06 Sep 2021
One of London’s most iconic bagel shops used to accept cash only; now you can use your debit or credit card to pay for your salt beef or smoked salmon.
This is just one sign of how the growth of the digital economy and mobile technologies, together with innovations in payments systems, is making the world increasingly cashless.
Indeed, there are many reasons to believe that digital payments will eventually replace cash altogether: cost-effective cross-border payments, quick access to financing, secure processing of transactions through electronic identification, flexible ways of paying for and returning items, and perhaps most importantly it all occurs in the blink of an eye and at any time. In a world where consumers expect everything done instantly 24/7/365, fast and flexible payments are key.
It’s not a surprise, then, to see that industry analysts expect global cashless payment volumes to increase by more than 80% from 2020 to 2025, from about 1 trillion transactions to almost 1.9 trillion, and to almost triple by 2030, according to PwC and Strategy&.
This growth potential reflects the breadth and depth of the digital payment ecosystem, which is more diversified than some may have thought and encompasses firms operating both card and cardless open banking payments.
Within this ecosystem, we believe open banking has a huge and disruptive potential, because it offers a secure way for consumers to share their financial information with merchants or service providers or to authorise a payment directly from their bank account, bypassing the entire card network.
Most countries now have or are developing an open banking structure. For example, PSD2 (the Second Payment Services Directive) is a piece of EU payments legislation that came into full effect in September 2019. It is aimed at improving digital payments capabilities and enabling consumers in the EU to have greater control over their financial data, thanks to the use of APIs (Application Programming Interfaces).
Real-time payments via the open banking structure should bring more competition to the digital payments market, providing consumers with more and better choices between different types of payment services and service providers. The ability to make real-time high- and low-value payments and access real-time transaction data should also make banking activity simpler and more affordable for all, fostering financial inclusion. User-friendly APIs and personalised digital products should be a significant boost towards the improvement of financial education – and ultimately financial health – of customers.
It is not only individuals and small business that are driving the transition away from cash; regulators and policymakers are also embracing the modernisation offered by digital payments. Here, the key developments to watch are CBDCs (Central Bank Digital Currencies), which are being evaluated by the Bank of England and European Central Bank, among others.
If adopted successfully in a coordinated manner on global scale, CBDCs could help resolve the longstanding problem of cash-based black markets, address the risks posed by the booming popularity of cryptocurrencies (not just in tax evasion or other crimes, but in interfering with traditional monetary policy), and broaden financial inclusion.
Since CBDCs can leverage blockchain technology and so could be conflated with something like bitcoin, policymakers have stressed the importance of differentiating between these and cryptocurrencies. For example, China – one of the first countries to trial a CBDC, having started its e-yuan research group back in 2014 – has recently banned financial institutions that provide any form of crypto-related business.
Unlike cryptocurrencies, CBDCs are backed by governments and regulated; they shouldn’t be as volatile or speculative as cryptocurrencies, and could avoid the harmful environmental consequences of crypto mining.
Yet even if CBDCs become widely used, we would also expect the private sector to have an integral role. As well as developing the APIs and facilitating the customer interfaces for CBDCs, by providing other digital financial services at the core of the global transition to a cashless economy, several firms across the digital payments value-chain could directly participate in the growth of this market.
The use of CBDCs and digital money is still at an early stage of development; questions remain regarding users’ privacy and data protection, while their introduction could have a significant impact on money markets. With retail deposits flowing out of commercial banks, central banks need to play a balancing act to ensure that CBDCs would not completely disintermediate banks.
Simple and direct transaction processing for digital money represents another threat to the existence of retail banks. There are also instances in which the use of a central-bank account for digital money would add steps in the transaction process, offsetting the immediacy of digital payments. Finally, wider adoption of CBDCs and digital money is dependent on the availability of technology and mobile tools.
While we don’t know exactly when the economy will be completely cashless, we can see how digital financial technology and payments have already started to influence the day-to-day life of individuals, business and central banks. We believe the world of digital payments has entered an exciting new chapter, broadening financial inclusion and ensuring effective and quick transactions.
Disclaimer: Views in this blog do not promote, and are not directly connected to any Legal & General Investment Management (LGIM) product or service. Views are from a range of LGIM investment professionals and do not necessarily reflect the views of LGIM. For investment professionals only.