Payments will be facing choppy waters

This does not mean that there have not been challenges.  Over the past couple of weeks, a number of events around the globe could be early signals that payments will be facing choppy waters in the future.

• On 16 June, the European Commission opened an anti-trust investigation into Apple. The case will look at Apple’s refusal to open the NFC functionality to banks and merchants.
• On 17 June, the UK’s highest court ruled in favour of merchants in their battle against Visa and Mastercard and found the setting of multilateral interchange fees was in breach of both European and UK competition law. Retailers could potentially receive billions in damages.
• In the US, banks across the country are facing a shortage of coins, prompting the U.S. Federal Reserve to ration distribution and work with the U.S. MintAn industrial facility manufacturing coins. More to boost supply.
• On 19 June, South Africa’s Postbank was forced to replace 12 million bank cards at a cost of $58 million after a security breach by rogue employees who stole over $3.2 million.
• In 24 June, Brazil’s Central Bank and antitrust regulator suspended Facebook’s WhatsApp payment services, to “preserve an adequate competitive environment, that ensures the functioning of a paymentA transfer of funds which discharges an obligation on the part of a payer vis-à-vis a payee. More system that’s interchangeable, fast, secure, transparent, open and cheap.”
• On 25 June, German payments processor Wirecard has admitted that EUR1.9 billion have disappeared from escrow accounts leading to the arrest of its CEO but also the investigation of the German financial regulator by the EU.
• On 29 June, the Spanish socialist party has amended its initial proposal for the gradual elimination of cashMoney in physical form such as banknotes and coins. More but still expects to lower the limit on cash payments from €2,500 to €1,000 for professionals. The proposal has since been dropped.
• On 27 June, the government of Zimbabwe ordered mobile payment firms to suspend transactions accusing them of sabotaging the currencyThe money used in a particular country at a particular time, like dollar, yen, euro, etc., consisting of banknotes and coins, that does not require endorsement as a medium of exchange. More. Millions of people rely on mobile payments following the ban of foreign currencies in 2019 and the re-introduction of Zimdollar which had been dropped in 2009 following a period of spiking hyperinflation.

These events underscore the major shortcomings of payment systems: financial inclusionA process by which individuals and businesses can access appropriate, affordable, and timely financial products and services. These include banking, loan, equity, and insurance products. While it is recognised that not all individuals need or want financial services, the goal of financial inclusion is to remove all barriers, both supply side and demand side. Supply side barriers stem from financial institutions themselves. They often indicate poor financial infrastructure, and include lack of ne... More; fairness, resilience; privacy.

Cash is a vital part of the transition from exclusion to inclusion

Take financial inclusion. According to the World Bank’s Global Findex database, 1.7 billion adults lack a transactional account with a financial institution and in 2017, nearly half (48%) of the world’s adult population had not made a single digital transaction in the previous twelve months. Over 200 million micro, small and medium-sized businesses also lack access to basic bank accounts and adequate financing. Contrary to a common perception, cash is not just a payment mechanism for the vulnerable and the unbanked. Cash is and should remain a vital part of the transition from exclusion to inclusion.

What about fairness? According to the Bank for International Settlements Annual Economic Report, Black Americans are less likely to have bank accounts than other groups in the US, and the same is true for poor people in Europe. Small businesses tend to bear the highest costs for card payments, and BIS data show that cash transactions remain cheaper to process for merchants. The Findex database shows that women are over-represented amongst the unbanked: 980 million women or 56% of the total do not have a bank account. In some countries women are not allowed to open a bank account.

Resilience has been severely tested throughout the pandemic. Banks have escalated their business continuity planning by dispatching staff to disaster recovery sites and enabling people to work from home. In many countries, governments have declared that the delivery of cash constitute essential economic activities and have been exempted from lockdown measures.  But the sheer scope of the crisis and the number of people under lockdown has also led authorities to limit the quality of streaming services such as Netflix or YouTube to prevent the broadband services from crashing.

Cash provides financial privacy

And what about privacy? One might think that privacy has been relegated to the bottom of the list of social priorities as lockdown policies deprived billions of their most fundamental rights: travel, work, meeting friends and family… However, it is noteworthy that coronavirus-tracing apps which have been presented by authorities as a key weapon to defeat the virus, have been met with a cool reception in most countries. In Singapore, only 20% of the population have downloaded the app. In Germany, 14% of the population downloaded the app in a week, in spite of a broad marketing campaign. In France, 3% of the population downloaded the app three weeks after it was launched. Norway suspended its use over privacy concerns. In India, which is the only democracy where the app is mandatory, privacy activists mounted a legal challenge. In Spain, it has been reported that the government had accessed consumption data of companies and citizens through credit and debit cards , to monitor the evolution of the pandemic.

Cash provides financial privacy thanks to its anonymity. A healthy democracy needs financial privacy and this is increasingly recognised by authorities worldwide.  An International Monetary Fund paper on Central Bank Digital Currencies concludes: “In designing moneyFrom the Latin word moneta, nickname that was given by Romans to the goddess Juno because there was a minting workshop next to her temple. Money is any item that is generally accepted as payment for goods and services and repayment of debts, such as taxes, in a particular region, country or socio-economic context. Its onset dates back to the origins of humanity and its physical representation has taken on very varied forms until the appearance of metal coins. The banknote, a typical representati... More, national authorities already face a trade-off between satisfying legitimate user preferences for privacy and mitigating risks to financial integrity.” It remains to be seen whether CBDCs can offer the same financial privacy as cash.

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