Frédéric Dupraz

Frédéric Dupraz

Thematics Asset Management

Matthieu Rolin

Matthieu Rolin

Thematics Asset Management

Cash may still be king in 2023, but in the real world paper notes are becoming something of an endangered species. The slow creep away from cash accelerated during the Covid-19 crisis, as merchants and shoppers alike opted for the relative safety of credit and debit cards. And shockingly, cash accounted for just 12.4% of all payments in the in the UK in 2020, well down from some 40.3% in 2005.1

In some areas of the globe, in fact, the move to cashless is even more advanced, with Asia leading the race. In 2016, for instance, the Indian government advocated for a cashless society during its demonetisation drive of INR 500 and INR 1,000 banknotes.2

Already 40% of all payments in India are digital, a staggering number considering 200 million people still remain unbanked in the South Asian state. The total number of digital payments – now around $3 trillion a year – is set to triple by 2030 too.3

Other countries like South Korea and Thailand have also become huge proponents of digital payments, and globally some three quarters of adults now have a bank or mobile money account.4

Meanwhile in China, whose advanced payment landscape is dominated by Alibaba’s Alipay and Tencent’s WeChat Pay, it’s become increasingly difficult to pay for a cab, buy groceries or settle basic payments without a mobile phone wallet.

The West isn’t there yet. But experts believe it’s only a matter of time before they’re hot on the heels of their Asian counterparts.5
Even if society never becomes entirely cashless, the increasing use of cards and digital payments has major implications – presenting risks and opportunities for investors and society at large.

For one, the rapid shift toward digital means security will take on an even greater importance, with a growing threat of fraud and ID theft. It’s no surprise that digital payments fraud surged 35% during the pandemic, as more and more people embraced going cashless.6 Such fraud, meanwhile, has also become increasingly sophisticated, with advanced phishing and identity schemes now commonplace.

Security companies are scrambling to keep up. Yet this also presents an opportunity: the global payment security market is expected to reach $54.1 billion by 2028, with an annual growth rate of over 16.5%.7 As digital payments grow, new data protection and fraud prevention methods are sorely needed, and those that can guarantee our digital security look set to be some of the biggest winners of the revolution.

For disruptive payment providers, however, it hasn’t been all smooth sailing. Although the opportunity is huge, with the digital payment industry expanding at some 20.5% a year,8 disruptive payment companies have struggled of late. The huge slowdown in e-commerce sales, which remains the biggest market for digital payment companies, certainly hasn’t helped matters.

After huge stock price run-ups, the likes of PayPal and Block (formerly Square) have seen their share prices tumble, while incumbents like Visa and Mastercard have fared much better – suggesting, perhaps, that disruption is still some way off.
As the world goes increasingly cashless, it’s also likely that we’ll be using our cards much less. Nearly one-third of Americans use mobile wallets, rather than cards, to make payments. In China, meanwhile, a staggering 70% of people use their wallets to meet their day-to-day expenses.

For now, at least, most wallet applications such as Google or Apple Pay are simply linked to an existing credit card or bank account – meaning there’s little risk of them completely replacing debit or credit cards altogether. And consumers still need access to credit to pay for certain items at certain times – or to enjoy the benefits of a better credit score and air-mile points.

But in recent years there’s also been a noticeable shift from ‘card holder’ to ‘account holder’, with online payment specialists like PayPal adding traditional bricks and mortar options for their clients. Such wallets and apps are getting increasingly sophisticated as well.

Like the so-called super apps in Asia, the new PayPal app features direct deposit, bill pay, peer-to-peer payments and even crypto investing. It has even announced a partnership with Synchrony Bank for a high-yield savings account, dubbed PayPal saving.

And when it comes to credit, experts point to the rapid rise of so-called Buy Now, Pay Later (BNPL) businesses like Klarna, which are hoping to take market share from traditional credit card companies.

We are still in the early stages of this revolution, and it remains to be seen how successful the likes of PayPal and Klarna will be – particularly since many business models of the disruptive digital payment or BNPL have yet to be fully tested by a recession or major downturn.

Over the long-term, however, it’s possible that these new technologies could pose a major threat to oligopoly incumbents like Visa, Mastercard and American Express, which have been forced to adapt and innovate by creating their own digital wallets.
There could yet be another twist as well: central banks are throwing their hat into the ring by developing so-called central bank digital currencies, or CBDCs. Not surprisingly, given its advanced digital payments network, The People’s Bank of China (PboC) is leading the way with its digital Yuan. But most central banks, be it in Jamaica, Sweden, or the EU, are working on technologies to power their own CBDCs in the future.

That opens up a raft of possibilities. A CBDC could be attached to a card or wallet for instance, which becomes especially interesting with the rise of blockchain technology.

“As we increasingly move toward a cashless society, the idea of central banks taking advantage of cryptocurrency becomes far more plausible,” wrote American economist, Campbell R. Harvey. “While non-government controlled cryptocurrencies will likely survive [gold is not centrally controlled, either] the big idea is blockchain technology. This innovation has applications that will likely soon affect every company and consumer.9

It would also have far-reaching implications. Not only could governments virtually outlaw cash if they chose to – to be replaced by CBDCs – but transactions, including those across borders, could be almost instantaneous, boosting financial inclusion as well. And they could be tracked in real-time.

“A key difference with the CBDC is that the central bank would have absolute control on the rules and regulations that would determine the use of that liability, and the technology to enforce that. This makes a huge difference to what cash is”, explained the Bank of International Settlements (BIS) general manager, Augustin Carstens.10

In what would be a huge blow to organised crime, which relies on cash and cryptocurrency to flout the law, such views have also sparked fierce criticism from privacy advocates.

Yet despite these concerns, central banks seem determined to plough ahead with their digital money plans, and they are likely to become major players in any new payment ecosystem that it spawns. Cash may not be a historical artifact yet, but its days are looking numbered.

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This material is provided for informational purposes only and should not be construed as investment advice. Views expressed in this article as of the date indicated are subject to change and there can be no assurance that developments will transpire as may be forecasted in this article.