Are We on the Verge of the First Cashless Societies?

In the first quarter of 2018, the global fintech sector raised more than 41.7 billion USD, surpassing 2017’s record total of 39.4 billion. This includes investments in artificial intelligence, cloud-based services, blockchain ventures and mobile wallet solutions.

All fintech innovation points to one inevitable fact: we’re going cashless – soon.

Governments around the world are picking up the quest to abandon paper in favour of entirely digitized economies:

• Mobile payments in China have gained traction with breathtaking speed. Alipay and Tencent now handle more payments in one month than Paypal handles in one year. In China, it’s not unheard of for millennials to blank out when they think about the last time they made an ATM cash withdrawal, or for homeless people to use QR codes. The rest of the world has a lot to learn from this society that has truly embraced going cashless.
• In 2017, South Korea launched its first pilot project for a cashless society. (Consider that in 2016 alone, the country spent 47 million USD on producing coins.)
• Turkey has set clear goals to go cashless by 2023.
• In March 2019, the Japanese government announced a plan to set aside ¥2 trillion of the fiscal 2019 budget for measures towards a cashless market, including rebates for consumers who make payments by card.
• In India, companies like PayTM and Google Pay have ushered in a revolutionary era of e-commerce. Not only can hundreds of millions of people now pay for items with the ease of a QR scan, but fintech companies – specifically PayTM – have achieved the near-impossible by servicing remote, offline vendors. Of PayTM’s 7 million merchants, 850,000 of them operate offline.

The implications of digitalization and increased access are not to be underestimated, but recent reports highlight lingering issues.

Unfair fees

In March 2019, US supermarket chain Kroger Co said its Smith's Food and Drug Stores division will stop accepting Visa Inc's credit cards, starting April 3, because of “excessive transaction fees.”

Mastercard and Visa have another round of fee hikes set to initiate in April. Although these will be levied on merchant banks and not on merchants directly, consumers can expect fee hikes down the line if banks want to avoid absorbing this cost themselves.

What this highlights is that digitization alone is not sufficient for solving many of the frictions that still characterize our global financial system.

Isn’t it odd that in 2019, a person sending money from one country to another can still pay upwards of 50 USD for processing fees? In real terms, the only “transfer” that’s happening is the change of digits on a few computer screens around the world, yet traditional financial institutions continue to operate on these costly systems.

While governments focus on the first hurdle of going cashless, technologists, economists and everyday consumers are looking at the underlying design of money and the infrastructure that supports it (for crypto fanatics, read “this is our time to shine!”)

A digital solution

Digital currencies present the technological answer to problems with money. A lot of maturing needs to occur, but the key aspect in this market is that choice determines adoption.

When Bitcoin hit its peak of 20,000 USD in 2017, the average transaction cost was over 40 USD. Would you have paid in Bitcoin for a 4 USD cup of coffee at the time? The market response to high transaction fees of cryptocurrencies has been simple: more innovation.

Today we have the Lightning Network as a second layer payment protocol on top of the Bitcoin blockchain, and transaction fees and speeds are now a fraction of what they used to be.

Unfortunately, going to your nearest bank branch and demanding that they process the international transaction you made three days ago, let alone do it for free, is wishful thinking.

Twenty years ago, going cashless would have seemed crazy. Yet in a matter of a few years, we could see the first cashless societies emerge.

In the same way, the logical step after digitization, the mass adoption of alternative, user-centric digital currencies, may seem in early stages now – but the groundwork has already been laid and the wheels are set in motion.

A wave is coming, and we’re ready for the flood.