Cashless society: the future of digital payments

May 2021  |  FEATURE  |  BANKING & FINANCE

Financier Worldwide Magazine

May 2021 Issue

The future of money is envisioned as a digital paradise by many. A world in which all financial transactions are carried out purely through non-analogue means – a veritable cashless society.

Increasingly, we are seeing traditional banks and physical cash losing out to digital currencies and challenger FinTechs, with successive crises – particularly the emergence of the coronavirus (COVID-19) pandemic – accelerating fundamental changes in how we handle and regulate money.

“Since the advent of the internet, digital payments have been all but inevitable,” reflects Anne Boden, founder and chief executive of Starling Bank. “From the introduction of the Bankers’ Automated Clearing System (Bacs) in the 1960s to the present day, digital payments have been gaining momentum while the use of cash has been in decline.

“In the span of a few decades, digital payments have gone from being rare to standard practice,” she continues. “In fact, for many the question is no longer about whether we should use digital payments, but rather how we make payments faster, better and more secure.”

Such a transformation of the financial landscape will of course have profound implications for business, society and government. “With bank branch and automated teller machine (ATM) numbers falling, access to cash is reducing,” says Ewen Fleming, financial services advisory partner at Johnston Carmichael. “Digital payments are commonplace and the numerous wallets that existed a number of years ago have now consolidated, with the likes of Apple, Google and PayPal dominating.”

“Furthermore, despite increasingly accessible online payment platforms, restricted access to cash still penalises some of the most vulnerable in our society,” he continues. “Research by Pockit in April 2019 estimated that the 1.2 million ‘unbanked’ adults in the UK pay an average £485 premium to make payments like gas, electricity and mobile phone contracts when compared to those with bank accounts who are able to pay by direct debit.”

In order to level the playing field and attract the ‘unbanked’, digital payment platforms need to establish trust with customers, including addressing data privacy concerns. “Such platforms also need to guarantee the security of their systems, while working to increase acceptance by business owners that might not only mistrust the instrument, but also bear additional implementation costs,” says Adriano Corrêa, a partner at BDO Brazil. “Compatibility of payment systems is also a challenge in a global economy.

“Countries may have different legislation and banking structures which pose obstacles for some cashless payment types, while others might create their own national payment system, as Brazil did with the PIX,” he continues. “Some digital payment systems, like Bitcoin, are hard to regulate and may present sovereignty risk to nations, which might respond by implementing legislative barriers for adoption.”

Cashless: pros and cons

The increasing availability of digital payment systems – including peer-to-peer payments, mobile wallets, mobile point-of-sale devices and digital coins – proffer a raft of choice for businesses and customers, each promising transparency, efficiency and convenience.

“Cashless payment systems can stimulate economic growth by making payments easier and convenient and, therefore, facilitate consumption,” says Mr Corrêa. “They can also provide time and cost savings opportunities for businesses, by reducing manual reconciliation, counting and cash handling, as well as reducing the governmental cost of issuing hard cash.”

Essentially, digitalising the payments process is advantageous in that, theoretically, anyone with a smartphone can make cross-border payments and purchases cheaply and efficiently.

“From a more macroeconomic perspective, digital currencies controlled by a central bank could avoid exchange rate risk and currency volatility if they are based on a range of currencies,” suggests Mr Fleming. “Likewise, if centrally backed, digital currencies can be used as economic levers just like traditional currency. These points are, of course, over and above the obvious cost savings from not having to manufacture coins and notes.”

On the flip side, despite all the significant advantages the variety of digital payment alternatives proffer, a key challenge lies in their interoperability and integration by businesses. In a future where digital payments are widely accepted and very much the norm, users may be required to utilise multiple services, with residual impacts such as a reduction in the utility of such payments.

“These systems, by their digital nature, also present opportunities for data mining, which might pose a threat to users’ privacy rights, as well as increase the chances of cyber attacks, potentially leading to data leakage and exploitation,” warns Mr Corrêa. “Incipient, and sometimes insufficient, regulation can also leave room for misbehaviour and abuse by service providers, which are not always transparent on how they monetise the data that goes through their systems.”

In addition, there are growing concerns over the influence of tech giants, as evidenced by Facebook’s intention to launch its own digital currency platform. “Similarly, where a digital currency is not issued or controlled by a central bank, supply may not be controlled, which could in turn lead to devaluation and rampant inflation,” adds Mr Fleming. “Bitcoin’s recent fluctuations based on Elon Musk’s investment is a good example of this volatility.”

