The Future of Payments
Will we soon only pay digitally? What are the consequences? When will all cash disappear?
▽Jun. 24, 2020|Bernhard Kauer
It is common knowledge that forecasts are difficult, especially when they concern the future. However, if you want to shape the present, you need an idea of what the future will look like. In this series of blog articles, we will therefore have a look at a single piece of the puzzle of the future.
If you deal with a topic intensively, you have partly concrete, partly vague ideas of how the future will develop. Many ideas will certainly correspond to the mainstream. A few theses, however, will be controversial, based on own insights.
We will start the series with the question: How will we pay in the future?
In the following, payment refers to the transfer of money from buyer to seller, which, the following analysis assumes, will continue to take place consciously in the coming decades.
Current Situation: Change
The current change can no longer be ignored. Cash tends to be on the retreat, the number of bank branches and ATMs is steadily declining. Fintechs are taking over market shares and Apple, Facebook and the like are pushing into the market. Digitalization has long since arrived in the payment market. But what will happen now?
It is obvious that digitalization is a long-term trend that cannot be stopped. This becomes particularly clear in the article Why Software Is Eating the World by Marc Andreessen, which was already published in 2011. It is worth reading it (again) in 2020.
In summary, it can be said that everything analog will disappear in the long run, as software-based solutions are more flexible and therefore above all cheaper. If a society does not want to consciously spend more money on an area, as they do for example for environmental reasons, there is no way around digitalization in the long term.
So the open question is no longer whether payment will be digital or not, but only when this will be the case!
When is it happening?
When will we be able to pay everything and everywhere digitally? It is quite difficult to answer this question, especially since the answer will vary from country to country.
For example, Sweden and Denmark are quite advanced. Some even see the first cashless society emerging in these countries within the next 10 years. Many bank branches already have no more cash in stock and there are therefore fewer bank robberies. The thieves are therefore adapting their methods and there is much more computer fraud in return. So the world is not necessarily becoming safer through digitalization.
In my opinion, the main difference to Germany, where currently about half of all payments are still made in cash, lies in a completely different culture of trust. As Daniel Ek, the founder of Spotify, explained in an interview, the Swedish society is built on trust. This is getting to the point where the tax returns of all Swedes are public, so you can find out about your neighbor’s last income. Compared to this is giving the phone number to a stranger to pay via the Swish App is rather negligible. However, many Germans find it rather scary to make their phone numbers or even their tax data freely accessible.
Lack of acceptance is therefore not a technical or regulatory problem, but rather a cultural issue that cannot be solved with a one-size-fits-all approach. In Germany, we simply have different requirements for a payment system, which existing products obviously do not meet yet. This is probably because it was never comprehensible to the persons involved why people still pay with cash. The search for a suitable digital payment system in Germany is therefore not over yet.
Digitalized payment systems
At some point someone will solve the mystery even for Germans and we will be able to pay digitally everywhere. What will the future look like then? Let’s take a look into the crystal ball.
No more cash
Done digitally, payments are just transfers from one account to another and are therefore considerably cheaper and faster to process. It is obvious that you no longer need cash for this purpose. There will therefore be a structural change in the cash industry, as many industries have already experienced. Some things will become superfluous in such a process, others will change and some things will remain as they are.
Digitalization will not only eliminate ATMs and wallets. In addition, the manufacturers of cash registers, banknote validators, counting machines, special paper, money printing machines etc. are losing their current market. Furthermore, services such as cash transport, cash deposits and withdrawals, as well as the development and maintenance of ATMs will become superfluous.
However, cash will certainly not disappear completely. Just as you can still buy gold coins today, even though they are no longer a common means of payment, you will still receive physical gifts of money in the future. Even the numismatists will not make the coins disappear completely. Just in everyday life, we will not and cannot use them anymore.
The future situation of the existing digital payment systems are less obvious, which have a market share of between 25% and 50% in the retail sector in Germany, depending on how it is measured. At the moment, there are not only different industries related to cash, but also for direct debit, giro and credit card payments. Just think of VISA, Wirecard, Paypal and Apple, who potentially all earn money when perfoming a contactless payment in a retail store.
However, the examples of M-Pesa from Kenya and WeChat from China show that payments can be made successfully without these intermediaries. In this respect, it can be assumed that an efficient digital payment system will function directly between the merchant and the customer in the future. It is a debatable point, whether the mobile phone manufacturers will be able to remain in the value chain in the long term.
If there are problems with the card, if you have to block it, have a PIN unlocked or make a complaint about a credit card booking, nowadays you usually do this by phone or (still) submit manually completed forms by snail mail. However, in a completely digitalized system, this is neither necessary nor possible anymore. This means that respective jobs at the banks and call centers are no longer required. The trend towards fewer bank branches will therefore continue.
There is no way around the digitalization of payments. However, the timetable is culture- and country-specific. In Germany, no one has yet found a viable business model that allows cashless payments everywhere. Only then, the customer will get faster payments at lower costs and the structural change, which has been quite slow so far, will accelerate rapidly.