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Has cash finally been dethroned?

(Image credit: Shutterstock)

As technology evolves, systems and processes that have been in place for years, if not centuries, are being quickly overthrown. Take paper money for instance. Once the primary form of payment, its prominence is being gradually eroded by safer, more efficient digital alternatives. Many might attribute cash’s ultimate fall from grace to today’s pandemic, and there’s no denying that Covid-19 has accelerated the use of digital payments. But the decline of paper money is a trend that has long existed outside of the last year. In fact, research from UK Finance shows that in 2019, cash made up less than a quarter of all payments in 2019.

Covid-19 should therefore be seen as one factor amongst a variety of different triggers for cash’s decline. Within these other factors, is the continuing shift in consumer behavior towards online shopping and the increase on contactless shopping payment limits. Similarly, the rise and popularity of fintech services have played a major role. Consider the growth of digital money transfer platforms as one example. These have eradicated the brutal fees and hidden exchange rates of traditional cash-based businesses and delivered a fair, fast, and secure remittance alternative.

This shift undoubtedly leaves cash in an ambiguous position in society but what is the wider impact on and response by the financial services industry?

Why organizations that had digital solutions gained the most

The pandemic has caused country-wide lockdowns and forced consumers to turn to digital alternatives as trips to banks and post offices to make deposits or collect banknotes became inaccessible. Fintechs, who are digital by default, were particularly well placed to support customers by allowing them to send and spend funds by facilitating online transactions through digital payment services.

Additionally, digital lending firms, who were able to move fast in response to the surge in loan applications as a result of redundancies and businesses shutting down, were much more nimble than physical branches and traditional financial institutions. And the demographic of users has widened too, with digital lending platforms seeing not just tech savvy users, but older users in their 40s and 50s turning to their services.

Notably, these restrictions have forced the older generation, who are typically more cautious of adopting new ways of managing their finances, to change their habits. A survey from Nationwide Building Society found that three-quarters of Nationwide customers over 55 had reduced their use of cash. Consumers are increasingly using credit and debit cards for smaller amounts, which coupled with the increased adoption of digital methods, such as contactless cards and online payments, is leading to a drop in demand for cash in general.

Prior to the pandemic, many people, for reasons such as lack of trust, being technophobes or just being creatures of habit, were hesitant to use digital finance services over cash. We expect to see a continued reversal of that as consumers get used to the ease and accessibility that fintechs have bought to the sector.

The remittances sector and its relationship with cash

Through the benefits of digital, providers can offer guaranteed and fair exchange rates, ensuring that migrants, who may be undergoing financial difficulties, are not stung by hidden remittance fees. They can also provide consistent and accessible support, for example by offering in-country agents who understand local discourse and issues and can help find appropriate solutions. What’s more, these services can offer a seamless customer experience, increased service reliability and perhaps most importantly security. For example, TransferGo recently announced a partnership with end-to-end ID verification companies SumSub and Veriff, which ultimately means that migrants are able to have their identity verified, quickly and reliably, preventing fraudulent activity, without causing a delay to registering for and using the service.

This issue of cash versus digital is especially prevalent amongst the migrant worker community. Migrants are often relied upon by their families for income support, and in some cases are the sole source of income. For example, in 2019 remittances amounted to $554bn according to the World Bank, beating all other forms of cross-border financial flows to third-world countries.

Alongside the lockdown, migrants have also had to deal with the issue of closed borders, which prevented them arriving home with cash. Combine that with the closure of most retail finance operations, options for sending physical cash were basically eliminated. Workers therefore needed to find other ways of ensuring their hard-earned money could get to those that needed it at home. Digital finance bridged the gap.

So, is this change just a result of the pandemic or is cash truly on the way out?

Covid has undoubtedly caused a huge shift in consumer propensity to use cash. Findings suggest over half of consumers had used digital transfers to give money to friends and family at least once during the first month of lockdown, with 20 percent doing so more than twice.  When you consider that cross border payments are expected to hit $240 billion by 2024 due to an increasingly global and interconnected economy, the future is seemingly evident. 

Change is slow, but with western societies on the verge of going cashless, it might be time to revisit the future of cash. Before the pandemic, UK Finance predicted that cash would make up less than 10 percent of payments by 2028 – now these estimates are being revised as the virus has only fueled trends that already had momentum.

Cash has continually competed with these new and ever-expanding alternatives to payment methods, but the convenience, speed, improved customer experience and security offered to consumers through digital-based offerings will be difficult to surrender – especially as people become accustomed to new ways of working and living.

With today’s current pace of technological innovation, it is likely that this will be an irreversible direction of travel. Therefore, it is incumbent on those of us at the very edge of innovation in the industry to ensure it remains secure and fit for purpose as the world continues to change around us.

Daumantas Dvilinskas, CEO and Co-Founder, TransferGo