COVID-19 and payments

The emergence of COVID-19 has, to a significant extent, disrupted the way money is transferred and how payments are made. In the view of many, across the board, the pandemic is an inflection point for the adoption of digital payment technologies.

For the payments industry, COVID-19 and its consequences has provided the impetus to overcome consumer inertia to create an unprecedented global appetite for changes to how we pay. According to Visa’s ‘Back to Business Study 2021 Outlook: Global Small Business and Consumer Insights’, 78 percent of global consumers have adjusted the way they pay for items in the wake of the pandemic’s impact on nearly all aspects of daily life for people across the globe.

“Like videoconferencing and online shopping, COVID-19 may have seen a tipping point in online payments, with even technologically reluctant sections of society getting to grips with paying digitally,” believes Mr Fleming. “In addition, more businesses are going cashless.

“This is partially a response to the rising cost of banking cash but is also a reflection of a concern, from a health and safety point of view, around regularly handling money in the current climate,” he continues. “With branch closures continuing, post offices are the ‘last outlet’ in many towns. However regular challenges in relation to capacity mean that the other crucial community services they perform are often curtailed.”

In the estimation of Ms Boden, the pandemic has highlighted the importance of digital payments and accelerated its place in the post-pandemic world by 10 years. “In the UK, we have seen the increase of the contactless limit not once, but twice over the course of the pandemic with the current limit being £100 – almost cementing the value of contactless and digital payments,” she contends. “That said, while we welcome changing times, we are cautious not to leave people behind.

“For some vulnerable people, digital payments are not an option,” continues Ms Boden. “Cash is all some people know, perhaps all they have access to. People in society, like those on lower incomes and the elderly, are more likely to be negatively affected by a switch to a cashless society.”

Traditional versus digital

While traditional banks with legacy systems may well find the digital transformation process a daunting prospect, the rise of digital currencies, FinTech payment solutions and the like means financial institutions (FIs) must reevaluate how to make their services compatible with an increasingly digital world.

“The responsibility to respond to digital currencies and FinTech solutions lies with central banks, not with individual FIs,” states Mr Fleming. “There is a risk that state-backed digital currencies could mean deposits are held directly with a central bank, but decentralised opportunities may open up too. Visa has unveiled a suite of application programme interfaces (APIs) that could turn traditional banks into cryptocurrency exchanges.

“If banks decide that this fits with their strategy, then their deep pockets could prevail,” he continues. “It is increasingly clear that banks do not see it as efficient to continue providing cash and transactional services, yet disaggregation may yet come back to haunt them. Many FinTechs, such as Monzo, Revolut and Cashplus, started as transaction alternatives but have since become banks. These institutions are now viable alternatives for customers who have a secondary account to apply for profitable products like unsecured lending.”

Digitalisation with caution

The digital payments market is forecast to grow at a compound annual growth rate of 13.7 percent between 2021 and 2026 according to ReportLinker – a demand driven by greater convenience, favourable government policies and evolving consumer behaviour, as well as COVID-19 disruption. Moreover, payments made via mobile devices alone are expected to exceed $2 trillion globally by 2023.

“The use of cash has been in decline for some time now, but I believe the pandemic has been something of a tipping point, in favour of the future being a cashless one,” asserts Mr Fleming. “States and central banks will take control of digital currency to protect money supply but Facebook’s announcement, in summer 2019, that it was to launch its own digital currency was a wake-up call for regulators.

“China and Sweden are both well on the way to producing their own digital currency, with Christine Lagarde, president of the European Central Bank (ECB), favouring its own as early as 2025,” he adds. “Proof of ID is still one of the biggest obstacles to opening a traditional bank account and that would not change for a digital version. Therefore, effort should be put into creating a universal utility for identity verification in order to further reduce the barriers for anyone wishing to open a bank account.”

Today, while technological innovation allows financial transactions to be performed on computers and mobile devices so seamlessly that it is now taken for granted, going forward, caution should still be exercised. “In a post-pandemic world, it is likely that digital payments will become increasingly popular and widely used,” opines Ms Boden. “However, in our eagerness to make money quicker, faster and better, we must be careful not to exclude the most vulnerable people around us.”

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Fraser Tennant