According to a report published by the European Central Bank (ECB), EU citizens made €123 billion worth of what the ECB calls ‘peer-to-peer’ cash payments in 2016. That’s just an alternative way of describing payments made to street vendors, the money that family members tuck inside your birthday or Christmas cards, donations to charity and the hundreds of other small cash transactions people make all the time.
Although cash still remains key to the current economy, cashless payment methods are becoming more and more common with each year as notes and coins are rapidly being replaced as the favoured payment method. By 2020, the use of e-wallets such as Apple Pay, Samsung Pay and PayPal is predicted to double to more than 16 million users as cash continues to become less prominent in the UK. Overwhelmingly, the rise of the cashless society is a good thing. It promises greater convenience, lower risk, and improvements in the state’s ability to clamp down on practices such as money laundering and tax avoidance.
But what about all of those micro-payments? And even more importantly, what will happen to the estimated 40 million Europeans who are outside the banking mainstream? These are the EU’s most vulnerable citizens, as they have little or no access to the various digital payment methods on offer.
CEO of Mastercard, Ajay Banga, has talked of the danger that in the future we’ll see “islands” of the unbanked develop, in which those shut out of the now almost entirely digitised economy are left able to trade only with each other. Therefore, if we don’t prepare properly, the transition to a largely cashless future could see the re-emergence of financial exclusion, which we thought had been vanquished in Western societies.
Will we truly become cashless any time soon?
For the majority of people, cashless payments can offer easier and faster payments, greater security, and improved access to a wider range of goods and services. But to maximise the benefits and reduce the downside, including those for strong personal privacy, we need to start thinking now about how we can manage the transition in a way that minimises the risk of financial exclusion for already marginal groups in society.
The ECB report cited above has also discovered that cash is still used in almost 79 per cent of transactions. So, with that in mind do we really need to worry about what will happen when we finally abandon notes for digital payments? The answer is both yes and no.
Although contact payments are on the rise, the demand for cash is also growing. A recent study found that the value of euro banknotes in circulation has increased by 4.9 per cent over the last five years. Given the historically low rate of inflation over the past few years, this would seem to be largely due to a cultural preference for cash. Low interest rates could also be encouraging Europeans to spend rather than save. But whatever the reason, cash will not be going away anytime soon.
But that doesn’t mean we can relax. Some markets are already much closer to going cashless than the European average would suggest. In Sweden, consumers already pay for 80 per cent of transactions using something other than cash. In the Netherlands, that figure is 55 per cent, in Finland 46 per cent and in Belgium 37 per cent. Today, Britons use digital payments in 60 per cent of all transactions. By 2027, that number is expected to rise to 79 per cent. Already, 33 per cent of UK citizens rarely, if ever, use cash.
Unless we take this challenge seriously, we risk stumbling into a situation in which the majority in these countries use cash-free payments most of the time, even if they still use cash in minor transactions. In such cases, there is the danger of many shops and services no longer accepting cash, leaving those who still rely on it stuck in the economic slow lane.
Mobile payments and charities pave the way
While there is concern about the move towards a mainly cashless society, as it could exclude those who are not digitally competent - i.e. the older community - the rise of digital payments does not necessarily have to mean the growth of financial exclusion. It is possible to create an affordable payments-infrastructure for small traders, churches, and charity shops — and, even more importantly, for economically marginal consumers.
As cash becomes less prominent in the UK, charities are leading the way and adapting in line with this societal trend. After noticing that donations were tailing off due to people not having cash with them, the NSPCC and Oxfam sent out one hundred volunteers with contactless point-of-sale devices, instead of charity collection tins. The rate of donations trebled. The success of the NSPCC trial shows that it is possible to roll out the supporting infrastructure for cashless payments, even to individual charity collectors on the street.
But that’s only half the story. While charities, shops and even small independent retailers may be able to afford and install point-of-sale systems to accept micro-payments, normal citizens cannot. In this situation, mobile payments may be the answer.
Many UK consumers are making in-store contactless transactions via their mobile devices. However, the example of the Kenyan M-Pesa, a system which allows payments to be made via SMS, shows that it is possible to create an accessible, widely available and used mobile payment system that does not rely on the consumer owning an expensive, latest-model smartphone. Already, 17.6 million Kenyans use M-Pesa to make payments of anything from $1 to almost $500 in a single transaction.
Although some worry about the rise in financial exclusion as a result of becoming a cashless society, an inclusive cashless future—in which mobile e-wallets and other contactless forms of payment dominate—is certainly possible. But it won’t happen by itself. As an industry and a society, we need to plan and work towards it: starting today. The stakes for many businesses and some of the most vulnerable people in our society couldn’t be higher.
Image source: Shutterstock/MaximP