Across the globe, rapid technological change is transforming the world in which we live. A major challenge for consumers, businesses, and governments alike is the significant innovation taking place in the payment’s ecosystem. As consumers swap cash for cards, the usage of contactless payment devices, including smartphones and smartwatches, proliferates. In the future, it is possible that emerging technologies such as Blockchain, Big Data, and Artificial Intelligence will be fully integrated into the industry. Such a shift offers perceived and subjective benefits for consumers, including greater convenience and security, while enabling financial institutions to profit. But for all the convenience that digital banking and digital payments bring, does the transition to a cashless world have major ramifications for the most underserved segments of society?
As financial institutions all over the world shut down cash machines and close physical branches, it is clear that they are trying to push consumers towards digital payments and digital banking infrastructure. Just as Google wants consumers to access and navigate the broader internet via its privately controlled search portal, it can be argued that financial institutions want consumers to access and navigate the broader economy through their systems. What must be questioned, however, is the authenticity and motivation behind this fundamental change in distribution channels. Are financial institutions seeking to maximize profit through efficient use of technology, or are they responding to changing consumer preferences in an increasingly digital age?
Are We Being Nudged?
In behavioral economics, the concept of ‘nudging’ refers to the process of a powerful institution encouraging consumers to choose a certain option by making the alternatives difficult to choose. Can it be argued that financial institutions are nudging us towards digital banking infrastructure? As financial institutions increasingly limit access to physical money, while simultaneously promoting the use of online channels, do consumers shift their consumption patterns in light of the enhanced utility provided by digitalization, or as a result of the increasing scarcity of physical banking infrastructure that makes traditional banking procedures increasingly more inconvenient?
The concept of interpellation by Louis Althusser argues that human behavior and consumption patterns are a manifestation of a multitude of ideologies that an individual is exposed to and that humans ‘accept’ these ideologies because they are ‘encouraged’ to do so. Presuming that the general consensus within society is that digital banking is more convenient and that cash is simply too inconvenient, one cannot discount the fact that this may be the case simply because financial institutions advertise cash in a particular way, with the outcome being a reverse-engineered belief within society. Twenty years ago, the idea of cash being too inconvenient would have been dismissed immediately. Therefore, is digital banking actually more beneficial?
Digital banking systems may be ‘convenient,’ but there is little doubt that they often fail, with the consequences of a failure being significant. On June 1, 2018, shoppers in the United Kingdom were left stranded, unable to make purchases with their Visa cards. The outage, which lasted for several hours, caused significant disruption and exemplified the problems of monopolized reliance on digital infrastructure. In another example, TSB, a leading British retail and commercial bank, recently faced scrutiny for its mishandling of the migration of its digital infrastructure, that left thousands of customers unable to access their online and mobile banking accounts for up to five days. According to the Financial Conduct Authority, financial institutions in the United Kingdom have reported a 138 percent increase in technology outages and an 18 percent increase in “cyber incidents” this year to date.
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Cash Does Not Crash
A cashless society brings dangers. Those without digital banking services or unable to access credit will find themselves further marginalized; disenfranchised from the cash infrastructure that previously supported them. Is it, therefore, possible that gentrification through cash exclusion ultimately drives out the bottom of the pyramid, minorities, or people with poor credit scores? And for those that are able to participate, do current financial products and institutions account for the poorly understood psychological implications regarding self-control that are inevitable when intangible money is so easily accessible? Cash does not crash. Its existence is not reliant on computer infrastructure. Cash is less able to be ‘controlled’ by financial institutions, and it provides more anonymity to consumers. Is digital infrastructure really more convenient and secure?
As transactions move online, the amount of data available about one’s finances and purchasing habits increases. Does the current digital infrastructure have appropriate safeguards to protect against data breaches? Using cold storage for cryptocurrencies as an example, is it not paradoxical that the safest form of digital currency is the digital currency whose existence is offline? Does the current digital infrastructure balance privacy with commercial and public concerns? Does current legislation appropriately allocate liability between individuals, financial institutions, and governments?
In recent years, the world has seen an alignment between governments and financial institutions. Governments often argue the negative elements of cash – associating it with crime and tax evasion – and while this is not incorrect, they fail to acknowledge the negative implications of digital payments. Ultimately, in a world where the needs of market segments differ significantly, and each distribution channel from a banking perspective offers numerous advantages and disadvantages, is it wise to shift towards cashless economies without fully addressing the implications and ensuring inclusion for all parties within the economy?
Ultimately, it is inevitable that the nature of economies and banking within those economies will shift over time, and that the right innovation is essential in order to ensure progression within the industry. However, it is imperative that change is made sensibly, in order to avoid irreversible damage caused by biased and irresponsible technological advancement.
Nir Netzer is the Founding Partner of Equitech Financial Consulting and Co-Founder of the FinTech-Aviv community.