In Part 1 of a new report on The Future of Payments, researchers at Deutsche Bank suggest that cash will persist as a method of payment, at least in the short-term. The report, authored by Marion Laboure and Jim Reid, finds that not only will cash be around for a long time, but that the transition to digital payments will have the potential to do no less than rebalance global economic power.
The report is the first in a series of three pieces that examines the past, present, and future of the payments industry. The bank will analyse the unexpected results of its proprietary survey of 3,600 customers across the US, UK, China, Germany, France and Italy and forecast trends in cash, online, mobile, crypto, and blockchain. The implications for customers and business are important; the potential macro and geopolitical consequences are profound.
The report notes that, over centuries, people have developed a deep-rooted trust in paper and coins during uncertain times. Today is no different. For example, the trade war between the US and China has led notable investors to increase their cash holdings. The survey shows that people also like cash because it allows them to more easily track their spending.
While the report believes cash will stay, it also predicts the extinction of the plastic card in the face of light speed growth of digital payments over the coming decade. Over the next five years, the bank expects mobile payments to comprise two-fifths of in-store purchases in the US, quadruple the current level. Similar growth is expected in other developed countries, however, different countries will see different levels of shrinkage in cash and plastic cards. In emerging markets, the effect could arrive even sooner. Many customers in these countries are transitioning directly from cash to mobile payments without ever owning a plastic card.
Digitalisation will give businesses extra incentive to smooth the payments transition. For starters, when customers are comfortable with a payment technology, they tend to think less about how much they spend. Furthermore, as the data gleaned from payments becomes increasingly valuable, payment fees will approach zero. Business-to-business (B2B) transactions will also benefit. Currently, corporates wait almost 70 days for payment from business customers. The number one reason for this is inefficient internal processes which lead to payment delays, something digitalisation can fix.
The authors of the report say they can deduce much about the future of payments from developments in China where the country is developing world-leading digital payments infrastructure. There, the value of online payments is equivalent to three-quarters of GDP, almost double the proportion in 2012. Today, just under half of in-store purchases in China are made via a digital wallet, far above the levels in developed markets.
As China (and India) develop electronic, crypto, and peer-to-peer strategies, the report suggests that the epicentre of global economic power could shift. China is working on a digital currency backed by its central bank that could be used as a soft- or hard-power tool. In fact, if companies doing business in China are forced to adopt a digital yuan, it will certainly erode the dollar’s primacy in the global financial market.
Many are sceptical about digital currencies citing the large energy needs and point out that currencies such as bitcoin and Facebook’s libra have encountered significant regulatory hurdles.
Yet, if the growth in blockchain wallet users continues to mirror that of internet users, then by the end of the decade, they will number 200 million, quadruple the current level. This will be encouraged by governments, banks, corporates, and payment providers who all stand to benefit from the digitalisation of payments. The report concludes that when countries and companies eventually look back at the way they transitioned to digital payments, it may become very apparent how they achieved their standing in the world economy.
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