The Rise of Digital Finance - Where Are All The ATMs?
Cash as king has been dethroned in the digital age. We examine the rise of digital finance around the world and where to from here.
Written by Victoria Kent, Senior Investment Specialist
This information does not take into account your personal objectives, financial situation or needs. You should consider if the relevant investment is appropriate having regard to your own objectives, financial situation and needs.
Tried getting cash out recently? You may have struggled to find your bank’s ATM. The number of ATMs in Australia has been declining at a rate of about 25% per year since 2016. The main driver being the increasing popularity of digital payments and availability of contactless payment options.
We often now have to pay to withdraw cash, with rediATMs charging $2.50 per withdrawal.
In The Economist’s "How digital finance changes everything" forum, panellists discussed how invisible money demonstrates visible differences. This begs the question:
When our wallets are digital, what does that mean for our relationship with money?
State-of-play
The world has been moving towards cashless payments for some time, with some countries much more progressed than others. Sweden appears to be leading the charge globally, where 90%+ transactions are cashless. The UK and US are not far behind, both sitting at the 70% mark. Many cash-dependant, developing nations have been slower on the uptake. However, in countries like India, the use of digital payments has been doubling every year.
The COVID-19 pandemic accelerated the cashless trend when lockdowns forced us to do much of our shopping online. This benefitted the incumbent card network providers like VISA & Mastercard, as well as newer payment platforms (Alipay, WePay).
Digital payments are lower cost, convenient and secure. Additionally, "the resulting increase in financial inclusion is also vital to women's empowerment", according to a World Bank Report: Digital Payments Vital to Economic Growth.
Recent changes in the digital finance landscape include mobile payment platforms in developing countries, and digital currencies backed by banks.
In India, the digital finance revolution relies on a fundamentally different model to the West – driven by the Unified Payment Interface (UPI).
The UPI is a non-profit controlled by the central bank. Last year alone, it processed $1 trillion in transactions (a third of India's GDP). The UPI eliminates the need for a credit card network, which means people without credit history can now unlock digital payments.
It was designed as a public utility, so big players like Visa, Mastercard, AliPay or WePay can’t swoop in to dominate the space or demand high fees in the process.
In China the payment system is different yet again. It’s not open like India’s UPI, and not a card network like in the West – China runs closed networks. Their innovative use of QR codes eliminated the need for payment processing devices.
China boasts the highest mobile payment usage of any market, with 92% of consumers using QR-code-driven digital wallets Alipay and WeChat Pay as their primary payment method.
Data everywhere
Any digital transaction produces data, which is a huge opportunity for digital finance. Whether it be consumer spending patterns feeding into lending and financial products, or increased ease of governments to collect GST. Open data initiatives are springing up globally, including the United Kingdom’s Open Banking Implementation Entity, the European Union’s second payment services directive.
A recent McKinsey Report suggests the boost to the economy from broad adoption of open data ecosystems could range from about 1% to 1.5% of GDP in 2030 in the European Union, the United Kingdom, and the United States, to as much as 4% to 5% in India. This is because all market participants benefit, from consumers to institutions.
Where to from here?
Some are questioning the resilience of the existing card network companies (Visa & Mastercard), and their underlying technologies developed nearly 60 years ago. But for now, their network effect seems to be enduring. Apply Pay runs on top of that existing system. And the entanglement of reward systems like Frequent Flyer and cash back bonuses remain a draw. Cards also come with consumer protection.
The evolution of digital finance has made embedded finance possible. Embedded finance is a subset of digital finance that refers to the integration of financial services into non-financial products and services.
As digital finance continues to evolve, embedded finance is expected to become even more popular. It can help businesses meet the changing needs of consumers, and compete more effectively in the digital age.
If you are interested in learning how your business can benefit from embedded finance, check out our website and click the "get in touch" button.