COVID-19: Is This the End of Cash?
Considerations for Financial Institutions
As kids, putting money in the piggy bank was how many of us learned how to save (and spend) money. Whether the cash was from tutoring or doing chores, we enjoyed the satisfaction of depositing a few dollars or coins into the top slot. Many of us developed a habit of shaking the piggy a few times – just to give ourselves the confidence that it was all there.
It’s these fond memories that make the situation today so unfathomable. With COVID-19 ravaging our communities, the use of cash is diminishing quickly. In a world of contactless credit cards and digital payment systems, consumers are increasingly opting to touch nothing at grocery checkouts.
As a precautionary COVID-19 related measure, the US Federal Reserve has started quarantining dollars it repatriates from Asia before recirculating them. The Chinese government has been destroying bills that have moved through high-risk areas like hospitals and food markets.
If there were ever a time for the rise of digital payments in the mainstream, this would be it. Some potential drivers for change include:
- New options. Banks and credit card companies have been migrating towards contactless payments for some time. Tech firms are also bringing in a new breed of consumers who use their payment platforms. Traditional players have responded with contactless payments and continued to bridge the gap between old and new. Recognizing this shift, central banks are also exploring a central bank digital currencies (CBDC) – with countries like China, Sweden, and France at various stages of development.
- Overcoming barriers to travel. Given the uncertainty around how COVID-19 is transferred, the general public will hesitate to use (and re-use) cash, for fear that it might serve as a transmission vehicle for the virus. In Italy, electronic payments have increased by 80% since the virus emerged as a contagious threat at the end of February. And perhaps even more striking, an early draft of the Senate COVID stimulus bill introduced by Senator Sherrod Brown proposed a CBDC digital dollar as a potential method for distributing relief funds more efficiently.
- The unbanked, and the millennials. According to the World Bank, there are nearly 2 billion unbanked people who don’t have access to basic banking services like checking and savings accounts; yet 70% of these people have access to a mobile phone, which means they can use digital payment platforms and branchless banking. In developed communities, the rise of branchless challenger banks indicate that consumer demand is strong there as well, but for slightly different reasons. In fact, the majority of millennials are more likely to seek financial services from a tech firm than a traditional bank. This thinking is validated through Apple Card’s launch positioning as “created by Apple, not a bank.”
So the question is – are we ready for a truly cashless economy? Despite the negative stigma caused by COVID-19 related concerns, it doesn’t quite feel that we are. For forward-leaning financial institutions and fintech firms looking to have their day in the sun, there are still a number of considerations to keep in mind.
- When crisis strikes, we need to know the “system” works. The US Department of Homeland Security Cybersecurity and Infrastructure Agency (CISA) included banks and financial institutions as “essential service providers” to remain open during the COVID-19 pandemic. Banks offer critical services that are interwoven into social confidence that the “system” works; and that confidence is demonstrated through immediate access to paper bills. Banks – and cash – have a psychological advantage on this front.
- Trust is earned. As a result of the market volatility and increased trading activity, recent outages on digital platforms have done considerable reputational damage to this growing part of the financial system. Financial institutions building a new digital presence must consider not only how robust their systems are, but also have a clear plan for responding to cyberattacks and inevitable technical outages. Importantly, how will they communicate these issues – with staff, with customers, with media, and with regulators to start? Earning trust and customer loyalty takes consistent transparency through difficult times.
- Differentiation is not a given. The wave of fintech startups has cluttered the space with innovative functions that are just one step ahead of competitors. Blockbuster features such as investment account integration (now with commission-free trading) and loan access have quickly become ubiquitous – a telltale sign that you really can’t win with functionality alone. What will differentiate is your ability to articulate how your platform meets customer needs on a personal level.
The views expressed herein are those of the author(s) and not necessarily the views of FTI Consulting, Inc., its management, its subsidiaries, its affiliates, or its other professionals