Cash versus digital payments: How to achieve financial inclusion

One of the more complex challenges banks must solve is to make payments more efficient. Recent news headlines show significant shifts from physical identification and physical forms of payments to digital forms in many jurisdictions. Europe recently announced a mandate that real-time payments be available from any provider who currently offers batch euro payments (such as SEPA credit transfers) at a price of no more than the cost of batch transfers.

This, combined with the increased use of digital identity in Europe and many other countries, is good news for consumers and businesses. These changes, along with other payments modernization efforts, may eliminate friction in financial ecosystems and the economy in general. But as some countries move forward with the advancement of digital identities and payments, other countries fail to realize the potential of these solutions.

In Malaysia, Alipay advances digital payments and digital identity

Malaysia, along with many southeast Asian countries, is moving to align and integrate their digital payment systems with other networks to make cross-border payments easier. Malaysia’s payments network, PayNet, is collaborating with Ant Group (the parent company of Alipay) to allow Alipay+ wallet holders from seven countries to pay via QR code using PayNet’s DuitNow QR system. The service launch means that if a bank or wallet participates in Alipay+, customers can make real-time payments simply by scanning the QR code using DuitNow in Malaysia.

The cross-border advantage to this system allows customers in China, Hong Kong SAR, Philippines, Mongolia, Macau SAR, South Korea and Thailand to make payments with a single Alipay supported wallet. AliPay also introduced its “Smile to Pay” facial recognition application on mobile devices in 2017, which allows customers to make purchases by posing in front of point-of-sale machines. Mastercard also announced its pilot of biometric recognition just under two years ago. It is likely that this form of digital identity for payments will continue to expand.

A missed opportunity: The US prioritizes cash over digital advancements

In contrast to recent digital payment advancements, the Washington D.C. Council recently banned cashless businesses. Cash as a physical commodity is a costly means of payment, given the security issues, risks and handling costs to every stakeholder in the value chain handling the cash. Increasing the use of cash does not reduce cost or friction in the economy.

The reasoning for the D.C. ban is that many people don’t have a bank debit or credit card, so they must use cash to make payments. In the United States, approximately 7% of the population are unbanked, according to Global Finance. That 7% may not seem like much, but it represents around 23 million people who rely on cash or other non-bank forms of payments.

The D.C. ban makes access to retailers more equitable for the unbanked, but it doesn’t address the root cause of being unbanked in the first place. One explanation is the lack of access to government-issued ID, for reasons such as having no fixed address. A digital identity that is established based on some attribute of the person themselves, as opposed to where they live or if they can drive, makes the problem of economic access easier to solve.

Achieving financial inclusion through a digital solution

For a good case study, look at what has happened in India since the introduction of Aadhaar, the digital identity system established by the country’s federal government. As a result of this system, financial inclusion for millions was possible. People could qualify for a bank account or a digital wallet with their digital identity, wherein they could store funds obtained from government or other sources. Those who formerly had no chance to participate in the economy, except through cash and the generosity of others, can now make payments at a merchant using India’s UPI digital real-time payments system.

The link between digital identity and financial inclusion is clear: with this system, India’s poverty rate declined by around 10% or nearly 135 million people in 5 years. Furthermore, the Indian economy is benefiting from this financial inclusion. Real GDP growth was 6.9% in FY 2022-2023 and is expected to be 6.3% in 2023-2024. The reduction in the use of cash is a contributing factor. It stands to reason that the US and other countries should consider accelerating the move away from cash to digital payments to achieve financial inclusion and economic growth.

There is an immediate opportunity to accelerate the adoption of digital alternatives to cash. Combined with the adoption of digital identity, the economies of countries who pursue this path will grow and be more competitive globally than those who don’t.  Moreover, businesses and consumers will be more satisfied with the ability to conduct business as the economies in which we live become more efficient.

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