Current estimates show that by 2025, more than half of global payments will be done digitally i.e. cash is under threat and plastic cards are becoming obsolete. China leads the way to the light, while ‘‘developed nations’’ cling on to old habits or metal and paper.
Will we miss shuffling through multicolored, freshly minted bills? Will the subtle earthy, greasy, sweaty smell of money evaporate from our collective memories? What of fingering coins, the arithmetic exercise followed by that ''a-Ha'' moment of adding up the numbers? Forget that classic yet lazy gift, the leather paper-holder we all… love? Alas, the age of leather is behind us. Make way for digitalization, and marvel at its prowess! Never again will you be burdened by the loss of a leather wallet, never again will your pants sag by its dictating weight…
Before digital currencies, digital wallets.
Also known as mobile wallets, or e-wallets, digital wallets represent a cashless method by which to transact money. This is done via a smartphone or a digital watch. One must add her card number via one of the mobile wallet solutions and voila you can pay for your baked goods and butter. E-wallets represent the starting point of a much greater phenomenon, namely, the complete dematerialization of economic transactions. Cash remains broadly used, but in the long run could fade away. The reason we will see this change is because e-wallets offer improvements in convenience, ease of storage, data leveraging capabilities and ease of entry into crypto.
Witnessing the death of cash?
Cash will remain in circulation for a long time while plastic cards will soon become obsolete. One reason for this is because developing nations simply leapfrog the plastic card era in favor of mobile wallets. This is made clearer by an increasing number of smartphones in households around the developing world. In China, 851 million folks had a smartphone in 2019. As a testament to e-wallet adoption in developing nations, research shows that in Chinese rural areas, 46% of people prefer digital wallets compared to 14% who prefer plastic cards. In the French countryside, only 2% of folks prefer digital wallets versus 80% who prefer plastic cards. Which country seems more ‘developed’ here?
Cash preferences are slowing down with 18% of the French and 22% of the Chinese reporting a preference for its use in stores. Another insightful statistic for the French shows that 28% of those who make above €100,000 enjoy digital wallets while every other economic group hovers between 1% and 5%. In China, the poorest economic segment shows a 42% preference for digital wallets followed by ranges greater than 42% and up to 79% for every other group! See the graph below.
Mobile payment players and ecosystem...
The payment ecosystem consists of the consumer, the merchant, and the banks. With cash, the bank’s job is done at the ATM and the transaction between consumers and merchants is instant. With mobile wallets, the interaction is multi-step. The very general way electronic payments occur is in the following fashion: when the consumer pays a merchant via her phone, the app she uses is the one that deals with the merchant’s bank directly. The app will generally collect a small fee from the merchant and gets paid back by the bank afterwards. The payment space has online and offline paths and makes use of many technologies like optical-QR codes, codes that are popular in China when paying at restaurants.
Players like Apple Pay, Google Pay, Samsung Pay are point of sale (POS) payment solutions. They focus on in-store payments and leverage contactless or QR code technologies. They are an added intermediary that help settle payments. They charge merchant fees as stated above, and streamline the process for consumers. Retailers are aware of these fees, so they have begun to develop in house solutions with loyalty program incentives to keep consumers in their pocketbook.
An example is the Starbucks Reward app introduced in 2011 which now sees 30% of payments going to Starbucks. As a merchant, Starbucks saves money on fees that would otherwise be exploited by firms like Visa and Mastercard (plastic card providers) or other apps. Other retailers like multinational grocery store Tesco have Tesco Pay + and Walmart is in on the game too. Amazon went so far as to eliminate any sort of upfront payment with Amazon Go stores. eCommerce solutions like PayPal, AliPay, Rakuten Pay, and WeChat have dived into social peer-to-peer payment paths that facilitate reimbursing a friend or splitting checks.
