Cash Is No Longer King
We’re not going back to normal. As we start reintegrating ourselves into the economy, many of our daily habits will permanently change. How we pay will be one of them.
Imagine going to a grocery store in today’s world. You head to the cashier line to check out. The person in front of you has COVID-19 and hands the cashier their credit card to process the transaction. You’re next. When the same cashier hands you your credit card back, you may come in contact with the disease.
Let’s go a step further and consider the entire payments ecosystem, such as ATMs and point of sale touch pads, as well as the surrounding cultural norms, like signing your restaurant bill or handing a $20 bill to your grandchild.
Now that their lives may depend on it, will consumers finally be ready to adopt digital wallets?
Psychologists have determined that the “unclean” perception around cash, especially in the wake of the pandemic, has already prompted the mass adoption of payment alternatives (e.g., Venmo, Apple Pay).
Let’s put these assumptions to the test by looking at a recent case study. In February, Italy — one of the hardest hit countries — instilled a lockdown in hopes of containing the virus from spreading. As a result, online transactions have increased by 81% in less than a month. Although these transactions were driven by need, rather than curiosity, the conversion to contactless payments will be permanent for most Italian residents — especially once they experience the many benefits of digital wallets.
There is indeed a growing fear among consumers that cash is a vehicle for diseases and the market is listening. As the appeal for in-person transactions is decreasing, Financial Technology (FinTech) startups are springing up and raising funds at an unprecedented pace to challenge the likes of Paypal, Apple Pay, and Venmo.
More established technology players, specifically Payments companies, are acquiring FinTech startups or creating in-house teams to come up with contactless payment solutions. For example, contactless tap and go credit cards no longer require signatures at checkout and have already flooded the market. Although these moves are remarkably agile and aggressive, they shouldn’t come as a surprise; since Payments companies rely on large volumes of consumer spending and therefore may struggle to cope during an economic shock.
If just replacing your wallet with your smartphone seems too simple in light of the massive investment waves, that’s because it is. Make no mistake; FinTech startups and technology giants aren’t just looking to convert users into digital transactors. Their goal is to transform the entire customer experience, starting first with payments and then later disrupting the broader financial services landscape. Banks should be vigilant.
Although tech giants and startups haven’t posed a major threat to banks in the past, the COVID-19 pandemic, coupled with evolving consumer expectations and the prominence of smartphones as a channel, could change all of that. Banks will need to digitally adapt and swiftly respond to these changes to maintain their consumer share and market relevance.
What about our elderly who may not be accustomed with the technology?
One critical issue with going contactless is that elderly individuals, the group we need to safeguard the most, may not be comfortable using digital wallets. Additionally, our elderly may have psychological biases towards the perceived security that cold hard cash provides. After all, stacks of bills are psychologically reassuring and may therefore be what people — even the wealthiest — turn to in times of crisis.
In this case, the strategy should be one of educating consumers on the benefits of contactless transactions; from convenience to security. The private sector should do its part too. Payments companies, banks, and merchants can collaboratively set in place incentives, financial and otherwise, to encourage consumers to fully switch to digital wallets.
Additionally, responsible communication should prioritize those who are at the highest risk for infection. It’s imperative to use the right marketing mediums, like messages that highlight the benefits of contactless transactions, rather than solely the risks of in-person transactions.
What about emerging markets with limited access to the required infrastructure?
Let’s be honest. We’re falling behind even in developed economies when it comes to transitioning to fully contactless transactions, so how can we expect emerging markets to go fully digital in the wake of a pandemic?
The good news is that the global payments industry is currently undergoing a wave of modernization of its digital infrastructures. In recent years, over 15 countries have upgraded their payments systems. Similar initiatives are underway in many other countries, particularly in emerging nations.
However, given that infrastructure upgrades are cross-cutting and very costly, emerging nations will need to build on the improved infrastructure by launching novel digital payments services to recover these investments.
As unpopular as this may sound, the private sector can help in this case. By establishing partnerships with local governments, leading tech companies can support in both modernizing the payments infrastructure and introducing digital financial products. This approach potentially also has the power to elevate communities out of poverty by fostering people’s digital skills and attracting foreign investment. Rather than fighting to gain market share, tech companies would be able to create a new population of consumers.
The road to a fully digitized and contactless payments system may not be paved with smartphones and drones. There will need to be a drastic conditioning of the cultural norms, habits, and mindsets surrounding how we pay; but one thing is clear today: Our antiquated payments ecosystem wasn’t ready for the digital era, and it is even less prepared for a global pandemic.
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