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The year 2020 will go down in the history books as a transformational one for the financial services industry. In particular, for the unavoidable progress made towards cashless societies becoming a reality.
When the pandemic hit and Europe was sent into lockdown, hundreds of bank branches closed to limit the spread of COVID-19, with this same pattern replicated globally. This, understandably, accelerated the shift to digital, with many avoiding over-the-counter exposure for the safety of online banking. As a result, four British banks made the permanent decision to close multiple branches across the country. Most recently, the Post Office also announced that it is closing 600 of its 2000 ATMs throughout the UK. The pandemic has confirmed that consumers preferences are now firmly with digital services, which bank managers would be silly to ignore.
However, although this is a strong preference of most consumers, it doesn’t suit or serve all. There are many consumers, the world over, that still don’t have fair access to financial services and are dependent on cash and therefore bank branches to complete their everyday financial tasks. With this in mind, the Financial Conduct Authority issued a warning to banks within the UK asking that for every closure of a bank or ATM they need to provide an analysis on the impact on customers’ access to cash.
It’s arguably initiatives like this and the smart utilisation of technologies to bring about better financial access that will help societies to balance the challenges of transitioning to cashless societies.
A first step towards understanding the impact of societies moving towards cashless transactions is to understand the payment method preferences of each market. By identifying existing preferences and building products and services to match, innovation and inclusion can be empowered.
PayU works with local governments and financial regulators in each of its markets to build a holistic understanding of payments preferences across the globe. Latin America is a prime example of a diverse and complex region. Brazil is the largest e-commerce market and strongest economy in Latin America, yet almost a third of its 212M inhabitants are unbanked. Across the continent, different markets favour cash, credit cards, BNPL or local methods. At PayU, we alone offer over 400 different payment methods to a potential customer base of 3 billion around the world.
A second step, and key part of this puzzle is education. Consumers need to be educated about the benefits of financial services in order to truly be included in the ecosystem. Until this crucial step is established in every market, cashless societies will only serve to create more financial barriers. This needs to be ubiquitous across all jurisdictions backed by governments and regulators. In short, this will only be made possible through collaboration, and arguably the only way to eradicate financial exclusion.
The global challenge
Though the pandemic has played a key role in accelerating many societies' cashless transition, this isn’t a new conversation. In November 2016, India’s government made a decision to demonetise 86% of the cash in circulation in an attempt to reduce corruption. As a country that used almost 90% cash at the time, you can imagine the furor this caused. However, the economy adapted quickly and non-cash payments saw a surge immediately following the demonetisation policy. In fact, digital transaction volumes grew 43% between November and December 2016.
India is not alone in this approach. As far back as 2011, Venezuela announced the decommissioning of its most valuable note accounting for 77% of the nation’s cash in circulation. This drastic move had mixed results; while card payments saw a staggering CAGR of 439.4% in four years, the country went into hyperinflation.
Despite initiatives such as these, to this day, a staggering 1.7 billion people around the world remain unbanked and, therefore, dependent on cash. With this in mind, we as an industry have a responsibility to remember the conversations being had pre-pandemic on the challenges of cashless societies. We’re also posed with the opportunity to take advantage of the accelerated digital innovation taking hold of the industry right now to create a world with even greater financial inclusion. But again, this can only be achieved through collaboration. The entire ecosystem is responsible and must be held accountable for making sure financial exclusion is not overlooked while we focus on new sparkly digital options. Ultimately it will require on-going conversations between governments, regulators, and fintech providers.
Utilising technology for progress
Many governments are already making progress. Most noticeably is arguably the Indian government which launched its own BHIM (Bharat Interface for Money) app after its demonetisation. This app facilitated electronic bank transfers via phones without internet connections linking every Indian with a mobile phone to the banking system.
There have been some initiatives to come out of the pandemic too. In particular, communications company Safaricom implemented a fee-waiver on mobile phone-based money transfer service M-Pesa to reduce the physical exchange of currency. Pakistan and Ghana also followed suit with similar moves, and both have reported booms in the popularity of digital payments. Kenya, on the other hand, reduced the fees of mobile money to use it as a public health tool during COVID-19.
Mobile money is a great example of utilising a technology to bring about better financial inclusion whilst working with existing market preferences. In fact, consumers who still rely on cash in Kenya can take it to M-Pesa agents to deposit into a mobile money account.
Societies edging towards cashless in developed countries could learn a lot from emerging markets like India and Ghana. Indeed, each of these markets has worked to find a solution which encourages financial inclusion despite lacking traditional infrastructure.
Globally, consumers have been confined to varying lockdown restrictions and as a result e-commerce has seen an exponential increase. This is a leading example of the benefits users can reap from embracing digital payments. Indeed, online retail grew by 74% in transaction volumes and this trend is unlikely to halt. As a result, some e-shops across PayU’s markets saw year-on-year revenue growth of 500-1000% during April and May 2020.
As the challenges of cashless societies remain a prevalent road block for financial inclusion PayU is committed to combating them. As a company, our vision is to create a world without financial borders where everyone can prosper. Until this is realised we’ll continue to champion collaboration between governments, regulators and fintechs to inclusively reap the benefits of digital payments.
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