Emerging countries are not synonymous with poor adjustment to technology. In fact, there are more people with mobile devices than bank accounts in Africa, Latin America, and the Indian Subcontinent, or more specifically, a higher ratio of people with phones to bank accounts. Mobile payment solutions like peer-to-peer payments are becoming ubiquitous with economic development because they lead to financial inclusion, inclusion on loans, quicker payments, and store of value.
Mobile money solutions have been critical in achieving governmental objectives in alleviating poverty and capital flows. The logical next step in of all this is crypto currency, which would relieve poverty furthermore in bringing zero transaction fees, a pure peer-to-peer experience and the all the benefits digital money provides the unbanked.
Why China leads the pack...
Let us turn our focus towards the leaders of the digital wallet age: the Chinese. China leads the pack because they have a young population, broad technology adoption rates, and a pro-digital government. Credit card usage in China ranks much lower than in other countries. Reasons include an ‘underdeveloped’ financial system, and a government that actively promotes its internet banking infrastructure.
China has seen explosive growth across online e-commerce and social networking platforms. Alipay was first made as a payment solution for its B2C system called Taobao which acted as an intermediary between buyers and merchants, with the goal of increasing trust. More customers started using Alipay because the app started paying interest on deposits much like a bank. Today, plastic cards are left at home and red envelopes for new years are sent via one of the two apps AliPay or WeChat. One can also pay utilities, fines, and highway fees via the apps, it is a one stop shop.
Tencent’s WeChat and Alibaba’s Alipay are now the dominant forms of payment in China with more than 90% of the Chinese claiming one or the other as their preferred mode of payment. These services can be used for ecommerce and peer to peer transactions as well as government transactions. The government is a big ambassador of mobile payments and acts as an investor, a developer, and a consumer in the space. The payment infrastructure is widely spread, and people trust its security. Chinese retailers have also embraced such payment methods with some stores only accepting mobile payments (though cash remains legal tender everywhere and cannot legally be refused). To this day, China represents the world’s largest market for smartphones, e-commerce, and online games, setting it up for more success on the digital wallet front and not to say on the yuan backed crypto front.
Can the US, and Europe emulate the adoption success seen in Chinese mobile wallets? Large companies engaged in digital payments include Apple, Google, Square and PayPal and their success could in part depend on the answer being yes. But the crux is around formed habits. It will take much longer to change ingrained habits in cultures that have been cash rich for centuries. The inverse is true of countries that are already cash poor because they can leapfrog from cash to digital. Younger populations seen in Africa, China, India, and other southeast Asian nations promise a bright future for the industry whereas the aging populations seen in Europe are threatening a more rapid integration of a digital infrastructure thus pushing the potential financial epicenter closer to Mt. Everest.
Digital wallets during Covid-19 and where we go from here...
Covid-19 has made a champion out of digital wallets. The handling of cash either made people feel queasy or the food ordering trend pushed folks to become more aware of the digital wallet their phones could be. Data shows that cash started to lose momentum around the time contactless payment solutions started becoming more available in stores, and this is true even of cash loving countries like Japan and Germany. Did you notice the bakery changed to contactless card screeners? In May of last year, PayPal rolled out a QR code solution which saved small business owners the cost of buying contactless hardware devices. This emulates what the Chinese have already had in shops for many years. The drawback to competitive capitalism in the US in this context is the quantity of firms competing in this market might saturate it. While competition will spur innovation, will it also motivate adoption?
Overall, merchants had no choice but to react to the pandemic through e-commerce solutions like PayPal’s QR codes. With consumers increasingly transitioning over to mobile payments, a growing demand for more secure and personalized systems QR codes and other such technologies will continue to grow going in 2021. QR codes are from the early 2000s so never say never! Emerging markets will also ride this wave primarily because QR codes are cheap to implement. Voice activated payments through AI in the payment space could pick up slack as users increase usage and chatbots with speech to text conversion could function as catalysts for more to come.
All in all, contactless payments will continue to replace cards and cash, in both emerging and developed economies. With it, major societal disruptions in the need for paper, for slot machines and to shake one another’s hands will become common place.