6 minute read 19 Sep 2019
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Why the potential end of cash is about more than money

By

Jan Bellens

EY Global Banking & Capital Markets Sector Leader

Passionate leader on innovation in financial services, especially in emerging markets. Global citizen. Keen traveler.

Contributors
6 minute read 19 Sep 2019

Banks may rejoice at the prospect of a cashless society, but a digital economy raises questions around identity and inclusion.

Cashless transactions are nothing new, but their share of the payments mix is growing fast. Advancing technologies, particularly the smartphone, have driven the fast growth of the digital economy and enabled an explosion of non-traditional financial solutions.

The rise of digital economy

The pace and nature of the transition differs across the world:

  • Across the European Union, account-to-account payment services are proliferating.
  • Canada, Australia and Singapore are among the nations that are licensing non-banks to initiate digital and mobile payments.
  • In Asia, China’s WeChat Pay and Alipay which mix low cost, transactional functionality with shopping and lifestyle features are leading the way.
  • In the US, checks are still widely used and only 53.5% of card transactions used modern EMV chip and pin authentication in 2018.
  • The mobile money operator (MMO) model – where consumers transfer mobile phone credit – is strong in sub-Saharan Africa, led by Kenya’s m-Pesa, which has since expanded to Afghanistan, South Africa, India, Romania and Albania.
  • In Latin America, many people remain unbanked, despite a government push toward electronic payments to curb corruption.

European cash-based transactions.

79%

of all point-of-sale transactions in Europe in 2016 were cash-based. Source: European Central Bank, November 2017

Ensuring cash-dependent consumers aren’t left behind in a digital economy

While cashless transactions are increasing each year, cash is still king in all markets. Even in Europe, where online financial services are well-established, cost-effective and easy to use, household cash payments totalled €1.7t in 2016, compared with €1.1t for cards.

Some consumers are attached to cash for cultural reasons. For example, the US is a nation of great technological innovation, yet Americans still pay with cash about one-third of the time and use checks about as often as they do digital payments.

For others, the prospect of going cashless would not just be undesirable, but have harmful consequences. When India withdrew certain bank notes from the financial system overnight, the population found that 86% of its cash was no longer legal tender. Several years later, and despite a strong government push to end cash and a plethora of new digital payment providers, 72% of consumer transactions in India are still settled with cash. Many merchants, particularly in rural areas, just aren’t willing or able to pay charges for what are often low-value transactions. Network connectivity is also a problem.

Even in Sweden, famed as the most cashless country, the rapid phasing out of notes and coins from circulation has led to political debate about how some members of society, particularly rural, older or disabled populations, may be left behind.

The problem is that few moves to cashless models have been planned from a top-down perspective. David Birch, author of Before Babylon, Beyond Bitcoin: From money we understand to money that understands us, believes three issues need addressing.

  1. Defining “cashless”: Will cash be removed entirely? There are some that point to the benefits of cash’s autonomous nature; for example, during protests in Hong Kong, some citizens bought transport tickets with cash so they could not be tracked. However, if businesses are forced to retain cash options, some argue they should be compensated for the cost of handling notes and coins.
  2. Concerted action to leave no-one behind: Government, central banks and the private sector must work together to ensure all existing and new payment “rails” work together.
  3. Determining who issues “money”: The fairest way forward may be for central banks to create e-money, with payment initiators and processors using the bank’s infrastructure and so ensuring fair and equal access. Competition and interoperability issues may arise if left to the private sector.

Banks can’t just leave the issue to regulators. They must take a key role in developing innovative digital solutions that empower more participation in the formal economy. This is an important growth opportunity as well. Banks could generate incremental global annual revenue of US$200b (equivalent to 20% of emerging market banks’ 2016 revenues) by better serving the financially excluded in emerging markets.

Technology can boost inclusion – if consumers trust it

Certainly, the technology driving the digital economy can help enable participation within it by those who may be excluded through conventional banking practices. For example, many of the world’s unbanked lack the identity documentation necessary for traditional know your customer (KYC) vetting. India’s electronic Aadhar scheme has used biometric authentication, including via fingerprints and irises, to overcome these barriers and verify digital identities for more than one billion people, revolutionizing the country’s rates of financial inclusion.  

Financial inclusion.

1.7b

global unbanked population

But, the creation of digital identities raises concerns around how these are managed and protected. Many warn against putting IDs entirely in the hands of governments. Mike Cowen, head of digital payments and labs for Mastercard in the UK, Ireland, Nordics and Baltics, suggests “degrees of validation,” with information pulled from different public and private sources, dependent on the level of authentication required. “If no one entity is the owner of your identity, you own your identity and it is supported from multiple sources,” he says.

Getting this right is critical to overcoming the trust barrier that is deterring some consumers from fully engaging in the digital economy. Despite the proliferation of digital banking options, customers surveyed for our recent series of reports on open banking told us they are wary of sharing data with financial institutions and uncertain of the need for, and benefits of, online banking. Stronger cybersecurity measures and regulation are obvious measures to help build trust. However, we have found that it’s often those markets with the toughest laws, such as the UK, that have most skeptical customers. The ability of financial institutions to inspire trust through innovation in cashless solutions may be a more effective way forward.

A globally connected cashless society is still a long way off

Would a cashless economy be truly global – allowing for transactions to flow seamlessly across borders? The evidence suggests this may not be easily achieved. 

We see some countries connecting their real-time systems to allow cross-border transactions, but a worldwide account-to-account automated clearinghouse (ACH) for US$689b of annual global remittances1 is likely years – or decades – away.

Meanwhile, the potential of cryptocurrencies, such as Bitcoin, to create a global digital economy has yet to be fulfilled. And attempts by tech giants such as Facebook to establish their own global digital currency are facing barriers, including consumers’ willingness to use them and the wariness of central banks. Bank of England Governor Mark Carney has stated that Libra must be “rock solid” from day one, while US Federal Reserve Chairman Jerome Powell has warned Libra raises “many serious concerns regarding privacy, money laundering, consumer protection and financial stability.”

A future digital economy must be safe and fair 

Cash is costly for banks and a burden for governments combatting the black economy. However, while a cashless society makes sense on many levels, there are hazards in pushing for transformation too hard and too fast. Digital systems must be safe and, critically, fair. Financial inclusion is a global imperative that can be enabled by cashless options that help build a better working world, while unlocking new growth opportunities for banks. 

Summary

The end of cash may not be as close or as utopian as some believe. The transition away from notes and coins to an increasingly online financial system will bring economic benefits to banks and governments, but the risks of moving too fast and too radically are significant. Digital financial systems must be secure and reliable, and use innovation to both inspire trust and boost inclusion.

About this article

By

Jan Bellens

EY Global Banking & Capital Markets Sector Leader

Passionate leader on innovation in financial services, especially in emerging markets. Global citizen. Keen traveler.

Contributors