As a result of the proliferation of credit cards, there has been widespread speculation about the possibilities of a checkless, cashless society in the future.
—Jack Lefler, Las Cruces Sun-News, July 24, 1968
The one thing that’s missing, but that will soon be developed, is a reliable e-cash, a method whereby on the Internet you can transfer funds from A to B without A knowing B or B knowing A.
—Professor Milton Friedman, Nobel Prize winner, 1999
If you wonder why physical cash still exists, you are not alone. Several countries have recently removed large notes worth $100 or more and have implemented policies to replace traditional payment customs with digital solutions. Yet the transition of usage and habits could take longer than previously expected. This chapter focuses on the digitization of money, including an analysis of twentieth-century innovations and the more recent rapid growth of global digital payment systems. For this chapter and Chapter 9, we did an exclusive survey of over 3,600 customers in China, France, Germany, Italy, the UK, and the United States. The goal of the survey was to assess attitudes about cash and digital alternatives across a range of cultural and economic variables.1
The transition from cash to digital currencies has occurred gradually, in phases. We will address these global trends and tensions in more detail in Chapter 9. First, we look at how currencies and transactions have developed since the early days and how change has accelerated in the last thirty years. A brief historical review can help us better understand current trends (Figure 8.1).
FIGURE 8.1 How currencies and transactions have developed
The idea of people exchanging goods or services with no intermediary or base “market” price, by establishing a “double coincidence of wants,” is one of the oldest forms of payment we know in human record. By most accounts, the history of bartering dates to circa 6000 BCE. The system was allegedly introduced by Mesopotamian tribes and further expanded by the Phoenicians through international trade. The Babylonian empire adopted this system with the concept of exchanging services and goods for items such as weapons, teas, spices, and slaves. The Romans went to great lengths to barter for items such as salt, which was a measure they used to pay soldiers in what we would call a salary today. This barter system became problematic in part because it limited dynamic economic activity, diversity, and growth. Around 1000 BCE the Chinese and others shifted away from exchanging weapons, and utilized lightweight bronze replicas of weapons as a form of payment.
The bronze and copper replicas described above could potentially be considered the earliest forms of metal currencies. This was just the start of metals used as a currency. Gold, silver, or a combination of both, such as the Lydia currency (circa sixth century BCE), became the dominant form of currency throughout Eurasia. The Lydia currency may be the earliest form of coinage. It was developed in the Mediterranean region and later copied and refined throughout the Western Hemisphere.
Beyond their visual value, precious metals gave people the ability to transport a durable, lightweight coin and thereby fostered a strong expansion of trade through the Middle Ages. Furthermore, coins enabled people to conveniently fix the prices of goods and services with a common metric unit based on the weights of coins. Additionally, coins facilitated the storing of value, which allowed for populations to buy, trade, and move resources all over the planet.
Paper money was implemented in Europe in the seventeenth century. This occurred in the context of a “price revolution” during which large amounts of gold and silver entered Europe (mostly brought by the Spanish from Latin America). With the influx of precious metals, banks handed out payable receipts to the bearers of documented resources.
By the first half of the nineteenth century, many towns in the United Kingdom (and the United States) had established local banks, and each issued local banknotes. Before national currencies and efficient clearing houses emerged, banknotes were only redeemable at face value by the issuing banks.
Paper currency, specifically the US dollar, only came to worldwide prominence after World War I. It has since played a major role in shaping global history. Inadvertently, paper currency, especially large notes, has also facilitated illegal transactions, underground economies, and money laundering.
The concept of using a card for purchases was described in 1887 by Edward Bellamy in his utopian novel Looking Backward. In 1950 Ralph Schneider and Frank McNamara created the Diners Club card. Initially made of cardboard, this card was used to pay for entertainment and travel expenses.
Ten years later, Diners Club had around 10,000 New York City members, all elite business professionals. They could use the card for payment at twenty-eight restaurants and two hotels. The card promised its holder convenience and served as a status symbol. The company convinced merchants that its card would stimulate people to buy more.
Credit card demand dramatically increased once the US Internal Revenue Service began requiring detailed business expense records.
By 1958 American Express had launched the first plastic card. Bank of America released the first recognizable modern card with revolving credit, in California, which was first called the BankAmericard and later Visa. To compete with the BankAmericard, a group of banks joined to create the Interbank Card Association, which later evolved into MasterCard.
Visa and MasterCard created a system in which banks could join a network of Visa and MasterCard cards, with the ability to choose both cards for their offerings.
Mobile payments are transactions conducted with a mobile phone in combination with a credit card, an invoice, an electronic wallet, or a cash account.
As for emerging economies, mobile payments started in the early 2000s. Their deployment has facilitated and spread financial services to communities with “unbanked” or “underbanked” citizens—those without bank accounts. These payment networks have often been used for micropayments. Mobile payments started in emerging economies (Alipay started in 2004 in China). They are increasingly common nowadays, but they only started gaining traction in advanced economies recently. Apple Pay and Google Pay launched in 2014 and Samsung Pay a year later.
