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The payments market is evolving rapidly in the wake of the COVID-19 pandemic. We are witnessing a more complex payment market, with a diverse range of new payment technology product innovations and participants. As a result of these changes, digital payments have become a preferential payment method, as consumers reap the rewards in real-time and frictionless payments. Although there has been a gradual decrease in the use of cash over time, the value of banknotes has actually increased during the pandemic, underlining the importance of cash during a crisis. However, as we transition to a post-COVID economy, can we expect physical cash to maintain its value, and what does that mean for the consumer, merchants and payments technology providers?

The rise of digital wallets

The growing adoption of digital payments and increased demand for smartphones and frictionless payments have contributed to the increased demand for digital wallets. We have witnessed digital wallets exceeding cash for in-store payments, with the use of digital wallet-based transactions growing by 7% in 2020. Concerns over the risks of virus transmission through banknotes led to many retailers no longer accepting cash payments. Health hygiene has contributed to this shift, leading consumers to take advantage of the contactless nature of digital wallets, but many experts argue the pandemic merely accelerated changes that were already underway.

Consumers have become more digital-savvy and expect a seamless payments experience that incorporates technology that enables frictionless and contactless transactions. Merchants not only need to consider the payments experience, offering more choice and flexibility that enable consumers to carry out their transactions; but also delivering improved customer experiences by enhancing the online and offline experience. As a result, data and consumer insights have become a critical tool for optimizing payments transactions.

The added benefit of using digital wallets compared to traditional payment methods is their enhanced security capabilities. The conventional card chip and pin technology is now recognised across the industry to be outdated and no longer not fit for purpose. Digital wallets have far superior security capabilities, including biometric authentication, voice activation, QR Code and machine learning fraud prevention.

Despite these enhanced security capabilities, fraudsters continue to push the boundaries by exploiting the tokenization system within digital wallets. Making it impossible to identify the card used. Even if the wallet is blocked, fraudsters can move a stolen card to a new wallet. Merchants are now under pressure to ensure that they are providing compliant levels of security to prevent fraudulent use of their digital wallets.

Cash demand in a crisis

Despite the increasing use of digital payments worldwide, demand for cash is still high. Throughout the pandemic, major economies witnessed a surge in demand for cash. Access to cash reduces the risk of uncertainty during a crisis. It can be used as insurance for consumers, illustrating that cash is being retained for its value, even if it is not being used for transactional purposes. This is illustrated by the decline of ATMs (with usage on average 35% below pre-Covid levels) to withdraw cash.

Although cash usage will continue to decline, a recent study by the RSA found that millions of people within the UK would find it challenging to engage in a digital economy and would prefer to use cash to buy goods and services. There are also complaints of losing of control of their finances. Despite the growing popularity of digital payments, cash remains an important payment option. As a result, industry-wide initiatives have been launched to preserve physical cash. A recent agreement between UK major retail banks to share services, ensuring long-term cash availability across the UK may offer a glimpse of what we can expect. Crucially, merchants will need to ensure that they can cater to all segments of their customer base, as not doing could prove to be a competitive disadvantage in short to medium term. 

Are we ready to become a cashless society?

Our relationship with cash is changing. As the demand for cash for payment transactions continues to decline and we transition to a digital-based economy, merchants will need to continue to bridge the gap between online and in-store by delivering an omnichannel approach that enhances the payments experiences for consumers, and recognize that cash will continue to have an essential role across broader society and the payments ecosystem.

Yousouf Alouat is Marketing Manager at The ai Corporation (ai). ai is trusted around the world for developing innovative technology that allows our customers to create predictable success and grow profitably. Founded in 1998, we have a long track record of providing solutions to some of the world’s largest financial/payment institutions and international merchants. Our longstanding business partnerships are based on making things simple and explainable, both technically and commercially. By focusing in this way, we constantly strive to help our customers create highly profitable returns.

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Our solutions enrich payments experiences for more than 100 banks and fuel card issuers, over three million multi-channel merchants and over 300 million consumer cardholders. We also monitor over 25 billion transactions and authorisations each year.