Cashless after Covid-19?
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The number of cashless transactions is rising as the coronavirus pandemic limits the use of physical cash.
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When the World Health Organization released a statement on March 9 recommending that people turn to cashless transactions to fight the spread of Covid-19, a number of governments and retailers across the world took action.
In China, thousands of banknotes were destroyed or disinfected to eliminate the spread of the virus. South Korea followed suit, and in the US, the Federal Reserve has started storing banknotes that have come in from Asia before recirculating them back into the economy.
Canadians, however, have taken a different approach. Rumours persist that some people have been shoving banknotes into washing machines to rid them of the virus – taking advantage of the fact that their ‘paper’ money is made of plastic. This takes money laundering to a whole new level.
Some retailers have banned the use of cash in their stores to keep employees and customers safe, opting for contactless payments instead. Meanwhile, for those confined to their homes, online shopping is a lifeline.
Even the most unwilling are keen to adapt. Manish Kohli, head of cash management at Citi, says from his home office in New York that even his wife –previously hostile to mobile money – has started to use Venmo to transfer funds to members of the community who have been braving the streets to get goods for others in need.
"People are adapting to the new normal," he says.
Necessity over convenience
Digital payments, once born out of convenience, have become a necessity for some. Yes, there might still be a number of people who hoard cash – as is often the case in times of crisis – but others will cease to see the point if they are not able to use physical money to buy essential goods and services. Luckily, we live in a time where much of the infrastructure required to complete an online purchase is already in place. This may not have been possible even ten years ago.
Cash managers and payments experts agree that payment volumes will be down across the board. But they also agree that the number of digital transactions relative to physical cash transactions will soar as more and more countries go into lockdown.
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Santosh Tripathy, SmartStream |
"It is probably too early for the data to tell us this, but most of us in the payments space are certain that this is the case," says Santosh Tripathy, practice lead, digital payments with financial transaction management company SmartStream Technologies. "In this environment, cash is losing its shine," he says.
This could be the push needed for some countries to become truly cashless.
"It's no longer inconceivable for entire countries to run on digital cash – we are already seeing this play out," says Victor Penna, global head of treasury solutions at Standard Chartered. "Most people have access to a mobile phone – which can also act as a digital wallet – and a number of central banks are thinking about introducing digital currencies. This is how we can boost financial inclusion and support the most vulnerable in society."
"One good thing to come out of this crisis is that I think more and more economies will start going cashless," says Kohli.
Benefits and challenges
There are plenty of benefits to going cashless: digital payments are convenient and – in current circumstances – are increasingly necessary. More importantly, however, they are a lot cheaper to process than their cash equivalents. Take one example: In India, 1.7% of GDP – or $210 billion – is spent on printing, storing and distributing cash. If all payments were digital, Tripathy argues that the cost would be a fraction of this.
There is also the argument that digital offerings will boost financial inclusion, as more and more individuals are able to open bank accounts online and transact digitally without ever having to enter a physical bank branch – difficult at times like this in most developed economies, almost impossible for rural populations in emerging markets that live far from their nearest town or city.
But the transition from cash to cashless isn’t all that straightforward. Online payments may seem easy enough, but there still remains a lack of standardization in the system that delays payments and creates bottlenecks. For example, real-time payments within the UK are a reality, but challenge your bank to make an instant payment to a recipient in India or Brazil, for instance, and delays are inevitable.
If any one country was to move entirely towards digital payments, bank liquidity would be essential because people and businesses need to have confidence in the banking sector- Santosh Tripathy, SmartStream
Fintechs such as Transferwise, WorldRemit and Revolut have plugged some of the gaps, but this often means that an individual may have a number of different accounts with a number of different payment providers and banks – which arguably removes the convenience that digital payments offered in the first place. Moreover, capacity is often limited and large transactions by multinational corporates still require strict due diligence and bank support for completion.
Until application programming interfaces are much more commonly used, the fragmentation in the payments space will be another barrier to fully cashless societies.
In addition – and perhaps most importantly within the current context – bank liquidity will be essential to the success of implementing and maintaining a cashless society. "If any one country was to move entirely towards digital payments, bank liquidity would be essential because people and businesses need to have confidence in the banking sector," says Tripathy.
"A cashless society would mean that, hopefully, there wouldn't be a run on the banks, but individuals still want to be confident in the fact that if they wanted to withdraw their money from their accounts, they could," he says.
Liquidity is essential for people to remain confident in the whole financial system. Following the global financial crisis, banks' financial buffers have become much more robust, but liquidity may soon dwindle as banks introduce a number of measures to prop up corporate clients and the economy, including emergency funding for repo markets, debt restructuring, mortgage holidays, new credit lines, huge credit drawdowns and more.
This is the paradox we face right now: while a viral pandemic is conducive to the establishment of cashless societies, the pressure on banks is not.