Meanwhile, in many parts of the world people are becoming more familiar with noncash payments such as paying with points accumulated through credit card spending and airline travel. Among US citizens, 45 percent are comfortable using an independent, nongovernment currency, as evidenced by an increasingly high number of companies that have points programs. The Starbucks Rewards app—one of the leaders in mobile payment apps—recorded 16.3 million US memberships in 2019. Thirty percent of payments at Starbucks stores occur with the company’s points program.
We will discuss cryptocurrencies in more depth in Chapter 9. But for historical context, the concept of cryptocurrency started around thirty years ago when DigiCash Inc. created the first worldwide virtual currency. It went bankrupt in 1998, less than ten years after its creation.
The most famous cryptocurrency, Bitcoin, was created in 2009 by a developer using the pseudonym Satoshi Nakamoto. Since 2011, cryptocurrencies have gained momentum from investors and captured media attention. Bitcoin prices rose dramatically in 2013. Several new cryptocurrency companies were born, including Litecoin (2011), Ripple (2012), Ethereum (2015), and Bitcoin Cash (2017), to name a few.
Cryptocurrencies have passed the tipping point needed to become fashionable. In June 2019 Facebook announced its Libra (now rebranded as Diem) cryptocurrency. With about 2.8 billion users, or one-third of the world’s population, Facebook’s planned cryptocurrency has the potential to compete with traditional online payment platforms.
For the last fifty years, various publications have predicted the end of cash. One of the first such articles was written by Jack Lefler in 1968. He envisioned the emergence of a cashless society that would use a single identification card for all transactions. In the late 1970s, a former Citibank leader presented a newspaper article titled “Cashless Society Is Predicted by Credit Card Use.” In his 1981 book, World of Tomorrow: School, Work and Play, author Neil Ardley foresaw a cashless world by 2002. “The answer is simple: You do not carry any money on you and neither does anyone else. You pay for everything you buy with an identity card like a credit card. It has a magnetic strip containing your name and other personal information in the form of a magnetic code,” he wrote. In February 2007 the cover title for the Economist was “The End of the Cash Era.” The corresponding article projected that cash would be a dinosaur doomed to extinction.2
Are today’s predictions about the demise of cash different? For now, people still want cash. The Financial Times revealed that wealthy investors had been holding ever-larger investable assets in cash. Two-thirds of the people surveyed said they had considered increasing cash holdings given the economic uncertainty around the US–China trade war, conflict in the Middle East, and the potential effects of Brexit.
But cash is losing ground as a payment method. Several countries have recently removed large notes worth $100 or more and implemented policies to replace traditional payment methods with digital solutions.
Governments, banks, and card providers share at least one common goal: the elimination of cash. Governments are more concerned with eliminating larges notes from circulation because those notes are mostly used for the underground economy, but banks and card providers have been finding ways to foster smaller payments with cards through technology innovations, such as contactless cards (cards that can be used without inserting or swiping them in a reader) and mobile payments.
Thus, the global campaign against paper money is lively, especially against large notes. One of the world’s leading economists, Kenneth Rogoff, makes a persuasive case for getting rid of most paper money, and Larry Summers wrote an article in 2016 titled, “It’s Time to Kill the $100 Bill.”
Large denominations are mainly used for illegal activities such as tax evasion, drug trafficking, and terrorism. The increase of monetary circulation over the last twenty years is almost entirely due to large notes (the USD 100 note in the United States, the JPY 10,000 note in Japan, and EUR 50 note or higher in the Eurozone). It is also estimated that two-thirds of USD 100 notes are held outside the United States, which indicates they are not used for ordinary transactions.
Large notes are disappearing fast all around the world. In 2018 the European Central Bank decided to permanently cease new issuance of the EUR 500 note.
Nevertheless, cash is still widely used in many advanced countries, including Japan, western Europe, and the United States. According to our proprietary survey, one-third of people in developed countries considered cash to be their favorite payment method and more than half believed cash would always be around. This statement was true regardless of country, gender, and age.3
Indeed, our survey showed that nearly 60 percent of in-store purchases in Germany were paid in cash. Germans held EUR 52 in cash, on average, the highest rate among advanced economies, and the average German planned to use even more cash in the coming six months.
Americans, British, and Italians considered cash to be their second favorite payment method (approximately a third preferred cash). Interestingly, 11 percent of Americans planned to use even more cash in the next six months. People said they used cash as a store of value and as a means of payment. Specifically, 53 percent of Americans said they wanted to make sure they always had cash with them and about 70 percent of Americans still used cash every week. On average, each American held about $47 in cash (Figure 8.2).
Cash has properties that no other payment method has. It helps users remain anonymous and avoids cyberattacks. However, these benefits were not among the top five reasons the citizens we surveyed loved cash so much. Surprisingly, over 40 percent believed that cash enabled them to easily track spending and to make payments faster. They found cash to be convenient, accepted almost everywhere, and secure.
