The world is transitioning toward a cashless society. In the US, the number of people using peer-to-peer payment solutions by Square and PayPal is rising. At the same time, companies offering Buy Now Pay Later (BNPL) solutions have become darlings of investors.
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Covid-19 and the transition to a cashless society
The Covid-19 has caused immeasurable damage to the global economy. At the same time, the pandemic has helped to accelerate some sectors of the global economy. One of the most impacted sectors is finance.
While the digital migration of the financial sector was happening before the coronavirus pandemic, the instability in financial markets helped to accelerate it. This happened since many countries like the United States and Europe implemented strict lockdowns. Banks were closed and therefore people were forced to use online banking. As a result, they turned to digital platforms to transact and send money.
There are many ways to validate this. For example, a quick look at financial earnings from leading companies in the money transfer industry showed that their revenue increased by double digits. For example, the number of people using PayPal increased from more than 305 million in 2019 to more than 377 million in 2020. The 72 million users it added in 2020 was substantially higher than the 38 million it added in the previous session.
At the same time, the revenues of companies like Western Union and MoneyGram showed that digital was a core part of their business. While Western Union’s revenue declined in 2020, its digital revenue rose by 38%. Similarly, we have seen an increase in comparison platforms helping people find the best money transfer services.
Central Banks and cashless payments
Another important aspect in this digital transaction is that Central Banks have been influenced by the success of cryptocurrencies. Some of the most prominent ones are now developing their Central Bank Digital Currencies (CBDC). The most advanced one is China, which is currently testing its CBDC product.
In July this year, the European Central Bank (ECB) governance council approved a plan to launch the digital euro. Similarly, the Riksbank in Sweden is also at the development stage of developing a digital krona. In the US, the Fed is also considering moving to a digital dollar.
It is still too early to determine whether these CBDCs will become successful. However, what is clear is that the era of physical cash is slowly coming to an end. These days, many retailers receive most of their payments using debit and credit cards. Similarly, many airlines accept bookings using digital payments. Other industries have followed suit.
Pros and cons of a cashless society
The overall transition from cash to digital cash has several pros and cons. First, it is relatively cheaper for companies. Historically, many firms like retailers and banks pay a substantial amount of money to cash transit firms. Second, it is a good thing for the environment since fewer resources are needed. Third, many digital methods of sending money are relatively cheaper than carrying physical cash. It can also help people boost their credit scores and track their payments.
The top cons for a cashless society is that the sector has risks such as cybercrime, it can encourage overspending, and it is threatening retailers.
The world is transitioning from physical cash to a cashless society. Some countries like Sweden have already shifted almost completely to these systems. Other places like Hong Kong and Kenya have seen an uptick in digital payments. This trend will likely continue in the coming years.