What will payments look like in 2025?

It’s easy to get carried away imagining a near future in which everyone pays for everything through digital devices. Or perhaps advances in biometric technology will soon enable us to dispense with our devices altogether and pay with our smiles alone.

After all, digital payment is booming, while the use of cash is declining in many countries and new biometric technologies are advancing fast. But it is more likely that no one payment method will dominate and the future of payments is going to be much richer and complex.

Rumors of the death of cash, for example, have been greatly exaggerated. While digital payments are booming, paradoxically, more banknotes are in circulation than ever before.

Despite the boom in digital payment, cash is still the most widely used form of payment worldwide, accounting for the majority of all payment transactions globally and with a banknote volume growing by around 3–5% annually.

The convenience of cash

Cash remains indispensable for several reasons. “People trust cash and the value it represents,” says Holger Ziegler, Head of Strategy and Market Intelligence in the Currency Technology business of G+D. Some people hoard it because it gives them security and independence from banks in an era of low interest rates, as well as the anonymity and immunity from cyberattacks that it offers. Others like the convenience of cash payments and how easy it makes budgeting. Even in the most advanced digital payment countries, such as Sweden, users of cash are pushing back, pressuring the government to force banks and at least some retailers to continue to accept cash.

Cash looks set to remain relevant for many consumers thanks to its convenience, familiarity and utility. At the same time, digital payments are becoming ever more established and entrenched. Digital payments are helping overcome geographic barriers, such as between Indonesia’s many islands, which present challenges for managing cash and card distribution. Markets like these are leapfrogging from cash straight to digital payments and largely missing out the card payment stage altogether.

Digital payments also have much to offer the circa 30% of the global adult population which is still unbanked. Almost everyone has a mobile phone these days, which means electronic money can spread financial inclusion at historic rates. In Africa, some telcos have established a role in electronic money, such as the successful MPesa mobile money solution, which facilitate unprecedented access to payments for the unbanked and for cross-border payments in Kenya. Mobile payments based on bar codes or QR codes are increasingly popular in China and many emerging markets.

Digital payments are getting easier still. “There are even solutions where the mobile phone can be the POS itself and you don’t need the classical payment terminal or card,” says Barnabás Ferenczi, Head of Strategy & Marketing in the Smart Card and Digital Payment business of G+D. In large parts of Asia, and especially China, digital payments are becoming the default. Today, just under half of in-store purchases in China are made via a digital wallet, way above the levels in developed markets. Increasingly, these are being handled by recent disruptors, notably Alipay and WeChat.

The big technology players will continue to make inroads via their platforms, notably Alipay and WeChat Pay, used by more than 90% of adults in the major Chinese cities.¹ Outside China, the “Pay” mobile wallet apps of Google, Samsung Pay and Apple are all fighting to grow their share of payments.

Meanwhile, online the choice of ways to pay via internet challengers such as PayPal, Stripe and a wealth of other fintech innovators is proliferating and posing a further threat to the big card payment schemes.

The rise of digital currencies

And there is more disruption to come from digital currencies. While most of the new crypto assets will not survive, some will establish themselves and go mainstream in the coming decade. It’s the Wild West right now, typified by the extreme volatility of cryptocurrency pioneer BitCoin. “These cryptocurrencies predominately serve as a speculative investment opportunity and not as a means of payment,” explains Raoul Herborg, Business Lead Digital Currencies at G+D. But Facebook’s proposed Diem currency is one contender that promises greater stability, ease of use and wider acceptance.

But it is questionable as to whether any of these crypto assets could actually provide the benefits of real currencies as a digital form of cash fit for the future ways we want to transact online and offline. This is where the central banks come in with what’s called Central Bank Digital Currencies (CBDCs). These promise to be secure, trusted, universal and convenient while also enabling the sort of privacy and anonymity that users of cash prize.

China is actively pursuing the idea of CBDCs along with other central banks in the face of the growing dominance of the big private payment platforms, which pose a dilemma for regulators who see too-big-to-fail payment ecosystems emerging that present potentially systemic risk.

With so many trends in play, which payment methods will the world adopt? The answer will depend on their ability to meet the needs of users. “The winners in the payment ecosystem need to have flexibility to offer the best customer experience, under the most secure conditions that also fit the local conditions,” says Ferenczi.

“In one country the solution may be more cash intensive, in others more electronic. Payments need to fit the reality of the customer, the merchants and the banks. This reality is and remains different across the world.” It is clear that the future of payments is one of continuing choice, exciting innovation and ever greater financial inclusion.

Published: 10/05/2020