The key question is what happens in the world’s two most populous countries—China and India. As the push to remove cash escalates, these governments are encouraging greater use of digital currencies.
In late October 2019, Chinese President Xi Jinping endorsed blockchain as “an important breakthrough for independent innovation of core technologies.” He repeated the PBoC’s intention to have cash replaced by a digital currency issued by the central bank.
In India, change is also coming. The government declared in 2016 that 1,000- and 500-rupee notes would no longer be valid, despite strong resistance to change and a temporary cash shortage. And recently a government economic panel pitched for the introduction of an official digital currency with the status of legal tender and regulated by the Reserve Bank of India.
Source: Reformatted from Marion Laboure and Jim Reid, “The Future of Payments Part I. Cash: The Dinosaur Will Survive … for Now,” Deutsche Bank Research, Corporate Bank Research, 2020, https://
Note: Cash carried in France, Germany, and Italy is denominated in euros, in China in renminbi, in the United States in dollars, and in the UK in sterling.
FIGURE 8.2 Cash carried in 2019, by generations, on average
Fintech companies and smartphones have facilitated banking innovations that could inaugurate a new integrated and dematerialized ecosystem for payments.
On the business-to-consumer side, smartphones are making plastic cards obsolete. People in advanced countries are gradually adopting smartphone-based payments in the context of each country’s infrastructure. Eager adoption by millennials and increased digitization of country infrastructures could diminish the use of plastic cards over the next decade—even as people continue to use humble notes and coins.
Most citizens we surveyed were not ready to abandon their beautiful leather wallets, but most of them also believed that digital wallets are more than a fad. Most planned to use a smartphone wallet more in the next six months, and most believed that digital wallets would eventually replace traditional wallets within the next five years.
This trend opens outstanding opportunities for brands, retailers, and, on a broader scale, any business selling directly to consumers. Digital wallets can allow businesses to better know, interact with, and personalize products for their customers. Personalization enables companies to stand out in the field and gain market share, especially because millennials tend to think that smaller, custom brands offer better-quality products. Looking forward to 2025, we expect e-wallets to be the second-most preferred method of payments after cards and the most preferred method among millennials (Figure 8.3).
Data source: Marion Laboure and Jim Reid, “The Future of Payments Part II. Moving to Digital Wallets and the Extinction of Plastic Cards,” Deutsche Bank Research, Corporate Bank Research, 2020, https://
Note: We expect purchases with checks to be lower than 1 percent, and nearly all cards to be contactless, in 2025 in the United States, UK, France, Italy, and Germany.
FIGURE 8.3 Weekly in-store purchases per country, in 2019 and projected for 2025
A customer-centric mindset is critical in the business-to-business space. Yet B2B customer satisfaction indexes are lower than 50 percent. This ranks systematically lower than B2C companies, which typically score at 65 to 85 percent. Some of the biggest B2B problems are late payments, collection, and recovery. Payment time has increased by 10 percent over the last decade. The average has reached nearly seventy days. One reason for this long average delay relates to business clients who deliberately extend payment terms to maximize their working capital. But the primary reason for long delays is inefficient internal processes and methods for tracking receivables. This factor is usually overlooked because everyone has focused on shifting companies away from checks to electronic payments, a change that requires businesses to gather and manage all the data, such as data required to make timely payments and track deliveries.
In this section, we will focus on the key global fintech transitions related to payments—for both B2B and B2C. Understanding these changes will provide a framework for better understanding possible outcomes—the topic of Chapter 9.
To ask whether we will see the end of cash in the 2020s is a distraction. The right questions are these: Which new means of payments will emerge? Which existing means of payment will disappear soonest? What if plastic cards, a recent invention, disappear first?
The digital payment revolution is rooted in the 2008 global financial crisis. At that time, liquidity in the financial system was low, people struggled to borrow money, and distrust in the banking system grew.
Since the financial crisis, regulation over traditional banks has strengthened. Meanwhile, most fintech players have operated below the radar and benefited from weaker regulations. The number of deals and the amount of capital raised for payments innovation have strongly accelerated in recent years. Today about a third of fintech deals and capital raised is related to the payments industry.
This sector of the economy has been growing and experiencing profound technological changes. Global payments revenues have nearly doubled since 2010 to almost $2 trillion. Unsurprisingly, the Asia-Pacific region, due to its market size and mass adoption of new technologies, represents nearly half of worldwide payments revenues. When Apple released its first-generation iPhone in 2007, no one would have thought that smartphones would be so successful. Today in the United States, individuals spend on average three hours per day on their phones and check incoming messages nearly eighty times per day. Millennials, especially, are seduced by smartphone convenience and addicted to the flow of information (messages, email, social networks, app alerts, news, and so on).
The centralization of all these functions into a “one size fits all” device has, of course, greatly expanded the use of phones for making financial transactions. That, in turn, has spawned a plethora of payment services, such as Apple Pay and Google Pay (to name just two). These services have strengthened what is called the “retail payment value chain”—the interdependence of smartphones and payment services, which is essential for today’s major fintech transitions.
