What Have We Learnt from COVID-19?

April 2020

In the last issue of CPN we deliberated on the likely developments this pandemic will cause to the payments industry, such as the concerns over safety of cash handling, a rapid shift towards digital consumer payments and the acceleration of the Central Bank Digital Currency (CBDC) efforts. A month later, some clear patterns are emerging that will have long lasting consequences for us all and have the potential to change the world of payments forever.

Depending on where you are, it has been a few weeks or possibly months of living with the effects of coronavirus, altering the lives of each and every person on the planet. We hope that our readers are keeping safe and well and some degree of normality will resume in the not too distant future. In the meantime, let’s have a look at what we can learn from the situation so far.

Changes to cash use

The last month’s lively discussion on the subject of whether coronavirus can be transmitted by physical cash appears to settle on the understanding that banknotes and coins are no more dangerous than other everyday objects, such as door handles or card terminals, in transmitting the disease. Handling any physical item in a situation of a contagion can never be entirely risk-free, but with sensible personal hygiene measures the risk is minimal. In that sense, singling out cash as potentially ‘contaminated’ is irrational.

The question that remains is why some central banks are actively implementing measures (quarantine, disinfection, restrictions on re-circulation etc.) that appear to suggest that cash, and banknotes in particular, can carry the virus, while others clearly state that there is no specific danger related to cash.

It could be that, as is the case for many other COVID-19 related decisions that are supposedly driven by scientific advice, the underlying motivation is political rather than scientific – being seen as taking steps can be comforting and reassuring to the general public that otherwise may be inclined to avoid cash all together. Perhaps each country adopts the approach that suits its situation best, regardless of the reality of science. For the latest studies on the subject of how long the virus can survive on different surfaces refer to page 8.

A more important aspect of cash payments, a lot more significant for the potential transmission than the amount of time the virus can live on the surface of banknotes, is the face-to-face nature of cash payments where people are necessarily placed in close proximity to each other. Without cash accepting devices this will continue to be an issue, particularly for small retailers that may not be in a position to install any protective equipment at the point of sale.

For example,  in the UK this has led to mass conversion of small businesses to cashless-only payments. The recent increase of the contactless threshold to £45 ($57) has facilitated this shift considerably, allowing for the majority of everyday purchases to be made contactless. Banks and authorities in other countries, including Austria, Germany, France, Hungary, Ireland and the Netherlands, have also increased the limit for contactless payments.

Cash is not the only casualty of the virus. Card terminals with public keypads are just as much maligned. Larger purchases that for a card payment would normally require a PIN code are increasingly being made by mobile wallets, which allow the transaction to go through by confirming the payment on the buyer’s smartphone, without the need to touch the keypad of the retailer’s card terminal. Contactless payments and biometric identification are definitely preferred public choices at the moment, where such options are available.

There is, however, one aspect of cash that has proven invaluable in this crisis. It is not something that is typically touted as a unique benefit of cash, but it certainly is unique and extremely useful – the fact that it is a ‘bearer instrument’, ie. it entitles its holder to the rights of ownership of its value, which can thus be easily given to somebody else.

In a situation where millions of vulnerable people in self-isolation have to rely on the help of others to deliver their food and other essentials, cash is the instrument of choice to enable such transactions without friction that an electronic payment would create. Some payment card issuers (see page 3) are now starting to address the problem by offering a second card with limited use that can be given to another person who does essential shopping for the self-isolating person. This may work for some situations but does not exactly replicate the universal transferability of cash.

Shift to digital

For years we have been told that cash is necessary for those in our society that are unable to fully benefit from digital payments, usually referring to the older generation that may be less familiar with the required technology, smartphones, computers etc. It’s too difficult, too unfamiliar for them and they will never learn.

In reality, it didn’t take long, not more than a couple of weeks, for a generation of ‘silver surfers’ to happily embrace the new (to them) world of teleconferencing, video calling and doing most of their usual tasks, both social and personal, online. Where there’s a will, there’s a way. Perhaps that demographic of ‘mostly cash users’ has now changed irreversibly.

We have also learnt that a total control over people’s lives and activities is a lot easier to achieve than previously thought. Hitherto unthinkable, at least in a democratic society, limitations on personal liberties, such as contact tracing, policing personal movements and even using mobile phones to track individuals are now seen as necessary measures of controlling the pandemic.

Against this backdrop, the unresolved privacy issues of digital payments seem a lot less of a concern. Whether the priorities will ever change back once the crisis is over remains to be seen.

Increased CBDC activity

CBDCs are suddenly at the forefront of many central banks’ agenda. From a conceptual exploration exercise it was only a few weeks ago that it moved to a practical task in response to the very tangible threat. Not the threat of the virus itself, but the growing concern that a shift away from cash will leave a gap in the payment landscape that may be quickly filled by the likes of Google Pay, PayPal, Alipay and WeChat Pay – and as a result private payment platforms may replace government-issued money, with the ominous consequences to the stability of the financial system.

European banks are justifiably very concerned, since the main private payment technology providers are US or Chinese companies. Back in December last year, the European Central Bank (ECB) said it would create a digital currency if the private sector fails to do so. ‘If industry efforts fall short of developing an innovative and efficient pan-European payment solution, the social need for it could potentially be met by issuing a CBDC,’ the ECB wrote in a paper. ‘Signs of a future decline in cash usage could be a catalyst in accelerating central bank efforts in the area of CBDC.’

At the end of March, the Banque de France launched a pilot program to test integration of a digital euro in settlement procedures – designed to measure both the potential of decentralised technologies and broader uses of central bank digital currencies. ‘A host of market infrastructure projects are underway, especially in Europe, aimed at helping financial markets to function more effectively and more smoothly,’ the Banque de France wrote in a statement laying out its digital euro testing plans and inviting qualified institutions within the European Union to participate.

In the US, there is a renewed discussion over the issuance of a digital dollar, a draft provision for which was included as part of an emergency coronavirus-induced stimulus bill as a means to make payments to people and businesses affected by the crisis. The proposal did not make it into the final bill, but the debate is set to continue.

All central banks that so far commented on the potential development of CBDC stated that the digital currency is being discussed as a supplement to cash, not a replacement. Notes and coins will be retained, regardless of this development.

Also in this issue:

  • Apps Want to Deliver Stimulus Funds
  • Coin Mints Retool to Battle Coronavirus
  • Isolation Innovation
  • Bleak Outlook for Payments Industry
  • Debit Cards Overtake Cash in Australia
  • Ups and Downs of Cash Demand
  • Cash and COVID-19: Scientific Evidence
  • Head of ATM Network Warns of Danger to Cash
  • A Time to Protect the Future of Cash
  • Sweden Joins Eurosystem’s Payment Platform
  • Cashless and Digital Payments, News in Brief & Further Reading

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