Many countries around the world are switching to digital methods for all, or nearly all, financial transactions. This is occurring in developing as well as developed economies – there are multiple benefits
On vacation in Iceland and Norway this year, I spent two weeks hiking and visiting tourism destinations. During the whole trip, I did not use cash for a single transaction. Norway ranks as one of the most digitally connected countries, with as little as 3-4% of financial transactions involving cash. One might imagine that this hi-tech retail world is confined to developed economies, but this is not the case.
In Africa, although cash still dominates, use of digital payments is expanding rapidly. A report by McKinsey in 2022 said that African countries, in particular Egypt, Nigeria, Ghana, Kenya and South Africa, are developing infrastructure and policy frameworks to support this growth. The Pan-African Payment and Settlement System is being developed by the African Continental Free Trade Area. In 2021, mobile payments grew 39% in Africa, with the value of transactions rising to more than $700bn – nearly 70% of global mobile payments. Increasingly, electronic payments are in real time. This development is boosting cross-border trade and social inclusion.
What is occurring in many economies that have lacked a comprehensive broadband infrastructure is that they skipped Web 1.0 and went straight to mobile technology. The social implications are fascinating. Less than half the population in Africa has a bank account, but a high proportion has a mobile phone. Mobile money is a pay-as-you-go system of exchange operated by a mobile network operator, independent of the banking system. A digital wallet, or e-wallet, may be linked to a bank account, and works in a similar way, typically with a smartphone. Wallets can offer services such as bill payments and savings, as well as retail transactions.
For retailers, cash can be risky and expensive – in terms of transporting cash deposits to the bank, and ensuring security. Card and mobile payments are quick and easy for customers. For governments, manufacturing banknotes and minting coins is expensive, especially for the hi-tech polymer notes designed to minimise counterfeiting. With digital transactions replacing cash, governments and law-enforcement agencies are better equipped to reduce the opportunities for tax evasion and illegal trading. Digital transactions leave a trail of data, whereas cash is virtually untraceable.
Privacy concerns are an important consideration. While being able to track payments is justifiable for law enforcement agencies regarding suspected criminal gangs, it could be a breach of data protection rights of law-abiding citizens, so legislation has to be balanced and effectively upheld.
There are concerns that older people on a low-income without a smartphone or online banking may rely on cash. In addition, some people choose not to be connected digitally at all – either out of privacy concerns, or just personal preference.
In the late 2010s Sweden made one of the most determined moves to replace cash with digital transactions, but following criticism the government was forced into a partial backtrack and in early 2020 passed a law requiring banks to maintain a minimum level of cash services.
In 2016 the Indian government announced, at short notice, the withdrawal of two large-denomination banknotes. The purpose was to destroy the value of illegally gained assets and encourage compliance on tax. Unfortunately, the government had over-estimated the extent to which wealthy tax evaders and criminal gangs held banknotes. Those most negatively affected were among the poorest, who were paid in cash. Over 99% of the notes were legitimately traded in through the banking system. Nonetheless, tax revenues and use of electronic payments did increase over the following years.
A different policy option is to impose a ceiling above which it is illegal to make a purchase with cash. The Qatari government introduced such a policy in 2022, setting the limit at QR50,000, which is just under $14,000. In a separate move, the Qatar Central Bank has issued a unified QR code specification and standard, which enables shoppers to pay by scanning a QR code on their mobile phone. In September 2022 the government mandated all commercial outlets to offer an electronic payment option. By July 2023 there were 69,040 electronic point of sale (PoS) devices.
The country is experiencing compound annual growth rate of around 14% in the use of digital payments. In 2021 alone, e-commerce payments through the Qatar Central Bank’s QPay system rose 53%, and by July 2023 the volume of transactions through electronic point of sale reached 27.2mn, with a value of QR6.48bn.
Enforcement of rules affecting the payment of wages is also made easier with electronic payments. In Qatar there has been a problem of late payments mainly in the construction sector. Since 2015 there has been a Wage Protection System which imposes a penalty on the employer if the payrun is more than seven days late. Payment in cash is no longer allowed.
Another advantage, in the context of an economy such as Qatar seeking to diversify and not be reliant on oil and gas, is encouragement of fintech sector. Mobile and other forms of digital payments can only be made if there is an effective and secure system.
No digital system is flawless, however. Just occasionally, a card reader will malfunction, the connection or the signal will be lost, or a system suffers a cyberattack. Power outages can be caused by natural disasters or other reasons. Countering illegal trades and tax evasion cannot be done with technology alone – there have to be effective laws and robust regulatory bodies. But minimising the use of cash will help.
There are many advantages for the switch to digital payments – for consumers, businesses and governments. There is likely to be a residual role for cash, as a reserve method in extreme situations, and for a small minority of offline customers.
The author is a Qatari banker, with many years of experience in the banking sector in senior positions.
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