The payment value chain is complex and highly intermediated. Let’s split it into two successive phases: first the “consumer front office” and next the “operations back office” (Figure 8.4).
Within the consumer front-office framework, the consumer (or the sending side, broadly speaking) first initiates a payment using a device. The payment moves through different channels (internet, mobile payment platform, bank branch storefront, and so forth). Then the data are transferred to the payment receptors of the merchant’s bank (the acquirer / processor). This first phase involves the highest distribution of sensitive data and might involve tens or even hundreds of millions of consumers and merchants in short amounts of time. That data is subject to many points of vulnerability. Security measures to protect data vary greatly and are still in the early stages of development.
FIGURE 8.4 The retail payment value chain
First, new players such as Apple Pay, Google Pay, and Samsung Pay have recently offered more convenience and speed to users. They enable users to store electronically, on a mobile phone, the personal and financial information that has traditionally been stored on plastic cards. Thus, the mobile phone replaces the traditional wallet and serves as a contactless payment tool. Importantly, this emerging system does not disintermediate the value chain; it creates, at least so far, an additional intermediary, which means increased fees for the merchant, but more convenience for customers.
The second type relates to retailers that set up payments through their own apps. This approach also does not remove (or add) intermediaries. But customers can avoid copying and pasting their card details into Apple Pay or Google Pay because they enter their cards details into the app.
The most popular and well-known app of this sort is the Starbucks Rewards app with 16.3 million US memberships in 2019. Thirty percent of payments at Starbucks stores occur with the company’s points program. More recently, grocery stores have started offering mobile payments. For example, the British multinational grocery chain Tesco introduced Tesco Pay + and the American behemoth Walmart launched a Walmart Pay app. Both the Tesco and Walmart apps mimic the system Starbucks introduced in 2011.
The Starbucks mobile payment app initially allowed customers to make payments and to store their Starbucks gift cards within the app. Now customers can also store their credit card information in the Starbucks app, enabling them to scan their smartphones at the register when they pay for their coffee. The coffee chain says that of the nine million weekly transactions conducted in their stores, 20 percent come from payments via smartphones.
|
Reach |
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|---|---|---|---|---|---|---|
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Domestic |
Global |
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|
Payments infrastructure |
Overlay |
Venmo |
Apple Pay, Google Pay, PayPal, Novi |
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|
Standalone |
Alipay, M-Pesa, WeChat Pay, Swish |
Diem |
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Data source: Bank for International Settlements (2019). Note: A standard font indicates a system or service in operation; an italic font indicates a proposal. |
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Notes: Venmo is a mobile US payments app owned by PayPal. M-Pesa is a mobile phone-based money transfer, financing and microfinancing service. Calibra is the mobile wallet that Facebook intends to run on top of the Libra network. Swish is a mobile Swedish payments app launched in 2012 by six large Swedish banks in cooperation with the Swedish central bank. “Overlay” systems build an innovative customer interface that improves the ease with which customers can instruct and receive payments. These systems then use existing payments infrastructure, such as correspondent banking, credit card, or retail payment systems, to process and settle payments. Standalone systems are “closed-loop” payment systems and do not interact with or depend on existing payments infrastructure. In these systems, payments are processed, cleared, and settled by the platform provider independently of any other system. “Domestic” platforms provide payment services within the jurisdiction or region of the platform provider. “Global” platforms provide payment services to users in several jurisdictions. |
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Amazon Go stores implemented a system by which customers check in to the physical store, select the items they want from the shelves, and then walk out of the store without going through a checkout line with a cashier. Payment occurs automatically by the power of sophisticated in-store technology that includes overhead cameras, weight sensors, smartphone payments, and other innovations.
The third type of payment app provides features such as credit card payments, bank account management, P2P transfers, prepay mobile phone payments, bus and train ticket purchases, food orders, ride hailing services, insurance selections, and digital identification document storage. Examples of this type are the Chinese mobile players Alipay and WeChat (Table 8.1).
The second step relates to the “operations back office.” First, the merchant bank contacts the payment bank. Then the payment is processed though data exchange via the card platform (such as Visa, MasterCard). Finally, the payment is authenticated and the funds are transferred between the two accounts.
This second stage involves the highest concentration of organizations that gather sensitive data. Fewer than twenty organizations in the world process billions of transactions with few points of vulnerability. The strongest security measures are found in countries with mature government infrastructure.
This second phase could produce significant efficiency gains in sharing and exchanging data, and it might benefit from further optimization. Distributed ledger technologies (DLTs)—which are still in early days—promise to fundamentally improve international payments by providing a faster solution for cross-border payments, with reduced fees and increased transparency regarding delivery timing and the final payment amount. The most obvious applications of blockchain to the banking industry include clearings and settlements, payments, trade finance, identity, and syndicated loans.
In short, the trend is toward dematerializing payments and streamlining customer experience.
