29 March 2021

Will we go cashless after Covid?

By Kiara Taylor

There’s an old saying that ‘cash is king’. While the expression originally dealt with business cash flows, it also reflects traditional consumer sentiment. For many reasons, from distrust of financial systems to limited access to digital systems, many households have continued to put their faith in folding money well into the 21st century.

There’s little doubt, however, that cash’s power has been slipping, to the point that many now wonder if we are on the verge of a cashless economy. Are we? Not quite yet, but the transition is certainly underway, and it’s only been accelerated by the pandemic.

With competing digital payment services like PayPal and Venmo commonplace and credit cards ubiquitous, it is perhaps surprising just how prevalent cash remains.

Understandably, physical money remains the predominant payment method in emerging markets, given the lack of technology infrastructure and access to high-speed internet in many parts of the world. According to a 2020 McKinsey report on global payment transactions, cash was expected to account for 89% of transactions in India last year, 96% in Indonesia, 86% in Mexico, and even 41% in high-tech China. While these are quite high numbers, they also mark a big change from 2010, when cash payments accounted for all or nearly all transactions in each of these countries.

But even well-established markets continue to have high levels of cash usage, although it has declined significantly in the past decade:

  • United States: 28% of transactions in 2020, down from 51% in 2010
  • United Kingdom: 23% in 2020, down from 55% in 2010
  • Korea: 34% in 2020, down from 66% in 2010

Sweden (9%, down from 56%) and the Netherlands (14%, down from 52%) have made the most significant strides towards cashless economies in the last decade. The world is clearly trending away from cash as a preferred payment option, but there is still a long way to go.

It is not just consumers who rely on cash. Many businesses (small businesses and family businesses in particular) prefer cash transactions, for both legitimate and more questionable reasons. The advantages are clear enough: cash is available immediately (an important consideration given that 64% of businesses report experiencing late payment problems), and doesn’t come with the fees often associated with digital payments. On the less savoury side of the equation, it is easier to avoid disclosure of cash transactions and the associated taxes.

Cashless in the Covid era

The Covid crisis has given consumers and businesses even more incentives to move away from cash. 

During the lockdowns, online purchasing soared quickly, with an obvious knock-on effect on the number of cash transactions. Some creative e-commerce merchants developed a cash-based invoice workaround, but it wasn’t useful during a lockdown because it required the purchaser to visit a brick-and-mortar store for payment.

Once the lockdowns lifted and brick-and-mortar businesses began to reopen, cash again became a viable payment option. But soon reports emerged about the possibility of contracting Covid from cash someone else had touched. Governments and the World Health Organization also weighed in, recommending that businesses prioritise cashless or contactless payment where possible. Those warnings gave Covid-conscious consumers another reason to switch to digital wherever possible – even if the actual risk of transmission through cash was never actually seen as a significant vector for the virus.

To encourage cashless payments, many EU countries raised the maximum purchase limit for contactless transactions substantially. In the US, proposed legislation sought to make cashless transactions safer by eliminating any contact between the consumer and the payment terminal during a transaction.

Some businesses decided to take the opportunity to become entirely cashless. In the United Kingdom, for example, there was an explosion of cashless businesses; they increased from about 8% of all businesses before the crisis to 31% at the height of the crisis.

Covid also forced banks to revise how they conducted business. Many closed branches, and those that remained open were only accessible by appointment. With in-branch banking becoming ever-more inconvenient, the shift towards online and telephone banking accelerated.

Cryptocurrencies are also an increasingly important part of the cashless economy. At the height of the Covid panic, Bitcoin (BTC) was at its lowest valuation in quite some time. But over the course of 2020, its price increased to almost unthinkable heights, reaching a $1tn market capitalisation in early 2021. With cryptocurrency investment at an all-time high, cryptocurrency payment applications for both individuals and businesses achieved newfound fame. And with companies like Tesla announcing that they would begin accepting cryptocurrency payments, this trend is likely to continue.

So is cash obsolete?

With all the advantages of cashless payment systems, why has cash held on this long? Trust, or actually distrust, is a decisive factor. Many people simply do not trust financial institutions, whether it’s banks, trading platforms, or investment houses. 

And who can blame them? After the subprime mortgage crisis and the resulting bailout in the late 2000s or this year’s Robinhood online trading investment scandal, consumers certainly have good reason to be wary. Many people are unwilling to move completely digital, putting total control in financial institutions. They would rather have something they can touch.

Consumers also have concerns about the infrastructure underpinning the digital economy. Service outages and data breaches have been all too frequent occurrences for many, making them wary of how they would survive if their money was all digital. And recent events have compounded this lack of trust by injecting malicious state actors and other nefarious cyber activity into the mix.

Access is another reason cash remains a strong contender. At the moment, less than half of the world’s population owns a smartphone, and just over half have internet access. Technology is not the only access barrier. Much of the world’s population is unbanked; that is, they do not have adequate access to standard banking services such as transactional accounts. As long as these hurdles remain, cash will have a key role.

So while the allure of cash has certainly dimmed, it has not entirely faded. And while people may have used cash less frequently for purchases during the crisis, some have taken to keeping their money where they can see it, withdrawing large amounts from their bank accounts to have on hand.

People have also increased their savings out of concerns regarding unemployment and economic downturns. Not wanting to spend cash is not the same as not wanting to have it. So don’t count cash out. It may no longer be king, but it remains payment royalty.

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Kiara Taylor is a financial journalist.

Columns are the author's own opinion and do not necessarily reflect the views of CapX.