The idea of a cashless society certainly isn’t new, but recent developments including COVID-19 and the Russia/Ukraine conflict have forced rapid innovation in this area. This against a backdrop of traditional bricks-and-mortar banks investing significantly in digital transformation, with many closing physical branches and upgrading their online offering as they look to repel growing threats from agile fintechs.
In the UK, more than a quarter of adults now have an account with a digital-only bank and an estimated 93% of the population will use some form of online banking this year. According to Barclays, 88.6% of eligible payments made in 2020 were contactless. It seems, for the UK at least, cash has had its day.
Not so, says FCA Clea Evagorou, who advises her clients on the regulatory implications of digital technology in her role as Risk Advisory Leader at Deloitte Cyprus. Speaking at a recent Member Spotlight event, she warned that, despite rapid digital innovations, many changes must still be made before a cashless society can become a reality.
“As more initiatives are pushed towards digitalisation, there is a thought in regulators’ minds about what that means for the disadvantaged,” she says. “Just because most people now have a mobile phone, it doesn’t mean they can use it to access money.”
While around 90% of adults living in high-income countries have bank accounts, that falls to around 45% in medium-income countries and just over 20% in low-income countries, according to the World Bank Global Findex database.
“Countries wishing to shift to cashless societies should ensure that all segments of the population have access to electronic payment means and are educated sufficiently to be able to use them,” Evagorou says. “To achieve this, a combination of regulatory and industry initiatives around financial literacy and managing branch and ATM closures are imperative.”
Moving to digital currencies
With the concerning lack of regulation around cryptocurrencies, a key development to move money safely into the digital space would be to introduce state-issued digital currencies. There is already talk of a digital Euro, which would live alongside cash, and consultations on this initiative are due to conclude in 2023. “Currently most countries can only issue paper notes and not digital currency, so that needs to be addressed. Such a shift would create more stability as we see more and more digital payments being made,” she says.
Moving money internally is one thing, but to support fluid transactions between countries there is much work to be done on aligning regulation. “At the very least, regulators would need to intensify their coordination efforts to make sure the supervision of digital transactions is not hindered by regulatory deviations between jurisdictions.”
Initiatives such as the Capital Markets Union could help ease the transition within the EU, but managing transactions between disparate countries remains a significant challenge.
On the idea of a global currency, Evagorou commented: “I think it would be difficult to move to a global currency. There are legal implications and there still needs to be a way to measure value. We’d need to start with a more gradual shift.”
“Shifting to a cashless society would require significant technological investments from all stakeholders in the ecosystem: banks, payment institutions and the regulators themselves. The current infrastructure is not geared towards such a large scale of transactions, nor is it equipped to support real time payments,” she says.
As well as the large financial investment required, she also called out the need for increased online security and operational resilience, as the threat of cybercrime grows daily.
Business model changes
Banks and other financial institutions currently make money by applying fees to customer transactions. In a cashless society there would be no cash payments and, therefore, these charges would no longer exist. As a result, the sector as a whole would need to relook at its business model.
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