Are We Witnessing The End Of Cash?

25 May, 2020 . 4 minutes

Cash may soon be a thing of the past but it wouldn’t be easy to discard it completely. Covid-19 has effectively wiped out cash-based transactions in larger cities but to some smaller groups in society, cash is still relevant.

Cashless payments have been trying to put an end to cash for years before the virus. Some changes are still in progress, some have taken place, but no matter how adamant the cashless revolutionaries are, cash has stuck around as a mainstream payment in areas with less access to other options.

Credit cards and debit cards are popular cash replacements, but some emerging markets prove both their success and failure. For instance, 21 percent of e-commerce transactions in South America were still done by cash last year, compared with 10 percent in Asia and 7 percent in Western Europe. Cash, still hanging on, even in the digital realm.

Smartphones and other mobile devices may be essentials for the younger generation, allowing mobile payments and digital banking to forge a new era of P2P (peer to peer) payments. Digital wallets like Zelle, PayPal, Venmo and Google Wallet were major players in shaping the stage as they provide secure and user-friendly cash payments. But in the US, a 2017 survey by the Federal Deposit Insurance Corporation showed about 8.4 million or 7 percent of US households do not have saving accounts at all as they are still unbanked. Another 19 percent had a bank account but still relied on financial products like payday loans.

Various fintech services have patched some gaps, but this usually comes with a lot of varieties in payment options, providers and banks, removing some of the single-pathway convenience offered by cashless payments in the first place. Fragmentation in digital payment platforms are another obstacle to the cashless revolution. As a result, people turn back to cash, or rely on it as a fallback, because it’s still commonly accepted.

Covid-19, as with many things, has forced the cashless revolution into overdrive.

Coronavirus: Cashless’ deus ex machina

The use of cash has dropped more than ever since the World Health Organization (WHO) condemned it as a fomite (or conduit) of the virus. The announcement saw a strong reaction from merchants, consumers and even banks.

South Korea’s central bank, for instance, withdrew all banknotes to limit virus spread. In February, the Bank of China sterilized banknotes, even burning some, from areas with a high risk of infection. Several merchants in Seattle and Sydney abandoned the “unsanitary” cash options, forcing customers into contactless payments and online.

As cash bites the dust, cashless payments are having a grand time. In Italy, one of the first countries that entered a lockdown, e-commerce transactions soared 81% since the end of February. PayPal's CEO said the number of customers setting up new accounts every day was "basically double" pre-pandemic rates.

New research shows more US consumers are using contactless payments, while in Germany more than half all payments are contactless, a 35 percent rise from before the coronavirus hit. Globally, online payment transaction volumes in mid-March rose 23 percent from the typical weekly volume, as consumers switched en masse to digital purchasing channels.

The pandemic’s overall effect on the payments industry might still be unclear, but drastic behaviour shifts are forcing significant change across industries. While some companies anticipate a downturn (or even collapse), digital payments and e-commerce are likely to reap the rewards in the long-term.

Divide and Conquer

For years, tech companies developed virtual payment systems to be more efficient and user-friendly than traditional methods. It was never going to be easy, though, to fully replace the old ways.

A Deutsche Bank survey found one-third of respondents in developed countries still use cash as their main payment method, with more than half rejecting the idea that cash dominance is ending anytime soon. Converting such ingrained social instruments, without force, will take time and effort.

The digital payment revolution is in motion and fast with the technology penetration and influence on younger generations. China, for instance, has significantly younger populations than Europe and the United States. As of end-2018, around 73 percent of Chinese internet users paid for their transactions with online payments services, an 18 percent increase on the previous decade. In the US, only about 67 percent of millennials last year used digital transactions over cash. However, it is likely the US and European countries will follow the example of Sweden, which has set a goal and taken measures to become entirely cashless by 2023.

The Swedish government has launched a massive cashless campaign nationwide. All merchants are encouraged to use a mobile payment chip-and-PIN card reader by Sweden’s mobile payment company, iZettle. In 2012, the mobile payments app Swish was rolled out via a collaboration between the six largest Swedish banks to make electronic payments easier. Over half the Swedish population have used it. In February, Sweden’s central bank Riksbank launched the country’s digital currency, e-krona, to accelerate the cashless movement by 2021.

As of 2018, around 18 percent of Swedish transactions are still carried out in cash, representing just 1 percent of Sweden’s GDP, but a large number nonetheless.

Like Sweden, India also set an ambitious target of creating a unified payment interface that only requires a phone number or virtual ID to have a transaction. 800 million monthly transactions were made using the interface in less than three years, leading even Asian money centres like Singapore and Hong Kong.

But despite the digital effort, along with the demonetization of India’s old 500 and 10,000 rupee notes, 99.3 percent of the trashed currency still found its way back to the banking system and contributed to a 25.6 percent rate of cash transactions three years after the demonetization in November 2016. This shows that there is still a portion of society that uses cash and remains unaccounted for.

India may be the world’s second-largest group of internet and mobile phone users, trailing only China, but in 2018, 27 percent of Indian people still paid for 50-100 percent of purchases without a digital trace or receipt.

Transformative technology cannot stand on its own and drive change. Some countries taking steps to slowly eliminate cash do so with support from community, government, business and now a force majeure in the form of Covid. Parts of the community will resist if they are not somehow brought on board.

In every population, there are groups of people who rely on cash either out of habit, distaste, distrust or other aversion to technology. Even in this pandemic, there are still people with limited access to banks or credit cards, let alone internet access.

While the Covid-19 outbreak is helpful to the cashless trend, banks might not find it as exciting. When the use of cash diminishes, banks may struggle for the liquidity to prop up capital for business enterprises.

For centuries, cash has been at the heart of any global transaction. Tech companies, banks and even governments have tried to get rid of it but as long as there is a small part of the economy that relies on cash, it will still be around. Whether Covid-19 forces them to reconsider, remains to be seen.

Criminals, for example, are unlikely to abandon cash even though untraceable digital currencies are already a favorite means of storing their profits. It is that air of independence, though, of paying without leaving a trace, that still appeals to law-abiding citizens, too.

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