The move to a cashless society is gaining momentum. While cash is still legal tender around the globe, the long-forecast transition to digital payments and cashless payment systems has gained wider acceptance since the onset of the COVID-19 pandemic and is expected to further accelerate.
The cashless payment systems shift
PwC predicts that cashless payments will double by 2030 — and these changes will have major repercussions for cross-border payments.
In the last few years alone, the rapid adoption of contactless payments — moving in concert with the e-commerce boom — has begun to reshape the payments landscape.
Cash may reign in many markets today, but its sway is waning as cashless transactions become more prevalent. The Economist reports that cash-based transactions “fell by an average of 25 percentage points in the world’s main markets” from 2011 to 2021. The increasing adoption of digital payment methods, such as credit cards and mobile payments, has contributed significantly to this decline.
Cashless catalysts
The biggest reason for the cashless growth is digitization, allowing cross-border payments to become easier while boosting transparency with enhanced traceability. Meanwhile, COVID-19 was another catalyst in accelerating the transition. According to research from McKinsey, cash usage plunged by 15% in 2020 and rebounded with a meager 1% increase in 2021 even as physical stores reopened.
These new habits and cashless experiences expanded thanks to more frictionless, digital payment options. As McKinsey outlines, “the majority of transactions that migrated to electronic channels in 2020 have remained electronic.”
Emerging markets lead the digital payments revolution
The biggest declines in cash payments came from emerging markets, which have also provided some of the most significant opportunities in digital payments. In Africa and parts of Asia, this growth is driven in part by the fact that underbanked populations have adopted mobile-first payment methods offered by banks, telecom providers and fintech firms, often integrating with existing bank accounts.
While emerging nations illustrate a fast and dramatic shift, some developed economies have already shown that a cashless existence is fully sustainable. In Sweden, for example, cash transactions accounted for a mere 1% of the country’s GDP in 2019.
A report from Discover also noted that 99% of Dutch citizens own a debit card and more than half of payment transactions in 2020 were made with debit cards. And while northern Europe leads the pack, a cashless existence is on the horizon elsewhere.
Polling from Pew revealed that over 4 in 10 Americans don’t use cash for any of their typical weekly purchases. As McKinsey outlines, the majority of transactions that migrated to electronic channels in 2020 have remained electronic transactions. Within China’s e-commerce market — the world’s largest, per Discover — annual online sales reached $672 billion with an annual growth rate of 27.3%, driven by platforms such as WeChat Pay.
A global payments rebound backed up by new technology
Overall global payments rose 11% to a record $2.1 trillion globally, according to McKinsey. Analysts also forecast healthy growth ahead, with revenue expected to exceed $3 trillion by 2026.
There’s certainly a long way to go to reach a fully cashless global economy, but as Discover asserts, “Many consumers and businesses are looking forward to the benefits it could bring — including easy cross-border payments, seamless electronic payments at the point of sale and better transaction tracing.”
Technological infrastructure isn’t holding things up, either. The so-called “plumbing” that makes payments work is undergoing a massive overhaul to support an increasingly cashless future.
An analysis from PwC discusses the evolution for both front-end and back-end payment tech. The range of innovations is extensive, featuring “instant payments; bill payments and request to pay; and plastic cards and digital wallets,” as well as a revolution to the payment mix and ecosystem that includes buy now, pay later firms, cryptocurrencies, and central bank digital currencies, all of which are part of evolving payment systems.
Bridging the gap between cash and digital FX payments
For businesses expanding internationally, the movement away from cash and the reliance on a secure bank account is likely a welcome development — especially given the challenges posed by compliance and visibility for cash payments across borders.
Yet going digital doesn’t immediately fix everything.
Amid the move to real-time payments, there’s an ongoing puzzle to balance secure clearance and reconciliation with new demands for speed. As described by The Bank of International Settlements, an increase in the number of direct participants handling payments can result in uncertainty regarding “the nature and degree of counterparty credit and collateral risks.” This uncertainty can significantly impact financial transactions.
Nevertheless, financial institutions need to instill confidence and keep up with the global nature of finance — and failure to do so can result in customers moving funds away easily, as demonstrated by recent US bank runs. So how can you ensure your business is ready to capitalize on the new frontier of cashless payments and mitigate risk?
It starts by partnering with a trusted payments provider that combines a worldwide network, a modern platform, and a team of experienced specialists. From understanding the nuances of regional financial regulations to keeping up with the payment mechanisms driving growth in key markets, choosing the right partner gives you the power to make global transfers as simple as local payments.
Plus, dive deeper into the trends shaping cross-border payments with our podcast, Converge.
