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Friday, October 7, 2022

How close are we to have a cashless future?

Money has been a part of human history for thousands of years, ranging from barter to currency to checks and now online banking. Although cash will likely continue to play a significant role in the payment industry for the foreseeable future, factors such as “contactless” pay systems, rising mobile penetration, and the high costs of cash (ATM fees for individuals, cash storage for businesses, currency printing for governments, etc.) are prompting society to reevaluate its widespread use.

In an effort to reduce cash transactions, some experts argue that large banknotes should be phased out along with smaller ones. On the other end of the spectrum are those who have declared war on cash and are calling for its complete elimination.

More prudent experts however draw the conclusion that a future with less cash is more plausible than a future with no cash at all. Although some advancement has been made, this change has not been comprehensive or consistent. It becomes evident as traditional cash use persists at a high rate around the world despite the rise of digital payment systems.

In fact, 85 percent of all purchases made by consumers around the world are still made using cash. The ratio of cash in circulation to GDP has been increasing in large markets, while remaining steady in most of the rest of the globe.

However, since 2010, the most rapidly expanding alternative to cash has been cards, and debit cards in particular. Meanwhile, over the past thirteen years, check use has steadily dropped. In more recent times, cash’s dominance has also been challenged by the introduction of mobile card readers, electronic networks for processing high volumes of credit and debit transactions, and digitalized private currency.

Is cashless the new way?

According to a survey conducted by US based Thoughtworks, 59% of people throughout the world expect cash to be completely obsolete by the year 2030. Given that Fintech was the fastest-growing sector of the economy in 2021, it’s not surprising that tech-savvy consumers prefer digital payment systems like PayPal and Monzo.

Actually, once COVID-19 pushed towards an e-commerce boom, internet payments skyrocketed as more consumers than ever before engaged in cross-border transactions and took measures to simplify how they exchanged money.

“Cashless transactions are rocketing and the UK has by far the largest number of payments made by card, phone or electronically in Europe, amounting to annual revenue of some €106 trillion per year,” claims Thoughwork’s Financial Director, Phil Hingley. “Some retail sectors – such as transport – are already almost entirely cashless and I see other sectors rapidly catching up. The question is, when will cash disappear from our pockets?”

The rise of card payments is mirrored by an increase in the prevalence of other types of digital transactions. For instance, in the post-COVID digital world, cryptocurrency adoption has surged as consumers have expressed overwhelming faith in the decentralized digital currency.

It is true that people prefer the simplicity of cash (at zero interest) over other safe assets generating higher rates during normal times. But for governments, decreasing interest rates to stimulate the economy during recessions is difficult since people prefer to keep their money in cash. The existence of paper currency consequently means that governments and central banks have little authority to support economic growth. The zero lower bound theory explains this phenomenon.

On the other hand, governments and central banks would have more control over the economy through monetary policy in a cashless world because people wouldn’t be able to withdraw money from the financial system and store it in physical cash. In particular, it would be easier to implement the novel solution of a negative interest rate in times of economic slump.

In a negative interest rate scenario, depositors would pay banks to hold their funds rather than collecting income. This is meant to encourage banks to increase their lending. It is also intended to encourage individuals and corporations to invest, lend, and spend money rather than hoard it. A cashless society would allow governments and central banks to exploit negative interest rates more efficiently.

Digital money and money services would also increase the openness of transactions, allowing governments to better track and analyze the financial activity of citizens. Ultimately, this would reduce tax evasion and improve government revenue.

What role can big data play in shifting tides?

Now, as we have discussed the benefits of going cashless and have seen that a number of indicators say that  we are potentially jumping into a cash-free tomorrow, we need to figure out what role big data can play in having this shift from paper to bits. This question is very pertinent as the financial sector is among the industries most affected by developments in big data.

Firstly, let’s have a closer look into what the term big data could really mean for the banking industry. Defined by Investopedia, “Big data refers to the large, diverse sets of information that grow at ever-increasing rates. It encompasses the volume of information, the velocity or speed at which it is created and collected, and the variety or scope of the data points being covered (known as the “three v’s” of big data).”

Currently, the global market for big data and analytics is valued more than $274 billion. Big data has had a huge impact on a variety of industries, including corporate security, legal decision-making, and smart finance, as one of the fastest-growing businesses alongside financial technology and artificial intelligence.

At present, financial organizations, such as banks, have globally amassed more than 1 Exabyte of data from customer interactions such as phone calls, online chats, and in-person transactions. As open banking gains traction among consumers, new digital-first financial institutions are relying on big data to keep up with surging volumes of digital transactions, international wire transfers, and demands for more fluid monetary flows enabled by fintech.

However, there are a lot of new services that financial institutions employ that are powered by big data but don’t appear to be included in this market. Nor does it seem to include some of the ways independent enterprises are leveraging big data to improve their financial management services. Nonetheless, one of the most noticeable shifts brought on by big data is the simplified acceptance and processing of financial transactions by businesses.

With the increasing popularity of contactless payments, big businesses have already invested more than ever in new technologies, such as contactless card machines, online payments, and Pay by Link, so they can sell directly through emails and social media. So, the culture and social norms have already gained enough tractions that whenever anyone talks about the future of payments, cash becomes always an afterthought and going cashless become almost a certain thing.

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