The dematerialization of payments also presents an advantage for sellers: data collection about customers. Most brands, retailers, and companies that sell directly to consumers have now developed a mobile app, for a variety of reasons related to consumer engagement. These reasons include building a stronger brand recognition; connecting better with customers; informing users of new products and offers; reaching out to younger populations; providing more value to customers; being visible to customers at all times; creating a direct marketing channel; improving customer engagement; standing out from the competition; and cultivating customer loyalty.
These mobile apps can contain a loyalty card or a prepaid card that users can load with funds for spending in a physical store or online. This approach is very popular with chain restaurants and coffee shops because users are confident that they will spend $15 to $25 each month. In addition, commerce companies that build apps or websites can take advantage of payment APIs from banks and vendors so that they can offer more options to consumers and seamlessly integrate with the means of payments. Some of these products, such as Appsflyer or Braze, can track users’ behavior on a mobile device and offer them targeted advertisements and discounts. Rewards and discounts can be managed through mobile apps as well as through scannable mobile coupons or automated cash-back options.
Some companies have avidly used apps to track personal data (such as age, gender, address, weight, height) so as to provide better and more personalized advice. Beauty apps use augmented reality that enables customers to explore clothing and hair styles by digitally overlaying products on a selfie. The same apps can be used to send regular notices, and to alert customers about new product launches. Athletic shoes retailers have developed apps for running that can track results (times, level, calories, and distance). Some insurance corporations have directly partnered with credit card providers, providing enhanced insurance services in innovative ways. Car corporations have developed apps to book maintenance, follow kids when they are driving, notify drivers of needed repairs, and file insurance claims.
Chinese citizens, who tend to be more advanced than people in more advanced economies, have realized the importance of in-app payments. Forty-two percent of the Chinese we surveyed said that e-wallets were just a fad and believed that in-app payments would be more widely used in the future.
Larger brands that have a strategic interest in selling direct to consumers must offer direct payments rather than rely on third parties (Figure 8.5). Mobile apps such as Apple Pay and Google Pay collect fees while collecting and analyzing customer data. For this reason, companies often insource their payment systems in a company app. Uber, Lyft, Starbucks, Tesco, and Walmart have made sure to safeguard customer relationships by offering loyalty programs, rewards, invitations, and special discounts, and other benefits. As a result, we expect payment fees to soon approach zero—while companies collect a record amount of data. Because data reveals customer patterns, it has become the new gold.
Data source: Marion Laboure and Jim Reid, “The Future of Payments Part II. Moving to Digital Wallets and the Extinction of Plastic Cards,” Deutsche Bank Research, Corporate Bank Research, 2020, https://
Note: The difference between the two columns accounts for indifferent between the two financial transactions channels.
FIGURE 8.5 Preferred channels for conducting financial transactions in 2020
The discussion above has been focused on two themes: The importance of knowing your consumer better by collecting data; and offering them an easy, personalized experience through suggestions, seamless payments, and rewards. This approach works well for companies dealing with many small consumers. However, it works less well for B2B companies dealing with a few large customers.
As indicated earlier, companies struggle to manage working capital and recover payments from bad payers. Quite often, large B2B corporations are organized as a myriad of SMEs that focus on a specific product or customer segment. To resolve these problems, each SME would need considerable financial staffing for billing, data collection, accounting, and payments; managing and tracking B2B payments is a highly manual process.
Digitization of B2B payments offers a remarkable opportunity for optimization. The transition of payments from checks (or even worse, cash) to wire transfers provides a far better tracking method. When trust is strong between supplier and consumer, then a direct debit mandate is even better. Indeed, digitizing payments is the first step toward automatization. Billing software is already widespread, but when combined with direct debit (or at least wire transfer) it allows companies to track and automate the whole back office. The software can automatically process direct debits, track payments made on time (or not), remind customers automatically, and confirm that payments were made.
Automation of back-office payments processes has a triple advantage: It reduces costs; it reduces complexity and coordination, which also lowers costs; and it can save time, thereby helping to conserve working capital and investments.
As changes in payment methods advance at a rapid pace, two technological advances could disrupt card providers: peer-to-peer payments and cryptocurrencies.
The main raison d’être of card platforms is to facilitate settlements between merchants and payers’ bank accounts. The development of peer-to-peer payments and e-wallets to facilitate noncash transfers between individuals will disrupt card platforms. An app can connect directly to a bank account and ensure e-wallet settlements are finalized. If these platforms become widely used for merchant transactions, then they could also shortcut businesses that provide consumers with cards.
Cryptocurrencies could also undermine this arrangement because they are traded peer-to-peer without need for a commercial bank or card platform.
Cash is still widely used and probably won’t disappear within the next decade. However, it is losing momentum to dematerialized payments. Over the last decade, contactless payments have gained momentum.
Dematerialization continues with the widespread use of contactless payments that include plastic cards (credit and debit cards) and other devices, such as smartphones and watches. In parallel to the contactless novelty, card providers have forged alliances with tech players (such as Apple Pay, Google Pay, Samsung Pay) to increase their reach and to incentivize people to pay via digital or plastic cards.
