The shift toward digital payments has been underway for years, given their ability to connect the world, expand access and drive inclusion. The COVID-19 pandemic sped up the adoption of digital payments around the world, and pandemic-driven trends are proving to be less of a trend and instead a permanent behavior shift. In South Korea, only 14% of payments involve cash, compared to 32% in the United States, and many nations like Sweden, Finland, and the UK are already gearing up to go cashless within a few years.
Looking forward, the U.S. should consider carefully the advantages of electronic payments and the overall trend away from cash-based transactions driven by changing consumer preferences and innovative new tools for businesses.
Digital payments help consumers, businesses, and entrepreneurs
Consumers and small businesses are major economic drivers, and spending at favorite shops, restaurants, and more is essential for the post-pandemic economic recovery. A recent survey found that over 58% of Americans prefer a digital method of payment, and the payments ecosystem continues to build these new options.
Digital payments can also be a tremendous new tool for business growth and entrepreneurial success. New mobile payments tools, for example, enable small businesses in particular to rent, buy, and get paid more easily. It also removes the cash flow issues associated with late payments and slow processing times for cash and checks, which 38% of small business owners in the U.S. and Canada experience.
According to a 2018 report from IHL Group, accepting cash costs businesses a total of $96 billion. While some customers still use cash, many consumers are diversifying across payment types (such as BNPL) or digital payment experiences that connect digital purchasing to physical stores (delivery, curbside, BOPIS, etc). By enabling additional choice for customers, retailers and merchants realize the advantages of accepting electronic payments, which include more customers, higher average transaction amounts, guaranteed successful transactions, enhanced accounting, and improved cash flow management.
Modernizing government payments makes them more efficient and effective
Governments are using digital payments to increase efficiency in disbursements and added transparency in procurement. With the use of paper checks, government payments like tax refunds or social security benefits have the potential for delay and cash-out costs for the recipient (up to 2-3 percent of payment value).
A significant amount of taxpayer funds is spent producing and managing cash. Electronic payments, on the other hand, are easy to manage and require less additional overhead to operate. The time and costs saved by utilizing ACH and pre-paid cards to provide $654 billion in economic impact payments and send child tax credits to 30 million families are one recent success, and represent a model to build on in the future.
Digital payment solutions are crucial to an inclusive economy
Building an inclusive economy means promoting financial security, ensuring all small businesses can grow, and ensuring inclusive economic growth; digital payment systems help foster financial inclusion and expand access to new opportunities.
Experts have remarked on the ability of digital payments to “make transactions safer by limiting theft and helping connect entrepreneurs to the entire ecosystem of banks, employees, suppliers and new markets,” offering critical tools to foster inclusion in the U.S. and globally. Digital payments tools that help people better track and manage their finances help consumers stay in control of their money and make the decisions about when to spend, save, or invest. These innovative new options are key to expanded financial inclusion within the payments ecosystem and beyond.
The path forward for digital payments
As electronic payments continue to complement cash payment options, households, businesses, governments, and society accrue significant benefits. Digital payments can be more efficient and secure, especially with the growing cybersecurity measures in place which are reducing fraud and shrinking the gray economy. Digital offers simplicity and convenience for users at all levels.
In addition, digital transactions provide more transparency, making it easier for businesses and individuals to offer and obtain financing. Overall, electronic payments play a vital role in simplifying the process of sending and receiving payments.
Boston Consulting Group estimates that widespread adoption of digital payments would add about one percentage point to the annual GDPs of mature economies like the U.S., and more than three percentage points to those of emerging economies. For the American economy specifically, the estimated increase in GDP is ~1.2%. That translates to $257 billion that could be added to the yearly GDP (based on the 2019 U.S. GDP).
With 97% of Americans owning mobile phones and more than three-quarters using some form of digital payment, the American payments ecosystem will continue to adapt to consumer preferences and provide new tools for small businesses and entrepreneurs around the world.
For more on the value of payments, see the March 2021 PLC white paper, “Supporting Main Street Through COVID-19: Payments In The Digital Age.”