A cashless world is in plain sight.

There are pros and cons to a cashless world. Here are three steps to make it work.

In three short months, we went from using cash…to not using cash. This is quite a statement given how many predictions have been made about the demise of cash. Whether we get to a cashless or “less cash” society remains to be seen, but we can all agree that payment preferences, as well as the systems to handle them, have changed. The acceleration towards digital payments will create new opportunities for the entire payment ecosystem, including banks. But it will also expose weaknesses for those not prepared to adapt.

The COVID-19 pandemic reinforced an already growing shift to digital payments and likely drove a three- to five-year acceleration in their use. PwC consumer research shows that online purchases have increased from 33% to 45% since the start of the outbreak. Furthermore, over 90% of consumers are likely to continue using e-commerce channels after COVID-19 subsides, indicating a change in online and in-store purchasing habits.

This means the pandemic has done what the industry’s been striving for: make digital payments the number one choice for consumers. However, given that one-third of personal spending is still done with cash or check, there’s still a substantial conversion underway. We estimate a $60 billion revenue capture for the payment ecosystem.

But the impact is larger, we believe the opportunity extends beyond the basic mechanics of the payment transaction. Call this the indirect opportunity: Digital payments are convenient. They’re more secure. But importantly, digital payments can also be an entry point into the financial system for cash management functions and pave the way for new payment flows such as digital currencies. To capitalize on these trends, we think financial institutions should expand product capabilities. Furthermore, forging partnerships focused on new payment methods and basic banking products should be pursued to leverage rising digital payment volumes and as a method to acquire customers more quickly than if done alone.

While the benefits of payment innovation might be clear, there are societal costs of going cashless. Because economically disadvantaged populations often rely on cash, an acceleration towards digital will inherently challenge financial inclusion. As consumers and businesses adjust their payment preferences, the payment industry at large will likely need to continue to provide choice and access to traditional and innovative options.

Exploring expansion with digital payments

The pandemic has been the single largest catalyst in the move away from cash. Even merchants that typically see higher levels of cash payments have felt the shift. According to company reports, major card brands have noted a doubling of tap-to-pay transactions in everyday segments such as grocery and pharmacy, and an increase of more than ten percentage points in consumer penetration.

To capitalize on these trends, payment processors, merchant acquirers and banks should connect the increasing consumer demand for new payment choices with the growing number of merchants seeking a digital-first approach.

For example, merchant acquirers that typically rely on scale for their sales approach likely need to ramp up on the increasingly popular integrated payment solutions. These solutions combine traditional point of sale (POS) capabilities with industry-specific demands across payment processing, loyalty, payroll and other business management capabilities for both online and in-store activities. 

For merchants such as restaurants, the shift from in-store dining to online and mobile ordering has increased the desire for integrated POS solutions that bundle menus, ordering, loyalty and different payment options supporting “card not present” payment experiences.

The surge in digital payment volume will also reinforce the role of banks in the payment ecosystem. While payment companies, particularly FinTechs with modern platforms, were already well positioned to address the shift to digital payments, banks, as the traditional incumbents, should adapt their technical capabilities to keep pace. Incumbent banks process about half of US payment volumes. They face the challenge of modernizing their payment products and software to meet new merchant and consumer needs, or risk losing share to payment companies or new market entrants.

Simultaneously, the shift to digital ordering and payments has opened consumers’ eyes to new conveniences.. Many consumers experienced the “aha moment”: even though no cash had changed hands, ordering and payment became a single activity; for transfer payments, funds were available in customer bank accounts in real-time. 

As consumers move beyond the immediate health and safety concerns that forced a shift to digital, we expect convenience to take over. We believe that when in-store commerce returns, convenience will likely be the appeal for digital contactless payments, making contactless the predominant form of payment for both online and in-store purchasing.

Three steps for banks to prepare for a cashless world

As mentioned, there had been a gradual shift towards digital. But the sudden shift triggered by the pandemic has amplified a desire to expand the range of products and to shore up gaps exposed by the rapid movement to cashless. Firms within the payment ecosystem can consider several approaches to adapt:

  1. Invest in integrated payment solutions to help meet merchants’ digital-first needs. Merchant acquirers and incumbent banks should look to capitalize on an upgrade cycle from legacy to integrated POS solutions that’s underpinned by the shift to digital payments. This may require firms to partner or build vertical-specific software such as ordering or business management for the upgrade cycle, and to acquire new merchants. Firms should also look at form factors such as tablet- or phone-based payment acceptance to offer more affordable options to small businesses.
  2. Expand to adjacent areas to provide more “money management” capabilities. Integrated POS will do for merchants what mobile phones did for consumers—put more capabilities in their hands…literally. Payment companies and FinTechs should look at bundling additional software-based services such as checking, payroll and cash management with their payment solutions. For example, select FinTechs have partnered with banks to offer debit cards and checking accounts to merchants that rely on their payment processing platform. From a banks’ perspective, offering banking products and extending their licensing into these types of partnerships may allow the bank to acquire small business customers more quickly than if it did it alone.
  3. Explore the viability of new payment flows. The digital payment era is already ushering in new payment flows, such as digital currencies. Bitcoin and other currencies are beginning to “leak” into the traditional banking system as more merchants accept the currency and institutional clients demand that the asset form part of their treasury operations. This may require traditional payment companies and banks to address technology gaps to manage a currency that differs from fiat.

Paying it forward

Even as in-store commerce returns, contactless payments are likely to remain a constant, as more consumers embrace the streamlined and efficient purchase experience. This shift from cash to digital should have a positive effect on the entire payment ecosystem, but particularly on the first movers that were prepared for a digital payment revolution.

Payment companies and banks alike should ask themselves if they’re fully prepared for the shift from physical to digital. What are the new digital needs of merchants? Are you prepared for a blurring between payments and basic banking capabilities? What new payment flows will consumers demand? Will bank branch network access or technology play a bigger role in the client relationship?

Each of these questions will likely have a different answer depending on where you stand. But each will likely require you to reassess your product portfolio, partnership and distribution strategy for a “less cash” world.

Contact us

Jim Russell

Partner, PwC US

Sanjib Banerjee

Director, PwC US

Doug Dwyre

Managing Director, PwC US