According to our survey, when people are comfortable with a payment technology, they tend to think even less about the amount they spend. This is particularly true for the Chinese, who are massive users of digital wallets and mobile apps.
Current trends show that most newly issued cards are contactless, meaning that they can be used without inserting or swiping them in a card reader. The next step will likely be the complete dematerialization of plastic cards as more people pay with a smartphone.
In emerging economies, digital wallets are replacing cash at light speed. That’s because a large part of the unbanked population in emerging economies is transitioning straight from cash to smartphone payments, thereby skipping plastic cards completely. In India, cash payments declined from 59 percent in 2000 to 30 percent in 2016. In China, cash payments dropped from 63 percent of payments in 2000 to only 11 percent in 2016.
By contrast, cash and plastic cards are well ingrained in the cultures of advanced economies. Forty percent of citizens in developed nations reported that they prefer traditional payments over digital wallets. However, despite this slower adoption rate, most people in these nations believe that digital wallets will eventually replace traditional wallets within the next five years. China and Sweden offer two remarkable illustrations of what could resemble the payment industry in many other nations in the short to medium term.4
In western Europe, contactless technology has been around for a decade and is now commonly used. In Italy, France, and the UK, contactless payments are by far the preferred method. Over half of the people in these countries believe that contactless payments are convenient. They understand that cash is rarely needed because cards are accepted everywhere.
Given that Silicon Valley gave birth to smartphone payment providers (Apple Pay, Google Pay), it is puzzling to see that only 13 percent of Americans use digital wallets on a weekly basis and nearly three-fifths of these started in 2019. The United States offers a stunning illustration of how physical payments—cash and plastic cards—are ingrained in the culture. On average, Americans hold a record number of plastic cards and an average of $47 in cash per person. Americans favor cash and cards because they are faster and convenient, and because most digital wallets offer no rewards and no cashback. So, even though the United States is the world’s leading innovator, card innovations are just starting to take off.
With multiple firms involved in the process—banks, credit card companies, payment processors—the cost of transactions for US merchants increases as a result all the processing fees. Digital wallets and payments systems like PayPal, Apple Pay, and Google Pay are also connected to this system, but neither commands the market that Alipay and WeChat Pay do in China.
Although contactless cards became widely available in the United States later than in other advanced countries, usage is nonetheless growing. A fifth of Americans have received their first contactless card in 2018 and another fifth in 2019. As a result, just 16 percent of US citizens pay with a contactless card in 2019. By comparison, 38 percent in the UK use a contactless card in 2019.
In short, physical payments—normal cash and plastic cards—are still ingrained in the American culture. Americans also say they are not interested in having a digital wallet if it means no rewards or cashback offers, benefits that are common with cards.
In Europe, mobile payments technology is just beginning. Apple Pay commenced in Europe in 2014 and Google Pay and Samsung Pay began in 2015. So far, only 7 percent of Europeans use smartphones to pay, and 70 percent started in 2018 and 2019, including 44 percent in 2019. However, these low rates are primed to take-off over the next five years, for two main reasons. Most Europeans surveyed believed that digital wallets were not just a fad. They agreed that digital wallets would replace traditional wallets within the next five years. This transition is already happening. Citizens who reported using active cards less than twelve months ago also mentioned using a digital wallet more frequently. Indeed, a third of Europeans planned to use mobile payments more in the next six months.
Consumers said they chose mobile payments for the convenience, speed, and absence of fees. Retailers are taking note. Many are installing a mobile payment app “to fit customer desire.” The key benefit is reduced effort; with mobile payments, there is no need to type in a PIN or handle cash, which removes a psychological barrier.
As the process of dematerialization speeds up, competition among companies seeking to digitally intermediate payments has been intensifying—with important regional variations. We first look at trends in China.
As of the end of 2020, around 86 percent of internet users in China used online payment services, up from 18 percent in 2008. Credit card usage rates among the Chinese generally rank much lower than in developed countries. Why? First, the overall Chinese economy is not wealthy enough for widespread credit card use. Second, there is a low level of trust among Chinese citizens. Third, the Chinese government actively promotes its internet banking infrastructure.
China has seen explosive growth across online e-commerce and social networking platforms. It is a pioneer in digital payment solutions and adoption. Alipay was initially created as a payment solution for its B2C system called Taobao, which acted as an intermediary between consumers and merchants to improve trust. Taobao held the money paid by customers in an escrow account. If the customer was satisfied, Taobao would release the funds to the merchant. This improved consumers’ trust and increased business for merchants. Taobao soon realized that it had a lot of capital in its deposit pool. To improve on its product, it offered to pay interest on the deposits in users’ Alipay accounts. This money market account gave users a higher interest rate than the rates offered by traditional banks. As a result, more customers put money into their Alipay accounts; that is, they started using it like a traditional bank account.
