Digital & Innovation

COVID-19 and the death of cash

3-minute masterclass

‘Cash is king’…or is it? Since the beginning of February 2020, cash use has collapsed as shops close, fears increase that notes carry the COVID-19 virus, and consequently contactless becomes the preferred payment method. Some shops are even refusing to accept cash.

From cash to digital

The move from cash to digital payment methods has been slow. Cash remains the world’s most widely used payment instrument and is critical for financial inclusion as an estimated 2 billion people globally do not have a bank account. Furthermore, there is a lingering distrust of digital alternatives among some demographics in society. Until recently, 80% of point-of-sale transactions in Europe were conducted in cash – COVID-19 has changed this.

COVID-19 as an accelerator

The impact of COVID-19 on the payments industry can already be observed as banks, businesses (especially retailers) and consumers have been quick to make changes. Banks are raising the limit on contactless payments, retailers are lifting minimum card spend rules, consumers are choosing to default to contactless payments. If the retailer allows, mobile phone users are increasingly making payments over the contactless amount thresholds by holding their phone over the reader and entering their card PIN on their phone.

Governments and central banks opened the door to a digital payment revolution with supporting regulation, but it took COVID-19 to trigger the event. In 2016, the G20 endorsed the High-Level Principles of Digital Financial Inclusion (HLPs) recognising the role of digital in helping people access financial services. In 2017, Singapore took a major step towards cashless payments with the introduction of a national real-time payment platform ‘PayNow’. When the Reserve Bank of Australia capped fees and put a ceiling on card surcharges the result was a massive increase in card transactions and a USD$11 billion decline in payment costs. Similar moves in the US resulted in an 8% increase in card usage. None of these moves have had the same impact as COVID-19; LINK, the ATM operator, has reported a 50% reduction in cash usage.

Mobile payments as a public health tool

The efficiency and customer experience benefits of digital payments are well understood. In 2020, digital payments are increasingly also seen as ‘clean’. Governments and banks promote digital payment methods to reduce fraud and theft, and shrink ‘black markets’. Payments using a card, phone or computer are usually relatively effortless, simple, and transparent. Business and consumers are preferring digital payments to reduce potential COVID-19 touchpoints; no trips to the ATM are required and there’s no need to worry about contact with physical cash.

Mobile payments, known for ease, speed and providing instant financial reporting capabilities, are now a public-health tool and daily usage rates are soaring. Established digital wallet platforms, such as Apple Pay and Google Pay, already represented USD$1 trillion in revenue around the world before COVID-19. And with Visa and Mastercard processing more than USD$14 trillion of payments each year, it is no surprise that innovative payment solution contenders want a slice of the action. Alipay, the financial arm of e-commerce giant Alibaba, launched “Smile to Pay” enabling customers to make a purchase simply by posing in front of point-of-sale (POS) machines equipped with cameras, after linking an image of their face to a digital payment system or bank account. There is no need for a smartphone or other device. Despite concerns over data security and privacy, many consumers in Asia seem unperturbed by facial recognition payment in the high street.

And what about voice-initiated payments?

With many of us now in ‘lockdown’ due to COVID-19, and cash largely redundant within the confines of the home, Artificial Intelligence (AI) assistants, such as Amazon’s Alexa or Apple’s Siri, are increasing their foothold in the P2B (Person-to-Business) and P2P (Person-to-Person) markets with voice initiated payment commands. Combined with integrated service offerings with producers of ‘smart’ products, the demand for AI banking functionality is steadily increasing. With the help of an AI assistant, you can order everything you need to survive at home without touching a button or needing any physical cash.

Internal and external opportunities for banks

Banks have an opportunity to enable cashless payments to be the norm going forward and realise the long-term benefits of ‘clean’ payments, lower cash associated handling and processing costs, increased efficiencies (i.e. improved straight-through processing (STP) rates) and create big data opportunities. Externally, banks can incentivise business and consumers by further lowering the costs of digital payments. If banks help foster innovation and competition among payments solution providers, especially for point-of-sale solutions, fee transparency will increase and costs for the banks, and prices for the consumer will face downward pressure. Internally, now is the opportune moment, due to initiatives such as ISO 20022, to holistically review their front-to-back payments posture ensuring the correct infrastructure in place to process large volumes of digital payments, with the support of clear legal frameworks and comprehensive training for staff. A strategy to partner and collaborate within an ecosystem can help create new payments capabilities, lower costs, reduce risk events, and improve the customer experience.

Governments, banks, businesses and consumers all stand to benefit from a shift away from cash. Payments methods were comparatively slow in adapting when compared with the speed of digital lifestyle adoption. The market was primed for a correction away from cash payments due to the high percentage of ‘digital connected’ people in the world’s population but it took COVID-19 to finally change the previously ingrained use of cash in our societies. The potential benefits for banks should not be underestimated, nor should the complexity of the execution. Projective can help.

We work with financial institutions to review their strategic offering and supporting business & IT models. We design, update and implement business models to deliver lasting change and realise real long-term benefits. Let’s talk.