The future of digital payments - has COVID-19 become a weapon in the war on cash?

COVID-19 has created a fear of touching cash and forced a greater shift towards digital payment methods, a development that could be a silver lining to the crisis for a small number of technology providers.

So what are the consequences for a society in which those companies could now find themselves in powerful, quasi-monopolistic positions, while a centuries-old medium of fair exchange, cash, is regarded with suspicion?

In short, if money is a social convention, what happens if that social convention changes?

The World Health Organization (WHO) has been partly blamed in some quarters for the fear of touching hard cash, claims Natalie Ceeney, CBE, Chair of the UK’s Access to Cash Review and of Innovate Finance. Yet this isn’t strictly true. Early in the pandemic, it was reported by some newspapers that the WHO had said that the virus can be spread via coins and notes. But in March, the organization issued a clarification:

WHO did NOT say banknotes would transmit COVID-19, nor have we issued any warnings or statements about this. We were asked if we thought banknotes could transmit COVID-19 and we said you should wash your hands after handling money, especially if handling or eating food.

In other words, good hygiene practice is important, but cash is no more intrinsically dangerous than a parcel, a door handle, or an item in a supermarket. Even so, months of lockdown and closed shops, pubs, restaurants, and cafes have pushed people towards using digital payments online and contactless payments in physical stores.

(This shift also prompted uncharacteristic speed in decision-making. In the UK, the contactless limit was raised to £45 at the start of April – a move waved through in just a fortnight by payments providers and regulators, whereas previous negotiations took many years.)

Left behinds

Of course, the supposed benefits of this come with the assumption that consumers aren’t unbanked or digitally excluded, both inherently significant risks for any society that is moving towards being cashless.

According to 2018 figures from the UK Office of National Statistics figures, 5.3 million people – roughly 10% of the adult population in Britain  – either lacked internet access or did not use online services, while Pew Research Center comes up with the same percentage for the US.

Meanwhile, the British government’s Financial Inclusion Report 2018-19 revealed that 1.23 million adults remain unbanked, while 14.1 million US adults have the same unfortunate status, according to the Federal Deposit Insurance Corporation.

Cash remains king for those people and for anyone lacking in digital skills, or living in areas of poor network coverage or scant local amenities – problems that may be accentuated if people are forced out of rented accommodation and onto the street.

Yet the global shift towards digital payments and fulfilment clearly stands to benefit providers such as MasterCard and Visa; a fact acknowledged by Sonia Brown, Executive Director of UK Government Engagement and Regulatory Affairs at Visa:

We've all been observing the marked transition from cash towards digital payments in recent weeks, which in many ways is great to see. But we need to be more mindful than ever about what consumers care about.

So what do they care about? Brown says of recent consumer research:

It was overwhelmingly clear that three factors are at the heart of what drives consumer behaviour: security, convenience, and inclusivity. The vast majority of consumers identified the prevention of fraud as their top priority….The COVID-19 pandemic has only placed an even sharper focus on these priorities.

Arguing that Visa works hard not to take its position for granted, she adds, perhaps with more than a hint of grandstanding:

We are aggressively monitoring activity using global data sets to analyse and authorise transactions in milliseconds. Security and reliability have always been the bedrock of what we do. To ensure that we can operate without any interruption, Visa’s infrastructure in the UK can route to multiple data centres around the world with instant failover capabilities, which contribute to best-in-class operational resilience. Visa deploys some of the industry's most sophisticated cyber-security tools.

War on cash?

Fair comment or an organization too pleased with itself? Mark Falcon is an anti-trust economist, whose organization Zephyre is co-leading a review of UK payment systems. He says

Unlike lending, savings, or insurance, payments are driven by network effects. A two-sided market, like a phone call: every payment always has two customers. This means that the value of the payment method depends on how widely it can be used by how many others. This makes payments essentially a network utility, just like telecoms and other regulated utilities. But this often gets forgotten.

The economics of payment systems are very different from those of other financial services, and the network effect means that payment systems have a tendency towards a natural monopoly or at best, indirect competition. This is why the UK government established the Payment Systems Regulator [PSR] as a utility regulator. [In establishing the PSR] the government highlighted the problem of anti-competitive and inefficient wholesale pricing and payments markets. Again, this has the analog of access pricing in telecoms networks, such as wholesale pricing in broadband, but the importance of payments gets forgotten.

As of last week, Visa and MasterCard are now the largest financial services firms in the world. Larger each than any bank, behind only the largest tech giants, with a combined market capitalisation of a billion dollars, just short of Google. That's what happens to unregulated platform businesses, they make very large profits.

In Falcon’s view, there is a war on cash and regulators have, to date, failed to intervene sufficiently in the market – conceivably due to the need to keep the economy ticking over in the lockdown:

One particular concern is the current scheme’s war on cash. This is effectively a war on the most vulnerable consumers and businesses, especially at the current time with the impact of the pandemic. 

The Access to Cash review rightly called for a guarantee on access to cash and an obligation on banks to provide suitable cash access to their customers. But, in my view, the Access to Cash panel was wrong to say that UK regulators have no legal powers to require banks to give their customers appropriate access to cash, and shops the ability to deposit cash. This is wrong because Parliament gave the PSR express powers.

It’s not right to say that the demise of cash is purely a matter of customer demand, that customers simply choose to use it less. It's also a matter of supply. The industry has a strong incentive to accelerate the demise of cash.”

My take

These issues can only be accentuated by moves in some parts of the world towards establishing national digital currencies – and by some companies, such as Facebook with its Libra concept, to establish stablecoins that could become either proxy digital dollars or mediums of global transaction linked to invisible networks of advertising partners.

Professor Alistair Milne, Professor of Financial Economics at Loughborough University, acknowledged that there is a competition problem in the market, quoting McKinsey figures which suggested that global payments were worth $1.9 trillion in 2018: 2.2% of global GDP.

As Milne explains it, with a conventional settlement, there is a transfer of reserves, whereas in what he called “atomic settlement”, the transfer of reserves is the payment. This will need far greater attention in the UK’s New Payments Architecture (NPA).

With many of us now relying on Visa, MasterCard, and other platforms, such as PayPal, the growing power of a handful of companies in allowing us to continue buying goods and services must be examined anew, once the crisis has passed.

Until then – as with many other areas of our lives – we must be cautious about some elements of the lockdown becoming permanently embedded in our behavior, without consideration of the consequences.