WeChat was created as a messaging platform like WhatsApp. In 2013 it launched WeChat Pay for P2P transactions and purchases from online vendors. WeChat Pay later introduced a money market account just like Alipay to create its own virtual banking system. Now small businesses can set up app-based business accounts to market and sell goods and services. Users share products and services with groups or friendship circles through the app. The seller only needs a picture, a product description, and a QR code linked to the seller’s bank account.
Today, WeChat Pay and Alipay are the most popular payment methods in China. According to a Penguin intelligence study conducted in 2017, 92 percent of Chinese citizens in major cities claimed to use either WeChat Pay or Alipay. These services are used for everything from e-commerce to ride sharing, as well as for government transactions.5
As is evident, the big risk to cards comes from mobile payments. In 2004, mobile payments emerged in China with Alipay. Our survey showed that today Alipay is by far the favorite payment method. Chinese citizens paid 47 percent of their small, regular in-store purchases via mobile payments. Two-fifths were convinced that digital wallets would replace traditional wallets in the next five years.
Three main reasons explain the popularity of mobile payments in China. First, the Chinese government has been playing an active role in building a Chinese world-class infrastructure to support digitization—operating as an investor, developer, and consumer. The Chinese government has blocked foreign websites it considers suspicious. This action brought about widespread internet policing and censorship, practices known as the Great Firewall, leading the government to ban Google, Twitter, YouTube, and Facebook. A new line of look-alike apps that resemble their American counterparts have started to enter the market.
Against this backdrop, Chinese customers have quickly moved from cash to mobile payments. They considered mobile use to be secure, convenient, and reliable. Half of Chinese citizens also planned to use mobile payments more often in the next six months. Only a tenth mentioned the issue of privacy. This low concern for privacy is explained by the fact that privacy in China is viewed suspiciously, as a form of secrecy. It is assumed that an honest person should have nothing to hide from the public domain, so Chinese consumers are often happy to give up their data.
In turn, Chinese retailers have embraced mobile payments. In fact, some stores have begun to accept only mobile payments and have refused cash. This has led the Chinese central bank to issue a formal notice in 2018. It clarifies that renminbi cash is legal tender in China and should not be refused. Elsewhere in Asia, people have been skipping cards completely and moving directly from cash to mobile payments.
By 2013, China had more than 600 million internet users, more than any other country in the world. Of these users, 83 percent used smartphones and 81 percent accessed the internet via personal computer. The number of people using PCs to access the internet has steadily grown at a rate of 10 percent per year. Chinese youth have been spending more than half of their leisure time on the internet, making China the world’s largest market for smartphones, e-commerce, and online games.
Major digital payment players like Apple, Google, and PayPal hope that Western countries will be able to emulate China’s high use of fintech. However, it takes much longer to change ingrained habits of people in a legacy system than it does to start a new system from scratch. People in China, India, and the other Southeast Asian countries readily jump from a cash-based society into a digital-payment society. Because digital payment services are vastly more convenient than the cash-only market, the transition is natural. Moreover, China and Southeast Asian countries have significantly larger young populations than are found in Europe and the United States, and young populations tend to be more open to adopting new technologies.
People in legacy systems, such as in the United States and Europe, have a long history of using credit cards. This makes it harder for consumers to shift to digital payments. It’s an uphill battle for digital payment methods to replace traditional consumer behavior. For this reason, the mobile US payments app Venmo, initially a digital wallet only, eventually introduced a Venmo debit card that deducts money from a person’s Venmo balance. This is a compromise between digital and card payments.
If we look at the next five years in Germany, while keeping in mind that nation’s current demographics and Germans’ favorite payment methods and payment method intentions, we can expect cash to remain the most popular in-store payment method. Elsewhere we expect e-wallets to be the second most-preferred method of payment after cards and the first most-preferred method among millennials.
In the late 1990s Google cemented itself as the search engine giant that it is today. In the following decade, a new technology contest broke out between smartphone manufacturers. Veteran companies such as Blackberry and Nokia fell to the rear, which opened the path for iOS and Android to become the operating systems of the future.
Now, a new battle over digital payments is brewing. The underlying technology for digital payments has been established. So, the companies that position themselves best for customers and merchants will end up winning.
On one front, there are smartphone providers like Apple and Google. Apple’s iPhones come standard with Apple Pay. Its counterpart, Android Pay, is preinstalled on most Android devices. Samsung sells smartphones that come loaded with proprietary Samsung Pay. These services now use NFC technology with fingerprint and facial recognition for authorization.
Social media companies have also entered the fray. Facebook has implemented payment services on its popular Messenger and WhatsApp platforms, and Apple has introduced payment services on iMessage. Both companies focus primarily on P2P transactions. Apple Pay Cash costs the same as Square Cash and Venmo. It is free to send money using a debit card or in-app balance, and it costs 3 percent of the transfer amount if you use a credit card. By comparison, using a debit or credit card to send money with PayPal costs 2.9 percent of the total amount plus thirty cents for the users.
