Will Covid-19 spell the end for cash?

Bank debit schemes. Contactless technology. Mobile wallets. Payments technology has evolved at an incredible rate. Even before Covid-19 cash was losing its dominance around the world. 

Now the coronavirus pandemic has accelerated the global transition towards a cashless economy. Cash is under attack on all fronts, in terms of both its physical use and its cultural significance. 

Giant swathes of the world’s population have shunned physical currency for fear of contracting the virus. Indeed, at the start of lockdown, it was widely reported that the World Health Organisation (WHO) warned that banknotes may be partly to blame for the lightning-fast rate of infection. It was suggested that Covid-19 could cling to the surface of paper and polymer notes for several days. 

While these claims have since been discredited, with the WHO clarifying that it did not advise against the use of cash, the impact was felt. According to GoCompare Money, 17.1 million Brits have avoided cash due to health and safety fears. Contactless has now become the payments medium of choice for shoppers across the world, from the UK to Australia. Even the US – far behind other developed nations in terms of contactless usage – is now playing catch-up. 

To help encourage the switch to contactless, several countries have raised the spending limit in response to the crisis. In Australia, it has risen from $100 to $200, while in the UK the ceiling was raised from £30 to £45 at the start of April. This has further accelerated the cashless trend.

Tills go cashless

This flight to cashless has been partially driven by high-street retailers. Some brands such as Next, Ikea, Urban Outfitters, as well as network providers such as EE, O2 and Vodafone, all declared their stores ‘card-only’ as they reopened in June. However, we’ve also seen an enormous surge in online shopping. Recent figures by Barclays Corporate Bank show over a quarter of respondents think the pandemic has accelerated a ‘technological revolution’ in retail. Additionally,  A&M found 17.2 million U.K. consumers expected to make permanent changes to their shopping habits.

In Southern Europe for example, online shopping is a relatively new phenomenon; e-commerce penetration stands at just 4 per cent in Italy and 5 percent in Spain, while France is slightly higher at 10 per cent. Yet online retailers, and groceries in particular, are now reporting sales that are “like Christmas”. 

Could Coronavirus accelerate this trend towards a cashless world, and end our love affair with notes and coins? 

The five stages of transition

A few years ago, I posted about the five stages of transition to the cashless society. Beginning with the first foray into electronic payments, we moved to the era of card payments for big-ticket items. We hit stage three when electronic payments became the norm for everyday commerce. 

I believe we are still in this stage right now, but this outbreak could tip us into stage four, where certain strata of society become entirely cashless. Stage five would only be reached if the transition away from physical currency is completed.

In the UK – a relatively advanced economy in terms of payments innovation – the cashless revolution is in full swing. In February of this year, the UK government released its Access to Cash Review, stating that the country is at a tipping point, with fewer than one in 10 payments set to involve physical money by the end of the decade. 

In many countries, however, cash is still king. In Japan and Hong Kong, the amount of cash in circulation has risen by a handful of percentage points in recent years. South America still has the largest pool of cash in circulation relative to its population size. Movement towards a cashless society requires high levels of trust in government, central banks and the financial sector, and this is not ubiquitous. 

In the US, too, cultural preferences remain skewed towards physical currency, both for smaller purchases and as a haven. Many rushed to extract their savings in the wake of coronavirus uncertainty. Bank of America in New York City was one of those targeted by stockpilers, running out of $100 bills in mid-March. 

Do we want to eradicate cash completely?

Eradicating cash would have some benefits. It would reduce the potential for tax fraud, crime, money laundering and corruption. Indonesia, the second-largest cash-based economy in the world, according to KPMG, is ranked alongside Colombia and Liberia by Transparency International as the 85th most corrupt country in the world. 

But there are downsides. A cashless future could pose privacy issues and create unintended consequences. In Australia, indigenous people were issued with welfare cards to replace cash payouts. It was hoped this would help tackle societal issues, such as alcoholism and gambling, because just 20 percent of the payment could be withdrawn in cash. While the programme was successful in some respects, the community also saw a steep rise in robbery and property break–in as people sought to steal cash.

A cashless society could also exacerbate financial exclusion. For example, research from The Inclusion Foundation found 1.23m of the UK’s most vulnerable do not have access to a bank account. It is notable that Sweden, where the amount of cash in circulation halved between 2007 and 2018, has now taken steps to avoid a cashless future. In January this year, the country’s government issued legislation to ensure the nation’s banks always provide cash services. The purpose was to protect the elderly, those in rural locations, migrants, people with disabilities, and those without access to digital payments. 

The UK, has wasted no time in suggesting it may follow Sweden’s lead, with the Access to Cash project testing ideas to preserve cash, such as pop-up post offices and purchase-free cashback in stores.

If these efforts are unsuccessful, the 1.7bn people worldwide without a bank account could be at risk of being left behind. And without cash as a haven, people would have little protection against so-called ‘tail risks’, such as the politically motivated appropriation of funds or bank bail-ins.

Infection rates are beginning to rise again as winter emerges, causing parts of the world to enter into a second lockdown. Covid-19 is likely to have a real and lasting impact on life as we know it. Will cash be a casualty of a new, hyper-hygienic world, where people’s hands are the agents of deadly infection? It is looking more likely than ever.

References:

1. https://fullfact.org/health/coronavirus-WHO-cash-comments/

2. https://press.gocompare.com/news/17-1-million-brits-shun-cash-fearing-covid-spread

3. https://www.barclayscorporate.com/content/dam/barclayscorporate-com/documents/insights/industry-expertise/The-new-normal-in-retail-report.pdf

4. https://www.alvarezandmarsal.com/insights/172-million1-uk-consumers-expected-make-permanent-changes-their-shopping-habits

5. https://ecommercenews.eu/southern-europe-discovers-online-groceries/

6. https://www.accesstocash.org.uk/

7.  https://www.pymnts.com/cash/2020/nyc-bank-runs-short-big-bills-customers-hoard-cash/

8.  https://www.transparency.org/cpi2019

9. https://theinclusionfoundation.org/index.php/2020/04/23/the-inclusion-foundation-launches-to-tackle-financial-exclusion/

10. https://cashessentials.org/after-sweden-the-uk-will-protect-the-future-of-cash-by-legislation/

11. https://communityaccesstocashpilots.org/2020/09/innovation-in-community-access-to-cash-pilots-unveiled/