levels. I think the
structural factors, for example the removal of distribution primary drivers in different levels of adoption are access,
bottlenecks in EMs or the ability of digital transactions to bridge convenience and choice, which differ by country. Levels of
the demand and supply gap. In many of these markets, e- adoption are also a function of where the e-commerce industry
commerce is enabling supply to fulfil the demand requirements is in its evolution both from the penetration of e-commerce
that are present but were historically unmet. Additionally, within and the rate of growth.
e-commerce more broadly, the percentage of cash on delivery
Markets such as India are still witnessing very high double-digit
(COD) transactions has decreased and the percentage of digital
growth in e-commerce. In contrast, many Eastern European
payments has gone up across the board.
economies such as Poland do not have such fragmented
Another driver of digital payments in emerging markets is markets and organised e-commerce penetration is already very
demographics. Younger generations are more willing to use high. I believe India is growing significantly faster in terms of
mobile systems, which in turn is driving the whole digital digital payments because there is greater opportunity for factors
payments ecosystem. such as access, convenience and choice, but also because of
the recent demonetisation reform and macroeconomics. It is
The third driver of digital payments is increasing levels of trust.
this access to the many necessary market ingredients required
In many of these markets, consumers have historically been
for payments innovation which provides India with the
reluctant to trust the online payment system. However, with
opportunity to leapfrog countries with more established
greater emphasis on security, for example through two-factor
authentication and 3D secure mechanisms, openness to digital
transactions is now much higher. Do you think the demonetisation action was significant
enough to change the attitudes of Indian citizens towards
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. Empirically, overall offline retail transactions were 10% digital
This is where payment platforms now have an even greater vs. 90% cash pre-demonetisation, rising to 60% digital
responsibility in terms of security as they are the ultimate immediately post-demonetisation before stabilising at 25%-30%
conduit between buyers and sellers, acting as an intermediary four months after the measures were first introduced. At PayU,
and as a source of trust. we saw our daily transaction volume skyrocket by 80%
immediately after the announcement was made. It then settled
What do you believe are the main catalysts behind this
to a 25% increase compared with pre-demonetisation still a
shift towards digital payments in EMs?
significant number. This uptick in the number of digital
I believe there is a combination of factors in play here. Firstly, transactions has been primarily driven by debit cards, as credit
the shift to online of larger, trusted retailers has to some degree card penetration is very low.
solved the chicken and egg situation that previously existed.
Moving forward, I am of the view that the digital medium will see
Previously, it was not feasible for smaller retailers to have e-
a higher share of transactions, or at least remain stable, relative
commerce optionality without demand from customers while
to today, rather than go back to where it was before the action
simultaneously there were not enough options to pay online for
was taken. This is due to measures such as the Payment of
customers who wished to do so. The shift to online of larger
Wages Act, which has allowed states to specify the industries
retailers has broken this existing bottleneck.
that will have to pay wages to workers only through cheques or
I believe another factor is companies such as Facebook crediting it to their bank accounts. As more people have access
integrating payments into their vertical to create a platform to, and make use of, their bank accounts, the higher the
chances that the ecosystem will force more and more digital

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Fortnightly Thoughts Issue 118

Do you think the shift in e-commerce and digital payments It is also worth noting that Indian consumers and payment
has changed consumer behaviour? providers alike are supported in this digital platform ambition by
a progressive regulator that is open to adopting a legislative
I believe that the shift to online can be partly attributed to new
framework to promote innovation.
incentives, which in turn is impacting consumer behaviour. If
vendors provide offers and discounts for using digital rather How important are privacy concerns to EM consumers?
than physical payment methods, then consumers are more
Unlike security, I think privacy concerns are lower in emerging
likely to try the platform. This could ultimately alter consumer
markets than developed economies, although I believe at some
behaviour if it builds a level of trust in the system.
point it will catch up. Currently, emerging market consumers
I also believe C2C payment platforms can have an impact on want to fulfil the aspirations that they could not previously, and
behaviour, providing solutions to geographical limitations. If therefore privacy is not a large factor. Security on the other
products are available on a platform, with an escrow service in hand is probably better in emerging markets, with the US being
between to provide a guarantee on the payment, this will more prone to credit card fraud than countries such as India
increase transaction velocity on the platform. due to differences in their prevention systems (for example two
factor authentication in India).