Other competitors include online payment systems such as PayPal, Square, and Stripe. PayPal subsidiary Venmo is extremely popular among millennials. Square, founded by Jack Dorsey, developed Square Cash to compete with Venmo, but it also provides financial solutions to merchants and vendors. Stripe integrates with e-commerce merchants, whereas PayPal and Square focus on e-wallet services that allow users to store and control their online shopping information and to purchase products from online retailers.
Finally, commercial banks are also competing in the payments arena. Most banks have partnered with Apple Pay and Android Pay to make their credit and debit cards easier for customers to use. Banks have also partnered with telecom providers. In this competition, banks have some advantages. They have preestablished financial networks, infrastructures, trusting customer bases, strong brand recognitions, and a history of regulatory compliance. One successful example of a bank’s digital payment platform is Chase Pay.
Each of these companies caters to different aspects of the payment system. Before we can declare a winner in the payments competition, we need to understand what it takes to win.
The first thing any company needs to do is identify its customer value proposition. This marketing term refers to the reasons a customer would choose a payments service. According to a McKinsey study, customers’ top priority is convenience. Apple Pay, Android Pay, and PayPal are more convenient than typing credit card information. Apple and Android have almost an equal market share in the United States. PayPal has long been a trusted online payment platform and has cross-platform adaptability. If PayPal can find a way to use Venmo as a payment method for online stores, then PayPal can tap into Venmo’s large consumer base.6
However, mobile sales contribute to less than 50 percent of all online sales; most sales still take place on desktops. This reduces the advantage that mobile digital payment solutions currently enjoy. This may change as people increasingly transact with mobile phones. E-commerce giants such as Amazon and Walmart store credit card information on their platforms, which makes one-touch payments more convenient than third-party digital payment solutions such as Apple Pay or PayPal. Amazon manages 49 percent of all online retail in the United States
Online retail is growing at a rate of 15 percent per year compared to 4 percent a year for retail sales at brick-and-mortar venues. However, as of 2017, online stores made up only 10 percent of all retail purchases. A notable phenomenon of the Covid-19 pandemic was the accelerated digitalization of commerce, which implies future growth in the merchant payments market. That market appears to be large. For example, approximately 80 percent of small European retail businesses did not have any online shopping capabilities, and some did not even have a basic informative website. According to our proprietary analysis in western Europe, consumers spent on average between 30 percent and 60 percent more via online retail at the end of 2020 compared to March of the same year. The biggest e-commerce sales are in the United Kingdom, with 42 percent of the population buying online, and in the United States, where e-commerce rose to 36 percent in December 2020. Thus, the number of payments transactions conducted by cards surged. Because digital payment methods do not provide a distinct advantage at physical and online stores, especially in countries like the United States where card usage is very high. It’s an uphill battle for digital payment methods to replace traditional consumer behavior. For this reason, Venmo introduced its own debit card that deducts money from a person’s Venmo balance. This is a compromise solution between digital and card payments.
In order to compete in this part of the fintech revolution, companies will have to identify merchant value propositions. In other words, digital payment providers must convince merchants that it’s worthwhile to accept digital payments. This is a tough task, as evidenced by the MCX consortium of the thirty-nine largest US retailers (led by Walmart). These companies each pledged to start their own digital payment systems rather than use a system designed by Apple or Google. One reason for that choice was to avoid paying a percentage of sales to an intermediary. This situation reveals that payments companies will have to offer services such as data analysis, reward programs, and higher conversion rates before they can convince merchants to use their digital payment methods.7
Apple has done a decent job of wooing merchants to its services by creating a buzz around Apple Pay. But without a long-term value proposition, it remains to be seen if Apple can retain those merchants. Google, Samsung, and Chase are far behind Apple in merchant partnerships. PayPal has established partnerships with companies in online markets, but it needs to find a way to leverage that advantage in onsite stores.
On the global stage, America and its Western counterparts must catch up with Chinese digital payments companies. As noted earlier, two companies dominate the Chinese market—Alibaba, with Alipay, and Tencent, with WeChat Pay.
Alipay has cooperated with banks to enable debit card payments, and it helped increase trust between buyers and sellers. As a result, Alipay contributed considerably to the prosperity of the Chinese online payment industry. As internet users migrate to smartphones, many believe that there is still considerable room for China’s mobile payment industry to expand.
Who will be the real winner in this competition? The short answer is no one. Banks and card institutions like Visa and MasterCard cannot lose because all payment methods, including those operated by Apple Pay and PayPal, still need bank accounts and credit cards to function, at least for now. However, banks do not seem to have made a significant impact in digital payment methods. As for the mobile phone companies, they must propose an additional value proposition to consumers and merchants if they want to make headway. Messaging and social media platforms like Facebook and WhatsApp may yet become dominant players in this space. PayPal and Square seem to be the best situated players because they have built strong partnerships and have a sizeable active consumer base. If a situation like Alipay or WeChat Pay arises in the United States, then PayPal and Square will find themselves at the top.