A New Paradigm for Payments

Increasingly one hears people speak about cash and payments co-existing in a symbiotic relationship. Generally this is in countries facing a sharp decline in cash use for transactions.

But what does it actually mean? What does it look like? Who is it for?

Today’s payment agenda

Less-cash societies such as the Netherlands, UK, Sweden etc. are focused on maintaining access to cash for merchants and citizens, regulating to ensure cash is accepted, and making cash use resilient in the face of a wide range of scenarios where it is disrupted.

Where cash remains a mainstay of payments, the priorities of the lesscash societies are almost irrelevant, even bemusing. For these countries the priorities are different, for example seeking cash cycle efficiency, ensuring sufficient quantities of cash in circulation, increasing the use of digital payments etc.

Virtually all countries are grappling with the implications of faster payments, stablecoins, cross-border payments and Central Bank Digital Currencies (CBDC).

Digital and physical payments

For the majority of countries, cash remains the predominant means of payment. But digital payments are being rapidly adopted.

In some countries faster payments are making a big impact, Pix in Brazil and India’s Universal Payment System (UPI) being prime examples. In Africa mobile money schemes are bringing digital payments through a different route, M-PESA being the best known of the many systems now being used.

For these countries, co-existence is a reality by default, but perhaps action now would ensure that a healthy balance of cash and digital services is maintained.

Are there actions which should be taken as cash payment use falls from mainstream (over 50%) to ‘breakeven’ (about 30%) to marginal (perhaps 15% or less)?

Three possible areas of focus

Thought is needed about how to allow and ensure cash and digital payments coexist, and there are already some examples of how to do this.

1. Cash: technology and process changes

Whether it is badged as CashTech or not, there are already a wide range of examples of increasing cash efficiency, particularly as more capable equipment becomes available.

In addition:

• The rise of micro cash cycles, where cash circulates locally only occasionally returning to a cash centre, is having an impact on efficiency and resilience.
• Digital connectivity is enabling real-time, proactive cash management.
• A more transparent and integrated cash ecosystem offers a different future of physical currency.

A handful of many possible examples of new ways of working are:

• Smart ATMs that accept cash and a whole lot more, Smartsafes, networked cash devices, standardised packaging, labelling and data exchange etc.
• ATMs as a utility, delivered by banks grouping together to create independent ATM companies.
• ATMs-as-a-service, where cash management companies provide ATM services for banks. Fintechs allowing customers to access cash through ATMs.
• The Bank of Thailand is building and equipping what it calls consolidated cash centres which are then run by private companies
• OneBanx, a fintech offering community banking, offers incentives for people to deposit cash in its ATMs. It wants to avoid having to order cash from cash in transit companies by local restocking of the ATM. All of its ATMs are accessed by a digital wallet or website only. Digital wallet access of ATMs is increasingly offered by banks.
• In the US, Armorsafe is leading an initiative to create standards for Smartsafe devices used at the point of sale.

In the UK, Lloyds Bank is collaborating with PayPoint, a company with 33,000 devices and services around the UK, to allow cash deposits. This is in addition to access to cash through post offices or shared bank branch hubs.

The opportunity also exists to go much further than this. To think through how to make cash operate as part of the digital payment infrastructure. Do faster payments, account-to-account payments, digital wallets etc. allows cash access and depositing to be reworked to be cheaper and easier?

2. Digital first

Many, if not all, countries have moved to faster payments and/or facilitated the introduction of digital payments methods.

Infrastructure, regulatory environments, politics, the presence of technology companies, the sophistication of the banks, the wealth of merchants and consumers etc. all determine what is in place.

The impact on the payment mix depends to some extent on what is being used and why, and the speed of transition. For example, M-PESA starts off as a cash generative tool and only later starts to change payments to a more digital model.

While every country will be different, that does not mean there won’t be lessons to be learned from others.

In the move to digital first, what is the roadmap for cash related actions to ensure it remains usable in society?

3. Digital cash

At a recent central bank event, the Federal Reserve said that people are not emotionally attached to the banknote itself, but to the attributes of cash. If a digital payment method was created that had the attributes of cash, people would change to it.

In due course it is possible that digital tokens, whether it is in the form of CBDC, stablecoins or something else, will change things again. But when and how? Why might they displace alternatives such as Pix? What happens to ‘store of value’ banknotes, what happens if people hold foreign denominated digital assets and is CBDC needed to ensure the commercial sector does not abuse its market strength?

Time to talk

There seem to be more questions than answers here. The conversation to consider both the practical and the theoretical answers probably needs to include policy makers for digital and physical cash, and it would benefit from shared experience of those on different parts of this journey. Are these conversations happening already and, if not, are these urgent conversations or are they a nice to have?