Goldman Sachs Global Investment Research 16

Fortnightly Thoughts Issue 118

What is PSD2?
PSD2 is also aimed at taking into account new types of services
New regulation could further shake up the like payment initiation services (PIS) and account information
payments landscape in Europe, writes services (AIS). These services have brought innovation and
competition, providing more, and often cheaper alternatives for
Mohammed Moawalla, our European internet payments which were previously unregulated. Bringing
software analyst. them within the scope of the PSD has also boosted
transparency, innovation and security in the single market and
The European payments industry landscape is all set for created a level playing field between different payment service
transformation given structural and regulatory changes. providers. In terms of timeline, member states will have to
Historically, industry IT systems have been built on the implement the PSD2 into their national regulations by January
foundation of local payment methods and local currencies. 13, 2018.
Following the introduction of a single currency (euro in 2002) in Under PSD2 banks will also be required to open up customer
the EU, an additional layer of systems was overlaid on the account data (with consent of the individual) to third parties
legacy. The result has been an infrastructure of systems that (including other banks). These third parties can then provide
are convoluted, antiquated, inflexible and inefficient, and financial services such as payments or other aggregation
expensive to run and operate. products. In our view, this implies that banks will need to
This setup has also resulted in an extremely fragmented significantly upgrade their IT infrastructure, creating a tailwind
landscape of payments technology providers, spanning new for IT suppliers including software, services and payment
disruptive players to recently spun-off bank platforms as well as infrastructure providers.
national bank owned platforms. This, in our view, is set for a It should also facilitate alternative payment highways that
revamp as a more modern infrastructure is required to ensure bypass existing systems such as the four party scheme. For
that the intricate systems specific to various regions in Europe example, a customer who has a payment to a service provider
are harmonized into an integrated system. (e.g. utility bill payment) could now provision the service
These newer systems will have to comply with new regulation provider to deduct the amount directly from their account,
notably PSD2, facilitating real-time electronic payment thereby bypassing the traditional payment rail. This would
acceptance with a variety of payment methods (including local invalidate the need for a card scheme and the payment can be
ones). We believe this will result in continued growth of processed as a direct debit (for a minimal charge).
electronic payments (at the expense of cash), provide greater In our view a good example of such a system that exists today,
security and vastly reduce the cost of processing these but is limited to one country, is IDEAL in the Netherlands. In a
transactions, resulting in lower costs for the consumer and also PSD2 world, consumers using IDEAL would be able to transact
spur further innovation in payments. across EU nations. However, a whole range of new systems
could emerge that cost less and are accepted more widely
Payment regulations like PSD2 are evolving to protect consumers across the EU.
and support growth in electronic payments
Key features of Revised Directive on Payments Services (PSD2) The implication is potentially negative for existing card
networks, merchant acquirers and payment processors, and in
A Lowerentrybarriersforonlinepaymentservice/solutionprovidersby
proliferation establishingregulationsforthem
the long-run could put pressure on take rates. The positive
ofchoices Consumerswillhavecheaperandmorepowerfulsolutions implication is that payment volumes should continue to rise as
more cash is replaced by electronic payments and in the short-
Lower Bansurchargesforcardpaymentsin95%oftransactionsintheEU,saving
term processors may benefit as there is yet another payment
charges 730mnforconsumersannually method to support.
We believe regulatory initiatives like PSD2 and payment
protections Lowerthelossesconsumersincurincaseofunauthorisedtransactions infrastructure transformation projects should be unaffected by
against political events in various European countries, as their
transformative nature would give consumers more choice and
Enhanced Betterprotectionwhentransactionamountisnotknowninadvance
innovation and thus lower industry costs. However, our
rights Increasedtransparencyinmoneytransfers/remittancesoutsideEUorinnon research with payment providers suggest banks are not well
prepared with only a handful of 6K banks in Europe
Better Paymentserviceproviderswillhavetocarryoutannualassessmentofthe
commencing working groups to be compliant with the January
security operationalandsecurityrisks 2018 deadline.
Source: Goldman Sachs Global Investment Research. As a result, we believe the timeline is likely to pushout as banks
commence projects. Furthermore we believe it will take time for
PSD2 is a proposal by the European commission to revise the customers to be comfortable with security and access issues
Payments Services Directive (PSD - legislation adopted in 2007 around giving 3rd parties access to their bank accounts and
providing the legal foundation for a single EU market for they will also seek assurances and consumer protection around
payments with safer and more innovative payment services. It misuse. Therefore, implementation and activation will likely take
is also the major regulatory initiative in Europe facilitating this longer than the specified time frame of January 2018.
While the economics of these new processes are not clear at
The main objectives include contributing to a more integrated the moment as direct bank-to-bank settlement is unlikely to
and efficient European payments market, and ensuring incur a fee, future value-added services could be a pool of new
increased security, consumer protection and lower prices.
Goldman Sachs Global Investment Research 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 Debit card,
Transfer, 13% 16%
Debit card,
eWallet, 31%

