The death of cash

Efma feature

01 July 2020

The COVID-19 pandemic has resulted in a sharp increase in contactless payments. Is a cashless world just around the corner?

Cash is king. Or it was. With the globe in the midst of an unprecedented pandemic, many previously held axioms have fallen by the wayside. Now, as people have become acutely aware of common surfaces and the passing of germs, cash has become a victim of newfound hygiene habits. On top of wearing face masks and constantly applying hand sanitizer, people have dramatically reduced their cash usage. While the evidence remains somewhat murky regarding virus transmission via bank notes, people’s perception of cash as dirty is what matters. Why pay in cash and receive bills and coins that have been touched by countless strangers before you? Paying by card is now not only convenient for customers, but also a responsible choice.

Is it here to stay?

Pre-COVID-19, there was already a shift towards a cashless world. Now, the pandemic is likely to serve as an accelerant to an existing trend. Adoption of contactless payments has varied widely by country in recent years. In Europe alone, there is a wide range of contactless payment usage. From countries like the Czech Republic and Poland, where contactless payments make up north of 80% of payments, to countries on the lower end such as Germany and Belgium, where less than 15% of payments are contactless.

Nordic countries have been ahead of the curve when it comes to eliminating cash. In Sweden, their mobile payment system, Swish, is used by more than 2/3 of the population. In Denmark, one of the most digitalized countries in the world, cash is rarely used. The Danish government has implemented a “digital by default” strategy that has all but eliminated the use of cash. In Norway it is a similar story, with the government planning to eliminate paper money entirely by 2030.

The United States is a different case altogether. The country continues to lag far behind Europe in the contactless payments space. When I left the U.S. three years ago, chip-and-pin had only recently become the standard form of card payment. Upon my arrival in Europe, I was confused by every restaurant server holding the machine for me to tap my card. Now, when I return to the U.S. on holiday, there are still many merchants that don’t even accept contactless payments. There are signs this is changing though, with more than half (51%) of Americans saying in a recent Mastercard poll that they are using some form of contactless payment due to COVID-19, which includes tap-to-go credit cards and mobile wallets such as Apple Pay.

One way to continue the promotion of contactless payments is to raise the transaction limit. That’s exactly what France has done, increasing the limit to €50 in May. In the UK, they increased the limit to £45 in April. These elevated limits allow a much larger range of purchases to be made without needing to insert one’s card or use cash. Another means of further promoting adoption is by providing customers with more ways to pay. KBC, in Belgium, is a bank that continues to innovate in this space. Last week they announced that all of their customers would be able to make payments using wearables.

Given the pre-coronavirus trajectory, and the fact that the virus is set to be a feature of life around the globe for many months (years?) to come, the movement away from cash will only gather pace. COVID-19 has now supplied this trend with unstoppable inertia. Mastercard recently noted a 40% growth in contactless payments in Q1 2020 compared to the previous year. With growth like that, the question then becomes: who will be the biggest winners in a world without cash?

Who benefits from a reduction in cash?

From a consumer point of view, the convenience of digital and contactless payments is second-to-none. There is no longer a need to carry bills and coins on a daily basis. Retailers can save your payment info so that you can order goods online in a single click. Businesses can set up automated payments to their suppliers through their bank portals. Digital payments simplify life and business.

Beyond consumers, there are many players in the financial services industry who stand to benefit from the continued shift to a cashless society. Merchants have always loved cash payments because there are no fees attached to a customer handing over a €20 bill. Obviously, in today’s digital age, being a cash-only merchant is not tenable. The digital habits of consumers have left merchants with no choice but to accept card payments. Card payments come with an assortment of different fees. Fees associated with each card payment can be quite complicated, depending on the amount, card type, currency, cardholder’s country, etc. Suffice to say, there are many parties involved that stake a claim to a fee from a transaction. And payments are not only about in-store, point-of-sale payments, but also include online and cross-border payments, among many others. For all of these reasons, there are countless fintechs entering this space, trying to carve out a slice of the payments pie.

While the possible rewards are spurring innovation, ultimately, the two elephants in the room, Visa and Mastercard, will reap the largest benefits from a cashless world. The two financial services and technology giants are at the heart of the payments world. Sandy Villere, portfolio manager of the Villere Balanced Fund, said, “They literally sit in the middle of the banks, consumers, and merchants and that has been a really enviable place to be.” They are the rails on which 90% of the payments world runs. Due to the privileged, not to mention strategically important, place occupied by Visa and Mastercard, there have been serious discussions in Europe regarding the development of their own payments rails. The Pan European Payment System Initiative (PEPSI) is an idea floated by the European Central Bank as it seeks alternatives, and the resulting autonomy, to the American payments giants. The idea remains a long way from actualization, however, and Visa and Mastercard look set to maintain their primacy in the payments world for a long time to come.

The world is going cashless and there is no turning back. As developed countries eliminate their dependence on cash, competition for consumer spending will only become more intense and important. Our cashless future, and present, promises to be convenient, digital, and lucrative. Those certainties are sure to result in further innovation and concentration in the industry.

Keywords : Cash , Payments , Digital payments/Wallet

Geography : International