By Alex Vavilov, Chief Commercial Officer for Stenn International
The concept of a cashless society has been circulating for years but it’s only since the global pandemic that the push for digitisation has succeeded. In the UK, cash transactions dropped 35 percent during 2020, with just one in six payments made using notes or coins.
However, this shift in financial services has threatened to leave poorer nations behind. With the majority of their businesses and civilians continuing to rely on cash, there are growing fears about the financial exclusion of these countries.
In this article, I explore how embracing a cashless society can help emerging markets keep pace with developed nations, and how ‘going digital’ will ultimately promote economic recovery to the benefit of local businesses.
Empowering local communities
Globally, 1.4 billion people have no access to banking services. Global Findex 2021 cites a lack of money as the chief reason for this but it may also be due to a lack of financial services infrastructure in rural areas.
Adopting digitised payments would remove the problem of proximity to financial institutions and give rural communities more autonomy over their finances.
A cashless society would also help to prevent corruption. In a modern, digitised world, physical cash has long had deep ties to criminal activity, largely because it is untraceable and allows criminals to operate unseen by authorities. Tax evasion, bribery, counterfeiting and the buying and selling of illegal items are all the more possible when cash is used.
Going cashless would remove the element of anonymity when transferring money, improving transparency while reducing criminal activity and boosting local economies.
One of the major problems developing nations face when tackling poverty is the failure to use, or trust, formal financial services.
According to a recent study which analysed how under the 35s in low-income communities experience financial services, just 15 percent of young people in developing nations have saved money with a formal financial institution. 62 percent of all people surveyed did not want to get involved with formal banking at all.
High interest rates, together with the need for documentation and collateral, have meant that those in need of financial support are more likely to turn to non-formal methods of accessing money, such as family and friends, community savings schemes and informal money lending.
For individuals and SMEs operating in a nation dominated by an informal economy, it can be extremely challenging to access financial services and increase the monetary productivity needed to help drive economic recovery.
However, embracing a cashless society would ensure widespread uptake of formal financial offerings, strengthening the financial systems to raise savings, reduce financial exclusion and help those in need of financial support achieve a more affordable line of credit through safer, traditional methods.
On an individual level, families would be able to save money more confidently and invest in their future, promoting economic growth. Meanwhile, payments for businesses could be sent and received in a timelier manner, boosting cash flow and enabling greater growth. For example, instantaneous payments allow businesses to diversify suppliers because they can be made from anywhere.
A cost-effective solution
Another benefit to businesses is the saving of costs. Many believe that accepting card payments will be more expensive for businesses because merchants are subject to credit and debit card processing fees for each transaction. However, there are plenty of reasons why cashless payments are more beneficial for businesses.
Firstly, businesses avoid the risk of accepting counterfeit cash. Across the world, counterfeit monies present a huge problem for businesses and economies. In India, for example, the Reserve Bank of India identified a rise of 10.7 percent in counterfeit notes of Indian denominations for FY22, with fake notes of Rs 500 increasing 101.93 percent and Rs 2000 by 54 percent.
A cashless society would eliminate counterfeiting and its consequent losses to SMEs. Additionally, it would prevent losses due to human error when counting cash. It would also safeguard businesses from theft as well as free staff to offer more help to customers.
Small business owners may also be able to find increasingly competitive card processing rates and other services as cashless payments grow in popularity. Invoice financing services, for example, will be more readily available as digitised payments become the norm, allowing those in developing countries to achieve increased cash flow and boosted revenues.
Catering to consumer demands
Digitisation is growing rapidly and becoming more common in businesses, with spending on digital transformation technologies and services projected to reach $2.8 trillion (USD) by 2025.
In China, for example, we’ve seen an uptake of innovative financial technologies such as the ‘smile to pay’ system that uses facial recognition to allow customers to purchase goods. In adopting this, China is among the top developing nations with the greatest utilisation of digitised payment.
As customers become more accustomed to digitised payments, SMEs using cashless innovations can attract a new tech-savvy generation of shoppers, allowing them to compete with larger businesses.
However, the growth of digitised payments in emerging markets will predominantly be determined by whether governments in those countries will prioritise pushing payment processes towards digital structures. Investment in infrastructure readiness, regulatory changes and mobile-money accessibility will all be needed to improve consumer trust in formal financial services and drive consumer demand in developing nations.
Only once this is achieved can we expect to see widespread uptake of cashless societies for emerging markets, allowing them to keep up with current changes across other continents.