Why should banks & credit unions lead the transition towards a cashless economy
Globally, cash fell -8% in 2023, and is expected to decline at -6% CAGR
(Compound Annual Growth Rate) through 2027. Reflecting global trend, cash usage
in the US is declining. This year, it’s
reported that 84% of payments in the US are being made digitally. This shift is
driven by several factors, the convenience and speed of instant payment
systems, the growing acceptance of contactless payments, and the increasing
adoption of smartphones. The 2020 pandemic has been a major catalyst, inducing
a lasting change in consumer habits, making people more comfortable with and
reliant on digital payments.
The increasing adoption of cashless transactions is altering the financial landscape. Banks & credit unions representants need to understand the potential impacts of this transition on their industry. As increased businesses and consumers adopt digital payments, the costs associated with cash use are only increasing, further incentivizing the shift towards a cashless economy.
Indeed, there are many government, central banking and industry-level studies that have shown the overall cost benefits of electronic payment systems over cash. Cashless economies have much higher rates of income tax compliance due to the increased transparency and traceability of transactions. The US loses more than $1 trillion a year in tax revenue due to tax avoidance practices, including activity in the untaxed cash economy.
Furthermore, the reduced reliance on cash leads to much lower rates of financial crime and fraud as electronic transactions leave audit trails that can be checked. This transparency also leads to lower banking system costs related to processing of cash, regulation, and supervision in the banking system.
Cashless systems enhance transaction security with advanced encryption technologies and multiple authentication methods, reducing the risk of fraud and cyber-attacks. Their traceability improves tax compliance by facilitating the monitoring in real-time of transactions. It also makes money laundering and others financial crimes more difficult. However, these systems must overcome challenges related to financial inclusion and user privacy.
As several countries are now on the verge of being functionally cashless, banks & credit unions have a key role to play in leading this transition.
· Improving the availability of identity infrastructure is essential to ensure that everyone can access digital banking services. This includes promoting mobile penetration, digital inclusion effort and making internet access affordable.
· Banks should also adapt by offering more accounts with limited functionality, that are affordable & transparent. Traditionally, banks in economies like the US, Australia, and the UK have viewed lower-income households as less attractive due to lower profit margins, often pushing the responsibility onto policymakers. Mobile wallets stand for a significant improvement in financial access, making basic banking services more affordable and accessible.
· Finally, banks could stand out by educating & supporting customers in this transition.
Banks and credit unions should lead the transition towards a cashless economy to save operational costs from cash management. The shift to digital payments allows for significant cost savings by reducing expenses related to physical cash handling, transportation, and security. They could also benefit from enhanced tax compliance & reduced financial crime and fraud reduction as digital transactions are easier to check and regulate. This not only improves operational efficiency but also strengthens the overall integrity of the financial system.
Finally, serving underserved populations is a new opportunity for banks & credit unions. By offering digital banking services, financial institutions can better meet customer expectations and expand their customer base. This approach generates revenue growth and improves financial inclusion.
About Author:
Throughout his career, Peter has
successfully built, led, and grown global organizations, giving him a global
perspective and regional insight. As President of Ingenico’s North American
Region, Peter oversees all aspects of the NAR business and is leading the
organization through its strategic transformation and continued top and
bottom-line growth. Peter is also a member of the company’s global Executive
Committee where he plays a key role in steering the company’s global strategy
and success.
Sources:
2024-03_Worldpay_TheGlobalPaymentsReport2024.pdf (sharepoint.com)
2024-03_The_State_of_Payment_Methods_2024_eMarketer.pdf
Cash use falls as instant payments gain ground: McKinsey | Payments Dive
The World is going cashless...but how quickly? (paymentscardsandmobile.com)
Swedish central bank calls for legislation to protect cash (finextra.com)
Transforming US consumer banking for the next normal | McKinsey