The share of patrons making use of digital and cashless payments is looking to become the new normal in the ever-growing digital economy, but not all pockets of society will benefit from these advancements.
A steady uptick in mobile payments, e-wallets, tap-to-pay, and virtual debit and credit cards have now become a common payment method for millions globally. Slowly but surely, cash is losing its hold on economies around the world, as both consumers and vendors adopt digital efforts, minimizing the need for cash.
A Pew Research Center Survey found that nearly four-in-ten Americans, roughly 41% of respondents, said that none of their weekly purchases is paid using cash. This number has steadily grown over the years. In 2018, only 29% of patrons made use of digital payments, and in 2015 this figure was even lower at 24%.
Digital advances in the finance sector and the rapid-fire growth of fintech companies across the world have meant that several nations in the developed world, such as the United Kingdom, Sweden, the Netherlands, and China now represent the biggest share of economies looking to phase out the need for cash over the coming decades.
Despite the ongoing innovation, not all members of society will be able to enjoy the benefits of a cashless environment, and it can pose greater challenges for developing economies.
The Risks of Going Cashless
The pandemic upended the lives of millions of people, forcing them to change the way they interact and use digital technology. With this came a change in the way people pay for things and how they can make better use of digital banking and payment methods.
Although the introduction of these tech features has allowed for frictionless payments and further helped democratize the global economy, there is, however, a digital divide that could drive patrons and vendors further apart.
Disproportionate access to electronic payment methods
Digital and cashless payment methods are often only targeted toward a select portion of the economy, excluding several communities of national demographics.
With this, we could see how vulnerable populations including senior citizens, low and rural-income earners, immigrants and people with disabilities may have limited access or knowledge relating to digital payment methods.
A report published in 2019, found that one in five British citizens could potentially be left behind in the transition to digital-only payments. This comes at a crucial time for a nation heavily advocating for more advanced and digital economic activities for residents and businesses.
Other pockets of the community, including those with a lack or poor access to the internet or mobile connectivity could be further disadvantaged. Often those in lower income brackets tend to utilize cash more freely to pay for ordinary goods and services.
Then there’s the portion of the consumers within the economy that solely uses cash to make larger transactions, such as paying rent, selling investment properties or simply buying a car with cash. This is often not only more affordable but includes several tax-related advantages for patrons.
Some communities, such as those with disabilities, may not be completely comfortable making the transition from cash to digital, as a lack of customer service options and education could hinder their participation within the broader economy.
Certain types of means of payment now seem indispensable for full participation in socioeconomic activity, yet they’re not necessarily available to everyone. https://t.co/YY509Bcscv
— The Wire (@thewire_in) April 19, 2023
A lack of data privacy and cybersecurity risks
Perhaps one of the biggest challenges for banks and fintech companies is the rapid rise of cybersecurity threats relating to data and information leaks.
The United States experienced the highest percentage of data breaches of any country globally in 2021 with more than 212.4 million users being affected according to statistics by Surfshark. This is a steady upswing from the 174 million recorded only a year before.
Digital and online payments, whether it may be through websites, third-party sites, or using virtual cards, could pose a security risk for many patrons who are not well equipped to understand how to handle a security breach.
Even more, this poses bigger problems for banks and other financial institutions that primarily make use of digital features. Without the right cyber security infrastructure, maintaining the threat of bad actors could hinder their reputation and further place users at risk of having their data and private information stolen.
Cash still king as online petition gets Cairns council cashless payments overturned https://t.co/A27tgD537g
— ABC News (@abcnews) April 19, 2023
Additional bank charges
Unlike traditional banks, newer finance platforms, including fintech companies often charge users additional fees for using digital payment methods.
While we’ve seen a growing number of newcomers enter the market in recent years, each trying to out-compete one another with more affordable rates and fees, patrons will need to ensure they are not being charged more to make use of digital payments when conducting transactions.
Although it is worth mentioning that these additional fees are often a small percentage of transaction costs, elaborate use can lead to greater costs in the long term.
