Cash is King: not anymore (2024)

Digital payments are soaring but a cashless society is not quite imminent

Cash, long the king for payments, is falling off its throne as consumers worldwide gravitate to theconvenience, ease and safety of digital payments. We are steadily progressing towards becoming a cashless society.

Although technologies enabling digital payments have been around for some years, the coronavirus crisis was the tipping point in accelerating their adoptionas businesses and consumers moved online and exchange of cash becameincreasingly difficult.

“The pandemic has led to an increased use of digital payments,” the World Bank noted in a research paper published in June 2022. “Two-thirds of adults worldwide now make or receive a digital payment, with the share in developing economies growing from 35% in 2014 to 57% in 2021.”

The Global Payments Report released in May 2023 by technology solution provider FIS surveyed 40 markets across five regions and found that the global e-commerce market reached US$6 trillion in 2022, accounting for 11% of global consumer spending. FIS forecasts the market to grow at a compound annual rate of 9% to $8.5 trillion in 2026.

While point-of-sales transactions stillaccounted for 89% of consumer spendingor over $48 trillion, the pace of growth is expected to slow to 6% to reach $61trillion in 2026. Cash was used for around$7.7 trillion or 16% of these sales in 2022 and the share is forecast to drop to less than 10% to around $6 trillion.

The Asia Pacific region has emerged as the largest e-commerce market globally. According to Statista, revenues fromconsumer e-commerce in the regionamounted to $1.7 trillion in 2022, representing 31.6% of the world’s total.

China led globally with $1.2 trillion in revenue, surpassing the US, the second-largest market, by $425 billion. More than 27% of China’s total retail sales were transacted online. Home-grown e-commerce giants such as Alibaba,Pinduoduo and JD.com have propelled China’s dominance.

Four other Asian countries – Japan,South Korea, India and Indonesia –ranked among the global top ten.

Japan, the second largest e-commerce market in Asia Pacific and the third largest globally, saw online shopping accounting for just about 9% of total consumer sales.

Consumers in India, Indonesia,Malaysia, the Philippines and Vietnam are all embracing online shopping rapidly. FIS forecasts the e-commerce markets in these countries to grow at compound annual rates ranging from 15% to 18% from 2022 to 2026.

Digital wallets

Use of digital wallets is soaring in both e-commerce and at points of sales. They are easy to use, providing the convenience of conducting financial transactions through an app running on an internet-connected device. Nearly half,or $2.9 billion, of global e-commercetransactions in 2022 were done via digital wallets, and one-third or $15.1 billion at points of sales.

In the Asia Pacific region, digital wallets have made significant inroads over the past five years, with their usage doubling to account for 69% of total online spending in 2022, and surging six-fold to settle 47% of point-of-sales transactions. They have become the preferred mode of e-commerce payments in China, India, Indonesia, the Philippines and Vietnam.

Although global wallet leaders such as PayPal, Apple Pay, Google Pay, Alipay and WeChat Pay operate throughout the region, local wallets such as GrabPay in Singapore, GoPay in Indonesia, GCash in the Philippines and MoMo in Vietnam lead in their respective markets.

Meanwhile, the use of cash in the region is projected to decline from 15% in 2021 to 8% in 2026. Mature economies such as Australia, China, HongKong, New Zealand and South Korea are expected to see cash usage drop below 10% of the value of point-of-sales transactions by 2026.

Credit cards remain important fore-commerce and point-of-sales transactions globally, totalling $13 trillion in 2022. However, their usage is projected to decline by 4% and 2%, respectively, by 2026. Nevertheless, they are a popular means to fund digital wallets, ranking third globally (22%) after bank accounts (34%) and debit cards (27%).

Payment platforms

Apart from shifting consumer habits, real-time payment platforms have also bolstered the growth of digital payments. These platforms have reshaped legacy payment value chains in various countries, enabling payments from individuals to businesses at lower costs, with immediate availability of funds. Globalaccount-to-account transaction valuereached $525 billion in 2022 or 9% of total e-commerce, and is projected to grow at a compound annual rate of 13% to $940 billion by 2026.

Asia Pacific is also the global leader in real-time payments. India’s Unified Payments Interface (UPI) platform is a prime example. Launched in 2016, it allows users to transfer money instantly to any linked bank account or mobile number, and is also seamlessly integrated with digital wallets such asGoogle Pay, Paytm and PhonePe.

The platform is playing a pivotal role in supporting India’s digitalisation initiatives, reducing cash transactions from 90% of total volume of money transfers in 2017 to 60% in 2021. Cebr Economic Research has estimated that UPI saved $12.6 billion in costs and added $16.4 billion to the Indian economy in 2021.

Asian countries are also interlinking their real-time payment platforms. For example, UPI, Malaysia’s DuitNow and Thailand’s PromptPay are linked withSingapore’s PayNow. Indonesia, Malaysiaand Thailand have also linked their QR code payment systems. These initiatives enable faster and cheaper payments for cross-border commerce.

Digital payments also play a significant role in promoting financial inclusion.

China has successfully utilised digital financial technologies to improve access to its formal financial system, even in rural areas. WeChat Pay and Alipay have emerged as the primary digital payment tools in the country within just a decade. And the rise of shopping platforms like Taobao and JD.com allows individuals to easily start businesses in the online marketplace, ship products, and make or receive real-time payments for goods and services.

As of 2021, a remarkable 89% of adultsin China had access to at least one bank account, with 82% using their accounts to make digital payments. By contrast, only 59% of adults in other East Asian countries had bank accounts, and just 23% made digital payments.

According to the World Bank, 36% of adults in developing economies worldwide now receive wages and government or commercial payments into a bank account, a catalyst for their engagement with the formal financial system. Some 83% use payments received into their accounts digitally to then make other digital payments, two-thirds use it for managing expenses, and around 40% use it for savings. This fosters further growth of the financial ecosystem.

Issues

The rise of digital payments comes with its own issues.

From a government perspective, digital payments leave a traceable trail, making it easier to track illicit activities than cash transactions. But individuals may perceive this as a threat to their privacy.

There are also concerns regarding the security of personal data held by banks, credit card companies and e-wallet providers. Many countries have not kept pace with legislation to address issues arising from these new technologies.

While cash has to be physically stored and carried around for payments and is susceptible to losses and crime, digital payments can be protected through encryption and authentication measures to reduce the likelihood of fraud. But they are not immune to risk.

Any non-cash payment instrumentother than central bank digital currencies is subject to operational risk, market risk, and credit risk associated with the market institutions involved.

Cybercrimes continue to rise. Figures from Statista show that about 40% of internet users worldwide experiencedcybercrime in 2022, with the average costof a data breach amounting to around $4.35 million. The US Internet Crime Complaint Centre recorded over $10 billion of losses due to cybercrime in 2022, a 45% jump from $6.9 billion in 2021.

Rapid transition to a cashless society can also exacerbate the social divide for some socio-demographic groups, particularly those lacking broadband and mobile connectivity or computer literacy.

Governments have to approach the shift to a cashless society with caution, taking their own unique circ*mstances into consideration. Sweden has reduced its usage of cash to only 2% and is set to go completely cashless soon. On the other hand, the US has proposed the Payment Choice Act to mandate retailers to accept cash, ensuring the inclusion of low-income and unbanked consumers.

Ultimately, digital payments should be seen as complementary to cash instead of a substitute.

*This article was published in Asia Asset Management's December 2023 magazine titled "Cash loses lustre".