The global payments infrastructure is experiencing massive digital upheaval. Mobile and proximity payments are quickly entering the mainstream. Bitcoin has a market cap that could make a blue chip blush, and new retail concepts like Amazon Go and Shake Shack’s cashless store bring momentum to the theory that cash could essentially become useless in a future retail environment. The Indian government has even undertaken, and largely achieved, an ambitious digitization of its economy and financial infrastructure. But is cash really on the road to obsolescence? Not yet.
The India Anecdote
The government sought to bring more Indians into the digital economy and onto their tax rolls, and in only 12 months, in part by demonetizing 85% of the country’s cash value, Indians opened over 270 million bank accounts. It created an $80 billion influx of investment for Indian banks, and national and international markets have reacted strongly in support.
If this massive shift away from cash can happen in a country where only 2% of transactions were non-cash just two years ago, why aren’t more developed digital economies on the precipice of abandoning this currency?
Rise Of Digital Payments In The West
Critics of cash might point out that total noncash payments in the U.S. increased at an annual rate of 5.3% by number or 3.4% by value from 2012 to 2015. They might bring up that in 2016, 75% of consumers said cards were their preferred payment type, while only 11% selected cash.
The most compelling argument for digital’s takeover is that these cards aren’t even secure in their preferred position, as global proximity payments are expected to grow in value by nearly 8X through 2022. In the UK, one of the most mature digital payments markets, six in 10 Brits report paying via mobile or contactless payments, with more than 300% growth expected by 2021.
This has led Visa’s digital chief to respond by saying that not only is a cashless future in the cards, a cardless one is too.
Emerging Payment Tech Will Replace Cards, Not Cash
The thing is, cards are more vulnerable than cash in the digital economy. The inefficiency of card payments is increasingly apparent as emerging technology makes digital payments faster, more secure and ultimately, more like cash. Consider cash’s competitive advantages:
Cash is the most commonly accepted payment type in the world. If I were to choose one payment method to live with for the rest of my days, I would choose cash. Until any one digital option becomes as ubiquitous as cash, cash will persist.
Counterfeit money exists, yes. But instances of cash fraud are disparate and sporadic. As a system, cash is far more secure than any digital process. The nonstop news stories of massive data breaches among retailers, financial institutions and even governments have created a sense of untrustworthiness of digital finance. It’s notable that nearly half of cybersecurity professionals don’t see mobile payments as secure.
Cash payments are simply the best option for those who don’t want to be tracked. From service industry employees not declaring income for cash tips to businesses hoping to avoid exorbitant transaction fees by payments processors, and yes, to black and gray market operatives, cash has a powerful, elevated status.
Constantly adapting to the latest, greatest innovation in financial technology could wear consumers out. Retailers will also tire of the need to continuously invest in expensive hardware and software upgrades just to keep up with new solutions. Cash offers the same transaction process today as it has for decades, anywhere in the world, in any currency.
EMV, Chip and PIN and ‘signature-required’ transactions are excessively slow and are poorly positioned for long-term relevance. Amazon Go-like concepts will ensure that other types of digital payments become more popular, replacing card transactions forever.
Yet, no matter how much the retail checkout evolves, the security, anonymity and simplicity of cash will still have a place in the pocket of our economy.
Wait. What About Cryptocurrencies?
One technology with the potential to rival cash is cryptocurrency, and its underlying technology, blockchain. Oversimplifying, this is because the blockchain payments are highly secure, anonymous (in some variations), decentralized (avoiding middlemen fees and tax authorities), and able to transcend borders instantly and at a fraction of the cost that current infrastructure allows.
Today, as much as $6.6 billion in digital currency changes hands every day. Its meteoric rise has led the IMF to acknowledge its potential to be the future of finance, and major financial institutions are partnering with tech companies like IBM to build digital trading platforms founded on blockchain. Even the Chinese and Danish governments have actively explored usability.
Just Not Ready For Primetime
However, cryptocurrency as it stands now has some barriers before it can become pervasive. The first is that it requires complete societal digitization, which in developing nations is a non-starter for its use, as buyers must trade traditional currency for their first coins. Even in developed nations, the user base and infrastructure are too disparate. Never mind the fact that the power of central banks would vanish. As one of the most powerful institutions in world history, this is no small task.
Ultimately, the volatility of coin prices is based on speculation, not real network strength, rendering them commodity investments, not a stable financial option. Cash, especially U.S. dollars, is relied upon worldwide because of its trustworthiness as a stable financial investment.
Cash Is King
Cash is not a perfect model. Someday, it may disappear. But for now, it’s the digital payments industry that is ripe for disruption. New innovations will continue to disintermediate the industry, shifting power away from the major card brands and towards innovative firms offering better security, speed, convenience and market adoption. Yet, until digital technology can do these things better than cash, it will continue its long reign as king.
As CTO of GK SOFTWARE AG and a Member of the Group Management Board, Michael Jaszczyk manages the development of the Company’s many software solutions. He has extensive experience in software development for the retail sector and as a manager within international IT companies. At GK SOFTWARE AG he initially headed up the Open Scale business in late 2010 before moving into the role of CTO in November 2011. Since 2013, Jaszczyk also heads the North American business entity as CEO of GK Software USA.