Since the start of the pandemic, businesses around the world have drastically changed their operations to protect employees and customers. One significant pivot is discouraging the use of cash in favor of digital and contactless payment methods. On the surface, moving away from cash seems like the safe, obvious thing to do to curb the spread of the virus. Also, the idea of zooming towards an innovative, digital-first, cashless society is indeed compelling.
However, going completely cashless may lead to some unintended consequences.
COVID-19 made cashless payments go viral
The world has been forced online, leading to a surge in e-commerce with online sales seeing a 45% increase in Q2 of 2020. From PPRO’s transaction engine, we’ve seen online purchases across the globe increase dramatically in 2020: purchases of women’s clothing are up 311%, food and beverage by 285%, and healthcare and cosmetics by 160%.
Alongside a shift to online shopping, 46% of Americans have turned to cashless payments in the wake of COVID-19. And this US figure reflects a global trend. For example, cash transactions have dropped by over 50% in the UK since the outbreak. In Italy, the volume of cashless transactions has skyrocketed by more than 80%.
Pre-pandemic, there was a stubborn resistance to digital and contactless payments in the US; just 3% of card transactions in the US were contactless in 2018, versus around 64% in the UK and up to 96% in South Korea. Now, however, merchants and consumers in the US have adopted a digital-first mindset.
Many US merchants have upgraded payment terminals to accept contactless cards or digital payments – like Apple Pay and Google Pay – to avoid potentially unhygienic cash. CVS recently announced the addition of contactless payments PayPal and Venmo via QR codes across 8,000 US locations. This digital form of payment is already wildly popular in other regions like Asia, where e-wallets like Alipay and WeChat Pay make up 46% of all online transactions.
Early into the pandemic, China implemented new strategies regarding physical currency to curb the spread of the virus. Banks were forced to withdraw potentially infected cash from circulation and ordered to either destroy it or disinfect it for 14 days before it could return to the market.
More recently, the US has faced a coin shortage. The US Mint, which produces coins, has been working at a limited capacity to ensure the safety of its employees. Combined with consumers avoiding exchanging banks and brick-and-mortar stores, the US expects a monthly gap of 2.3 billion to 3.5 billion coins for the rest of the year. This shortage has forced many retailers to limit payments to either contactless methods, cards, or in some cases, exact change.
Does social distancing mean financial exclusion?
Even before the pandemic, people around the world were leaning towards a preference for digital payments. Indeed, 53% of US and 45% of UK consumers believe cash will be a thing of the past in the next five years.
Yet, while COVID-19 has seemingly propelled the world into a digital age and left cash in the rearview, there are large ramifications of going completely cashless. Many consumers in underbanked regions still rely on cash in their daily lives.
We must take into consideration how removing cash could disenfranchise over a quarter of our society; 26% of the global population doesn’t have a bank account. Many consumers have avoided banking systems and cards due to hidden fees or the volatile nature of their occupation. Traditional financial systems have made it difficult for underbanked consumers, hence the affinity for cash. With the rise of digitalization around the world, FinTech must build solutions for these shoppers, not abandon them.
Across Latin America, 38% of shoppers are unbanked, and nearly 1 in 5 online transactions are completed with cash. While in Africa and the Middle East, only 50% of consumers are banked, and 12% have access to a credit card. In countries like Kenya, where more consumers have a smartphone (60%) than a bank account (56%), the prospect of an outright ban on cash payments restricts access to the global economy. Even here in the US, approximately 6.5% of US households (14.1 million adults and 6.4 million children) are unbanked, exposing the large number of consumers affected by any ban on cash.
Many consumers around the world rely on cash-based payments, even when shopping online. At the checkout page, consumers are provided with a barcode for their order. They take this barcode (either printed or on their mobile device) to a local convenience store or bank and pay in cash. At that point, the goods are shipped.
Cashless protocols not only restrict access to goods and services for consumers but also limit revenue opportunity for merchants. While 2020 has provided the global economy with one great reason to reduce the acceptance of cash, the payments industry has billions of reasons to offer multiple options that cater to the needs of every kind of shopper around the world.
This column does not necessarily reflect the opinion of FinLedger’s editorial department and its owners.
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