Moving towards a cashless society
By Laura Flood, Partner, PwC
The shift towards a more cashless society is primarily driven by advances in technology, the development of new and innovative efficient payment solutions and consumer preferences. Speed, convenience and reducing the risk of theft of physical cash are also some of the key reasons we are seeing a marked reduction in cash transactions. And COVID-19 has now also played a role in the further ‘normalisation’ of digital payments.
There is also strong support at EU level for pan-EU payment schemes. Valdis Dombrovskis Vice-President, European Commission has recently said “we also need to be clear that if our banking sector doesn’t deliver on innovative payment solutions, Libra or others will move into that space. There’s an unmet demand.”
Beyond the current advantages of reaching a wider audience through digital payments, the reduction in risk of theft and keeping pace with consumer preferences, the future of payment digitalisation holds more opportunities for businesses and entrepreneurs.
Open Finance is seen by many as the next stage of payment innovation and is based on the principle that the data supplied by and created on behalf of financial services customers is owned and controlled by those customers. Customers who consent to sharing their data being used could be offered tailored products and services which could include personal financial management tools, receiving competitively based quotations tailored to the consumer’s specific situation as well as alternative creditworthiness assessments. The EU Commission’s Digital Finance Strategy, due to be published in Q3 of this year, is expected to consider Open Finance as part of the overall EU’s data strategy. Open Finance will present a significant opportunity for those seeking to develop innovative new services for products including mortgages, savings, pensions and insurance.
The risks associated with a move towards a more cashless society are the subject of much analysis. Those not in favour of the trend often cite a wide variety of issues such as possible financial exclusion for those who are currently not in the banking system or for those who struggle to access reliable broadband. Another possible issue is the overt transparency of a digital system and the lack of anonymity associated with non-cash transactions.
Security is often presented as a significant concern for many who are reluctant to move away from cash, with the fear of online frauds and scams a greater concern than the risk of physical theft of cash.
In order to move to a fully cashless society, the financial sector’s digital products and services would need to allow for full participation by all members of society and enhance financial inclusion with evidence-based design and transparency at the heart of progress in this area.
In a global context, Ireland is not moving away from cash as quickly as other countries, although the use of card and online payments is increasing. Sweden, regarded as one of the most cashless societies in the world, is a really interesting country to observe when it comes to this switch. At this point Sweden is virtually cashless, with widespread adoption of Swish, a payments app, which is backed by Sweden’s main banks. In Sweden a couple of interesting factors have emerged. Firstly, the Swedish parliament in 2019 voted in favour of a Bill to preserve cash to ensure ongoing access to cash for those who require it. Secondly, given the general attitude towards cash and the trends noted in Sweden, the Central Bank is exploring the possibility for a Central Bank Digital Currency, the e-Krona, to ensure ongoing access to government-backed currency.
In contrast to Sweden, there are many countries where the prevalence of cash remains reasonably high, where citizen preference appears to favour the use of cash. Germany is often given as an example where cash is still a very widely-used payment method.
While the prevalence of card and online payments is certainly increasing, we are still quite a distance from a being cashless society here in Ireland, although as technology and services continue to develop, over time it seems likely we will see the widespread adoption of non-cash payments.
From a regulatory perspective, consumer protection, anti-money laundering and the safe and efficient operation of payments and securities and settlement systems are key areas of focus for regulators in this area.
For entrepreneurs, an awareness of the regulatory landscape, understanding what is and what is not a regulated activity is clearly very important. In Ireland, the Central Bank of Ireland’s Innovation Hub is an excellent facility for those seeking to explore the regulatory aspects of their propositions. Designed to allow fintech firms to engage outside of the formal authorisation process, it is a great resource for those developing or implementing innovations using new technology in financial services.
For regulators, a world without cash presents some significant considerations. Central banks and regulators, responsible for monetary policy and stability and financial regulation have been monitoring the declining use of cash, the emergence of innovations such the cryptocurrencies Bitcoin and Ethereum and Facebook’s global digital stablecoin Libra project as well as the Decentralised Finance movement more broadly. A number of forces, including these have resulted in the concept of a Central Bank Digital Currency (CBDC) being widely explored by many central banks around the world to complement or replace traditional currencies. A recent Bank for International Settlements survey showed that more than 80% of the 66 banks surveyed were working on CBDC, though many in an exploratory or ‘analytical’ phase.
COVID-19 has significantly accelerated the move away from cash as a method of payment. Much of the early advice from officials during the pandemic recommended the use of contactless payments due to the potential risk of transmission through coins and banknotes, with shoppers encouraged to use contactless payments. Equally, consumer behaviour has necessarily changed significantly during the pandemic, with many shoppers required or choosing to buy online. As we head into the next phases of the pandemic, we will see if consumer behaviour will return to pre-COVID levels of cash usage or whether this shift will be a permanent shift in consumer and societal attitudes towards the adoption of non-cash payment methods.