In fact, the pace of innovation in payments is such that any predictions about the future are fraught with risks of extrapolating our existing knowledge and technologies into the world where they may no longer be valid, replaced by something entirely new and functioning in a completely novel and unexpected way.
With this in mind, we’ll resist the temptation to conjecture this year’s future trends and instead will look back at the past ten years, trying to identify several key developments which shaped the diverse and evolving payment and currency environment we have today.
1. New payment technologies
A greatly reduced cost and increased speed of internet, technological convergence and mobile connectivity has spurred the use of mobile-based payments, digital wallets and QR codes. Early adoption of contactless cards and devices as payment methods in low value, time-sensitive applications such as transportation services and toll roads quickly expanded to the more generic retail sector, with contactless point-of-sale terminals and QR codes becoming standard in many countries.
Development of payment applications such as China’s WeChat Pay and AliPay facilitated the adoption of digital payments around the globe, even in countries with an otherwise underdeveloped financial infrastructure. Open banking regulations in the UK, Japan and Southeast Asia have contributed to the growth of non-bank payment providers and a broad spectrum of competitive offerings in the digital payment space. BigTech companies ventured into the digital payments’ arena, leveraging their existing customer base and competing with the traditional financial services providers.
The convenience and speed of contactless has undeniably resulted in less use of cash by consumers when paying for goods and services.
2. Widespread adoption of e-commerce
Although, in many countries, the option of online shopping existed way before the 2010s, the last ten years saw an explosive growth in e-commerce, to the extent that many brick-and-mortar retail outlets are balancing on the brink of extinction.
The UK is one of the countries where this shift in shopping habits is very obvious, greatly facilitated by consumer protection rules and credit card guarantees that make online purchases secure and risk-free for the public. As the high street shops close, the option to pay in cash diminishes alongside.
Even in countries with deeply ingrained distrust in financial system, such as Russia, methods to participate in the digital economy and benefit from growing e-commerce without a payment card or a bank account have developed in the form of cash-accepting terminals. These convert the deposited value into a single use payment code that can then be used for online purchases.
It is not just the way we pay that’s changing; it is the way we shop. Cash has no natural place in the increasingly digital world.
3. Growing cash in circulation while the use of cash in payments decreases
One of the traditional indicators of cash demand, the value of cash in circulation, has been showing a long period of sustained growth in almost every country during the last decade. The decade started at historically elevated levels post-financial crisis and, after a short period of correction, the upward trend continued until the present day, with only a handful of exceptions, eg. UK and some Scandinavian countries, where the trend is now beginning to reverse.
The conundrum of growing cash in circulation while the use of cash for payments is evidently in decline becomes easy to explain when the patterns for different denominations are considered separately. Since cash in circulation is typically measured by value rather than volume, the high-value denominations tend to dominate the picture, obscuring dynamics in the low-value, transactional denominations.
The recent period of low interest rates has made holding cash as a store-of-value asset virtually costless, thus fuelling the demand for cash for hoarding, a trend particularly noticeable for major currencies. Drop in demand for low denominations used in payments was relatively small in terms of value, but it is now getting to the levels where the overall picture starts changing.
4. Demise of cheques
While the imminent death of cash was a recurring subject of headlines for much longer than a decade, a relatively quiet departure of another relic of the pre-digital era, paper cheques, has taken place without too much hype.
Once a universally accepted means of making larger payments, both for consumers and businesses, and in many countries a part of everyday life from grocery shopping to paying rent, cheques are a rare sight these days. Convenience and speed of electronic payments either replaced the paper instruments altogether or changed them into a digital form to provide a route to continue using a familiar instrument in a modern world. Cheques served us for a long time but their disappearance is unlikely to be lamented.
5. Vanishing coins
While the convenience of contactless payments affects both banknotes and coins, it is the coins that suffer substitution to the largest degree. The burden of having to carry coins when given as change is something that many would like to avoid, making most consumers more likely to reach for their phone, a contactless card or a wearable gadget when paying for small purchases.
The additional challenge is the loss of purchasing power of low denominations coins, accumulated over the years. A few countries have decided to optimise their currency structure and eliminate the lowest denomination coins in the recent years, but others, be it for political reasons, fear of price rises or other considerations, continue to mint the smallest coins that no longer circulate in the economy. The result is so called ‘one-way’ coins, that are never used past the initial transaction of being given as change.
6. Changing cash distribution models
Although the idea of delegating cash processing has been around for a lot longer than the last ten years, it is this decade that has seen the most changes in the cash distribution models, both on the part of the central banks, and in the commercial sector.
Some central banks that historically provided cash services to the economy revised their role in the cash cycle and opted for a less hands-on approach. Cash recirculation legislation defined the rules by which commercial providers can reissue processed banknotes, resulting in optimised logistical movements of cash. Some central banks provided a structure to create shared cash processing entities with the participation of commercial banks – a ‘cash utility’ model gained popularity.
Many commercial banks came to a decision that cash handling is not their core business, but a service they have to provide while their customers require it. Instead of running individual cash centres and ATM networks, commercial banks in some markets, notably Northern Europe, transitioned cash processing activities and ATM networks into a shared service where banks cooperate with each other, rather than compete, in pursuit of lower costs and efficiency.
As cash volumes dwindle, cost efficiencies become even more critical for the continuing existence of cash. Governments and central banks have started looking for the options to keep cash going, where the joint ‘utility’ cash infrastructure may be the only practical choice.
7. Emergence of digital currencies
The arrival of digital currencies is the latest and perhaps the most significant of all the payment-related events of the past decade. While in some countries, such as Japan, US and Germany, cash remains a popular choice, in others, eg. China, Sweden and UK, it is rapidly becoming marginalised. A cashless society is no longer just a thought experiment, it’s a very real possibility. The steady decline of cash creates a need for a digital alternative. In the last couple of years both private companies and sovereign states embarked on a quest to devise an instrument that offers the same mix of convenience and freedom as cash.
It is too early to say whether any of these endeavours are going to be successful. The central question is who is going to develop and control the payment systems of the future. Most of the existing payment providers are private firms, like PayPal, Venmo, AliPay, M-Pesa. Facebook’s Libra with its vast existing customer base probably has the most potential to become a global currency, if it is ever going to take off in the face of the fierce regulatory resistance. Reluctant to leave payments solely in private hands, many governments are looking to develop an electronic alternative for their banknotes and coins.
Proponents of blockchain technologies argue that it may be the best basis for digital currencies to ensure anonymity of payments, while others are willing to accept that financial privacy will no longer exist in the digital world. As of now, there is no perfect technological solution yet, only a realisation that no universal template is suited for all individual countries and their specific situations, despite the fact that all of them are using cash in exactly the same way.
The paradox of cash is that it is a thousands of years’ old technology that may just prove impossible to re-create in a more advanced form.