Banks are the hare of the financial race but must keep pace with the ongoing digital revolution, as fintechs are capturing their market.
Cash is king, but for how long?
Cash is king, but for how long? As a new era of payments is here. Big changes are afoot in the financial ecosystem. Read about them here.
Once upon a time, there was a king called Cash. He was a powerful king, known across the length and breadth of the world by many different names. The king was believed to be invincible until of course, the king met with his match. Demonetisation and the ongoing pandemic have weakened the dominion of Cash. The newer and easier modes of payment are bringing Cash’s monopoly close to its demise.
Why is cash no longer the king?
The phrase “Cash is King” is a reflection of the long-held belief in the superiority of cash over other modes of payment. Cash is a tangible payment option and has been the preferred mode of payment for traders and businessmen for a long time. However, cash exchange presents some difficulties in cross border transactions or while making large payments. Here are a few reasons why cash is losing the royal status that it enjoyed for so long:
Cash is trusted by traditional buyers and sellers. To the payer and payee exchange of physical currency notes offers a transparent transaction however, cash exchange leaves no proof of transaction for future reference and hence is used for illicit activities like money laundering.
In 2016 Government of India declared a “war against Black Money” by banning the circulation of Rs500 and Rs1000 currency notes. Since then, the Govt has promoted digital payment and developed Unified Payment Interface (UPI) to allow seamless transaction across various service providers and financial institutions.
The Covid-19 pandemic forced central banks all around the world to adopt a bullish approach towards cashless payments. Digital methods enable contactless payments which was necessary to curb the spread of virus.
Hygienic contactless payment methods
The Covid-19 pandemic played a key factor in accelerating the growth of the Digital Payments industry. During pandemic lockdowns when brick and mortar stores have to remain closed, e-commerce became indispensable - along with it the need for online payments. With contactless options, people could do curb-side pickups, complete transactions without endangering health. Furthermore, even as the market slowly opened back up, businesses that adopted multiple contactless options were valued by their customers, for providing convenient, safe options, and for valuing their well-being.
Digital wallets are fast replacing cash. Credit Cards and Debit cards, invented almost half a century ago, eliminated the need to carry cash. However, the use of credit cards was restricted among the developed nations with higher per capita income. The advent of the new millennium saw the dawn of a new kind of technological advancement. Easy accessibility of the internet and smart devices is leading to another revolution in the payments industry. Services like PayPal, PayTM, M-Pesa are the leap forward in the payments industry.
According to a 2016 study, mobile money is particularly popular among low-income groups of African communities that make frequent small amount transactions which are not usually cost-effective for banks and credit card companies. Users in remote areas can also transfer money safely using mobile wallets. Shopkeepers, farmers, cab drivers and other daily service providers no longer need to carry cash or worry about returning exact change.
Banks ride the Digitization Train
High-speed data is now more affordable and easily accessible than ever. Banks leverage the Internet to create applications that enable a customer to do transactions through a website or mobile application from the comfort of their homes and offices. Senior citizens and differently-abled persons no longer need to stand in long lines to deposit money or encash cheques. Digital banking provides more inclusive ways of conducting business.
Cloud computing has made the sharing of hardware possible between different users without any hiccups in the end-user experience. This has brought down costs for financial firms while allowing higher scalability and performance. This benefit is transferred to the end-user in the form of low-cost, pay-per-use financial services.
Cross-border trade made simple
Digitization has accelerated globalization. It has revolutionized global trade and international transactions. Cross-border payments are often costly as it involves exchanging one currency for another and has to pass through separate national payments systems with different regulatory requirements.
New technologies allow small businesses to enter global trade avenues through collaborations and partnerships. New-age financial technology firms like Fable Payment Platform provide technology solutions to help businesses conduct smoother cross-border transactions.
Rise of Cryptocurrency
Cryptographic currency exchanges are carried out digitally without involving a bank or government. The rapid rise of cryptocurrencies is forcing governments and financial institutions to co-opt changes in their payment methods.
As of Feb 2022, more than 89 countries (representing over 90% of global GDP) are exploring a Central Bank Digital Currency (CBDC). The benefits of CBDC, according to International Monetary Fund, are that CBDCs are more cost-efficient than physical cash as they have lower transaction costs and that they can promote financial inclusion.
To know your country’s position in the CBDC development process, check out the CBDC Tracker.
The shift away from cash is both a consequence and a manifestation of other big changes afoot. The world of finance is on the verge of major disruption. In many small advanced economies, and in some developing economies, cash is playing a smaller role in retail transactions. Rapidly adopting new, inclusive ways of conducting transactions allows financial institutions to be part of this shift, leapfrog to the next generation of the financial landscape.
To know how you can leap onto the train of financial revolution consult a cross-border payment solutions expert,here.