While coins and tokens were in use nearly three millennia ago, early attempts to create paper currency as the predominant medium of exchange date back to the Yuan dynasty in 13th-century China. Backed by silver, the currency lasted about 100 years before it collapsed due to uncontrolled printing and excessive inflation.
Nevertheless, paper-based fiat currencies returned, and have generally been stable over the past 400 years in major economies. Nowadays, less than 3% of the paper-based cash in circulation is backed by gold and other reserves. Although doomsayers have long prophesied the demise of fiat currencies due the temptation to print uncontrollably, trust in their validity remains strong since governments provide a credible defence of their value.
Cash is still king, as the majority of payment transactions around the world take place in cash. Yet, Singapore Senior Minister Tharman Shanmugaratnam estimated that the cost of processing cash is about $2 billion a year — a credible figure when the cash management costs of banks, retailers and government are taken into account. While cash may still be king, powerful challengers are waiting in the wings.
Contactless payments trends
The percentage of the global population with bank accounts increased from 62% in 2014 to 75% by 2020, according to the World Bank.
Middle-income people habitually use payment cards to pay for goods and services. As online commerce has expanded over the decades, so has the use of card payments. Debit cards remain the fastest-growing non-cash payment instrument, with 9% growth globally in 2020.
Over the last five years, contactless card payments at point of sale (PoS) have become commonplace for small payments using a card linked to a mobile handset are now omnipresent via apps like Google Pay and Apple Pay. In October 2019, 56% of consumers in Singapore used mobile contactless payments — an increase of 12% compared to the previous year.
The pandemic has exacerbated this trend, with Mastercard reporting a 40% increase in contactless payments in the first quarter of 2020. In the UK, contactless payments accounted for 89% of card payments in 2020, according to data from Barclaycard. Singapore’s largest bank reported that the volume of cashless transactions nearly doubled in the first quarter of 2020.
Driving inclusion with contactless payments
Financial inclusion in developing countries has exploded in the last 15 years, due to the advent of e-wallets and account-to-account transfers in real time initiated on mobile handsets. The phenomenon has quickly spread in China, India, and across Africa. Innovations employ contactless technology, PoS scanning, or remote payment methods.
The global instant payment market reached US$1.18 trillion in 2019. In Singapore, one of the leading countries in mobile handset-initiated transactions, almost 100 million transactions were processed through the Fast and Secure Transfers (Fast) operated by electronic payment service provider Nets.
In terms of the scale of cashless payments, China and India are at the forefront. China’s Alipay and WeChat Pay dominate the payments market, with each having almost one billion users. Meanwhile, India’s Paytm, boosted by a precipitate demonetisation, claims over 350 million subscribers.
That level of usage demonstrates that a large portion of the population endorses the real benefits of contactless digital payments.
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What’s next?
Contactless cards are winning the speed and convenience stakes. Contactless debit cards are extremely fast at ATMs and PoS, but they do not support person-to-person (P2P) money transfers.
Tap-and-pay NFC apps and scanned QR codes meet both PoS and P2P payment needs with simple contactless actions, but are not quite as quick as contactless cards. However, QR codes have much greater flexibility. Scanned contactlessly by a mobile device, QR codes include both simple static codes and system-generated codes with full details of a transaction and strong cryptographic security features. QR payments have become ubiquitous in countries like Thailand, Singapore and China.
Moreover, mobile apps enable an instant choice between payment from a bank account, a credit or debit card, and even a cryptocurrency wallet. These methods deliver easy cash management — a boon to small retailers — as well as the speed, convenience, and certainty of transactions to consumers.
Once payment service providers can offer speed, convenience and instant confirmations, they will need to shift their focus to the next issue: security and digital trust. They will have to continually convince consumers that their money is safe. On the positive side, 75% of the surveyed users in Singapore felt that their personal information is not at risk when making mobile payments.
As technology develops and the digital society matures, China is leading the digital payment revolution and clearing the path to cash retirement. Indeed, it would be poetic if the first economy to dispense with paper money uses that same innovative yuan 700 years later.
Gordon Clarke is managing director of Monetics, a Singapore-based payments consulting firm. Emir Hrnjic is head of FinTech training at the Asian Institute of Digital Finance (AIDF) at the National University of Singapore (NUS). The opinions expressed are those of the writers and do not represent the views and opinions of AIDF or NUS
Photo: Bloomberg
