How business is adapting to the demise of cash

Cash notes and coins are in retreat — and the coronavirus is hastening their demise.

According to research carried out in April for the 2020 American Express Digital Payments Survey, the pandemic had already led to a 16% decrease in the number of US consumers who said they were likely to use cash. It also caused a similar fall (15%) in the number of people likely to insert or swipe a card.

A September report by the UK’s National Audit Office (NAO) — the body that on behalf of Parliament scrutinises public spending — found there had been a 59% decrease in the volume of cash payments between 2008 and 2019.

The NAO forecast a 65% reduction in the use of cash in the UK between 2018 and 2028.

However, the NAO noted in its report that while “many consumers and businesses switched away from cash during the lockdown”, it is “unclear yet if this is a permanent switch or a temporary effect”. There was evidence, it said, that “the demand for notes and coins declined by 71% between early March and mid‑April during the COVID-19 lockdown but by early August had recovered to 77% of pre‑lockdown demand”.

Pinar Ozcan, professor of entrepreneurship and innovation at the University of Oxford’s Saïd Business School, said the technologies — near-field communication — that allow digital payments through chips in cards or mobile phones have been developed since the late 1990s.

She said: “Physical payments have gone almost entirely digital — most contactless, and that has now made it possible for small retailers to accept digital payments where they didn’t before, and that trend is going to continue.”

Boost for small retailers

The coronavirus’s impact on increasing online retail volumes is well understood. It has also led to a technological revolution in the sector. A recent survey of senior retail managers in the UK by Barclays’ corporate banking arm revealed that a third (33%) of retailers have had website upgrades, 32% have started to accept new payment methods, and one in four (26%) have embraced data analytics for the first time.

For retailers, digital payments made historically through Mastercard and Visa have been expensive, and there was little choice of payment system provider.

“Contactless has now become the preferred method of payment when you are physically paying for something,” Ozcan said. The fintech companies’ physical point-of-sale terminals have become smaller, and they work with retailers’ smartphones, she added.

“There was also a bit of democratisation there — these smaller fintechs don’t charge retailers through the roof, so it has been possible for these smaller ‘ma and pop’ shops to actually accept payments,” she said.

“Online payments have also seen a huge development. And there what we see is that there are many different ways in which you can pay now,” Ozcan said. “If you are a designer online [for example], you can accept someone else’s payment solution that is integrated into your website.

“[The number of] smaller firms that provide much cheaper and … more one-stop solutions for accepting payments [has] really grown.”

One large company operating in this space, Stripe, announced in April that it had secured $600 million in new funding to take its valuation to an estimated $36 billion.

Swedish bank and online retail payments platform Klarna has brought payment by instalments into developed countries, Ozcan explained. “In the UK and in the US paying your credit card in instalments without paying a penalty has just not been possible, and that is the kind of system [retailers] are now bringing — in order to get people to purchase more.”

Peer-to-peer payments

Peer-to-peer payment systems have also become more widespread. Ozcan said that payments through social media platforms are a “bigger deal” in countries where people may not have a bank account than in developed economies.

“That … has led to a revolution in allowing people to accept payments through either their social media accounts or through other types of accounts such as Apple Pay [that] provide … cards that are associated with your phone or with some of the apps on your phone rather than with the banks. [They] are becoming much more important, and that trend will continue, which of course diminishes the power of the banks.”

Open banking

For fintech companies to initiate payments, they need access to customers’ bank accounts. That has been made a lot easier since the new Open Banking regulation was introduced in the UK in early 2018. This allows third-party access with customers’ consent to their financial data through APIs (application programming interfaces). Open Banking is also starting to make progress in countries such as Australia, France, and Italy.

In the US progress has been relatively slow — it is more industry- than regulator-driven, in contrast to the UK. A 2019 Deloitte survey found that while nearly half (48%) of Gen Z and 39% of Millennials in the US would find Open Banking valuable, this figure was 23% or lower for older generations. According to Deloitte, Open Banking can enhance banks’ digital transformation efforts and lead to the emergence of new business models.

“There are many startups — such as TrueLayer and Bud — that are now occupying a space in allowing fintechs to access people’s bank accounts, obviously with the consumer’s consent. And that is a hugely important development as well. So that is not just about how you pay but whether somebody you give consent to can pay your money on your behalf,” Ozcan explained.

However, she warned that while payments can be made easier, for the financial welfare of society, it’s important to also support people in managing their finances through personal finance management apps, for example.

Future developments

“Payments are going to become even more seamless,” Ozcan said. Payments using voice and retina movement to control phones in order to make payments “are probably going to come”, she suggested.

“There’s wearable tech for payments — that’s already there. Not hugely but that’s because people are addicted to their phones and there is no need. But once phones become smaller … then, of course, wearable tech might be something that is interesting — like rings and bracelets that allow you to pay.”

— Oliver Rowe (Oliver.Rowe@aicpa-cima.com) is an FM magazine senior editor.