This not only makes it more expensive for some individuals to use virtual cards, e-wallets, and other forms of payment methods, but individuals coming from lower income levels might experience the most significant cost burden.
An increased digital footprint
Using digital payment options can increase a user's digital footprint, which is often directly linked to their financial information or transaction history.
Although, there is an upside to this as it enables patrons improved access to their transaction history and financial information.
However, in a time where data privacy and cyber security threats remain a big concern for consumers and businesses, as this could lead to an increase in malicious players having access to private information, but also the fact that banks and financial institutions can constantly monitor transaction history, there is an uneasy fear of information being harvested by big companies and third-party players.
Inability to control spending habits
Stubbornly high inflation against the backdrop of a broader economic decline has made it increasingly difficult for many consumers to adjust their spending habits over recent months.
One source indicated that many American households are struggling to keep up with the rise in the cost of living, with nearly three-quarters, roughly 72% of middle-income families now saying that their earnings have fallen behind the cost of living, which an increase from 68% in 2022.
Another source showed that nearly 65% of Americans had no recollection of how much they spend in a month, with many of them keeping little or no track of their spending.
Considering these alarming facts, it becomes ever so clear how digital payments, although a prolific innovation for the digital economy, can increase the risk of irresponsible spending habits for many consumers.
Often swiping or tapping a card is a lot easier than carrying cash, this allows consumers to spend more money than what they have, or don’t have at all. The result is an increase in mindless spending habits that can only tarnish a consumer's financial situation even further amid rising costs.
Costly for small businesses
Beyond consumers, small businesses can also be affected by a majority cashless society. High processing fees have resulted in nearly 33% of small-medium enterprises agreeing that monthly costs and processing fees are eating into their small profit margins.
In some instances, digital payment vendors can charge merchants anything between 2% and 5% per transaction. Depending on the vendor a business decides to work with, these fees can vary and can be higher for more advanced and well-known digital payment options.
Paying these fees would make sense in larger, and more financially equipped businesses that often see a high number of transactions, for smaller businesses this can become a costly endeavor that often leads to smaller profit margins and a decline in revenue.
Requires updated digital infrastructure
Small-medium businesses that are unable to adapt and integrate the appropriate digital infrastructure over time could fall behind in the digital transition.
Oftentimes, vendors would assist in the set-up and training of working with newer payment devices, including the software that is used to monitor transactions.
However, this comes at the expense of the business and would require businesses to make upfront payments to receive the proper digital infrastructure. Although these efforts would mean that businesses often increase their pool of potential customers, it does come at the risk of being left behind as cash becomes increasingly irrelevant.
System vulnerability
Another risk that businesses and consumers will need to navigate is potential system vulnerability, which can occur at any given time if the infrastructure is not properly maintained or managed.
Although today’s payment systems have become increasingly complex, and seemingly reliable, there are those instances where unforeseen circumstances may cause a system to go offline, malfunction, or become a victim to potential cyber threats.
These instances are often far and wide between, but the possibility thereof remains a constant fear for many vendors that provide digital payment solutions to merchants and consumers.
While every technical problem can be resolved, this requires the necessary resources to resolve issues as quickly and efficiently as possible.
In some instances, where technical problems are undetected, bigger problems may evolve over the long term, not only putting the system at risk but also the entities making use of these systems.
Access to the financial ecosystem
While cash still plays a significant role in the modern-day economy, despite seeing a steady increase in the utilization of online and virtual payment gateways, several known risks can have an impact on several pockets of consumers and businesses.
Although these risks can be further mitigated by providing sufficient solutions, it does come at a time when digital adoption is rapidly outpacing the human ability to keep up.
As digital finance trends continue to emerge, merchants will need to keep their strategies aligned with how fast patrons and vendors can adapt.
Although digital payment efforts remain a frictionless opportunity that creates borderless economic movement and a more democratized network, those less likely to benefit from a cashless society will need to be included in strategies that will not hinder their access to the financial ecosystem.
