Cash vs. Digital Payments: How to Achieve Financial Inclusion

One of the more complex challenges banks must address is improving payments efficiency. Recent news headlines show a significant shift from physical forms of identification and physical payments to digital forms in many jurisdictions. Europe recently announced a mandate to make real-time payments available from all providers offering bulk Euro payments (e.g. SEPA credit transfers) at a price below the cost of the bulk transfer.

Combined with the growing use of digital IDs in Europe and other countries, this is good news for consumers and businesses. These changes, along with other payments modernization efforts, can remove friction across the financial ecosystem and the economy as a whole. But as digital identity and payment technologies advance in some countries, others are failing to realize the potential of these solutions.

In Malaysia, Alipay enhances digital payments and digital identity.

Malaysia, along with several Southeast Asian countries, is moving to coordinate and integrate its digital payment systems with other networks to make cross-border payments easier. Malaysian payments network PayNet is collaborating with Ant Group (Alipay’s parent company) to enable Alipay+ wallet holders in seven countries to make payments via QR codes using PayNet’s DuitNow QR system. The launch means that once a bank or wallet joins Alipay+, customers will be able to make real-time payments simply by scanning a QR code using DuitNow in Malaysia.

The cross-border benefits of this system allow customers from China, Hong Kong SAR, Philippines, Mongolia, Macau SAR, South Korea, and Thailand to pay with a single Alipay-enabled wallet. AliPay also launched “Smile to Pay” in 2017, a facial recognition application for mobile devices that allows customers to make purchases by posing in front of a POS machine. Mastercard also announced a biometrics pilot just two years ago. This form of digital identity for payments is likely to continue to expand.

Missed opportunity: America prioritizes cash over digital advancement.

In contrast to recent advancements in digital payments, the Washington DC Council recently banned cashless business. Cash as a physical commodity is a costly means of payment, given the security concerns, risks, and processing costs for all stakeholders in the value chain that handle cash. Increasing the use of cash does not reduce costs or economic frictions.

The reason for banning DC is that many people do not have bank debit or credit cards and have to use cash to make payments. According to Global Finance, approximately 7% of the U.S. population is unbanked. 7% may not seem like a lot, but it represents approximately 23 million people who rely on cash or other non-bank payment methods.

While the DC ban provides more equitable access to retailers for the unbanked, it doesn’t address the root causes of people being unbanked in the first place. One explanation is lack of access to government-issued IDs, for reasons such as not having a fixed address. Digital identities built on a person’s own characteristics rather than where they live or whether they can drive can more easily address economic access issues.

Achieving financial inclusion through digital solutions

For a good case study, look at what has happened in India since the introduction of Aadhaar, the digital identity system established by India’s federal government. As a result of this system, financial inclusion has become possible for millions of people. People can create bank accounts or digital wallets with their digital identities to store funds obtained from the government or other sources. People who previously had no opportunity to participate in the economy except through cash and the generosity of others can now make payments at merchants using India’s UPI digital real-time payment system.

The link between digital identity and financial inclusion is clear. This system reduced India’s poverty rate by about 10%, or nearly 135 million people, in five years. Moreover, the Indian economy is benefiting from this financial inclusion. Real GDP growth was 6.9% in fiscal year 2022-2023 and is expected to be 6.3% in fiscal year 2023-2024. Reduced cash use also has an impact. It stands to reason that the United States and other countries should consider accelerating the transition 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 identities, the economies of countries that pursue this path will grow and become more competitive globally than those that do not. Moreover, as the economy we live in becomes more efficient, businesses and consumers will become more satisfied with their ability to do business.

Contact IBM Payments Center to optimize your digital payment system.