eWallet, 30%

Source: Global payments report, Worldpay, November 2016.

Mohammed Moawalla
European Software analyst
email: Goldman Sachs International
Tel: +44-20-7774-1726

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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


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%


Cash flow 0%
S Korea















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

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
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
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 As mentioned above, shadow economies have become an
increasing focus for governments in emerging economies,
There is high degree of correlation between the use of which are comprised of legal activities including retail sales
electronic payments and the penetration of an economys and employment which are unreported or under-reported for
banking system (see exhibit). As expected, economies with a the purposes of tax avoidance. For example, construction and
high adoption of electronic payments including the US and restaurant workers are often paid in cash, especially in
Europe have a relatively high share of adults who have an developing economies. In Europe alone, the size of the shadow
account with a formal financial institution, while emerging economy was estimated at $2.1 trillion or 18.5% of GDP with
economies in Asia and Africa show meaningfully lower rates of most countries in Eastern and Southern Europe running well
penetration. As nearly half of the world population is without above this average at 19%-31% of GDP. The shadow
access to financial services, sizeable shadow economies exist economy translates to significant lost tax revenue and cannot
which operate entirely in cash and are generally outside of be completely eliminated. In an attempt to boost electronic
government control and taxation. 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
to demonetize its primarily cash-based economy. The two 400%

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

~$7.50/$15.00) were outlawed, effectively voiding c.85% of 300%
cash in circulation at the time. The result was somewhat
encouraging for companies in our coverage: both Visa and
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

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















One of the most stubborn and persistent uses of cash, even in
developed economies, remains the purchase of small-ticket Source: Company data.
items. Typically, these purchases are under $20 and tend to be
habitual - which makes the shift to electronic payments in this Ultimately, we are on the path to becoming a cashless society,
category particularly difficult. Payment disruptors like Venmo and wealth and technology will help drive the continued shift to
and mobile wallets including Apple Pay have made active electronic payments as emerging economies develop and
efforts to penetrate this category to displace cash-based consumers look to bank with financial institutions. Although
payments. Convenient and accessible payment options like many regions are still in the very early stages of this transition,
these allow consumers to complete simple transactions using we expect a combination of new technology, global participation
an app with just a few clicks such as paying a babysitter or in the banking system, and government fiscalization policy to
splitting a check. 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: 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
Agriculture industry
Miscellaneous US
Self-driving vehicles
Software & A.I. UK
Vision Systems
Service Robots BTB Singapore
Service Robots B2C
Mobile Robotics
Mobile Robotics/AGVs Brazil
Machine systems
Materials handling Nigeria
Surgical device
Consumer prodicts Italy
Educational robots
Sensors manuf.
Component manuf. Germany
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


1,000 6.6
100 6.2

600 6

50 5.8
200 5.4



S. Africa



















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%





Belgium 20%


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

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Fortnightly Thoughts Issue 118

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Goldman Sachs Global Investment Research 23

Fortnightly Thoughts Issue 118

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