Digital payments – disruption risks in a cashless economy

Physical currencies have been the mode of economic transaction for thousands of years. Today, payment systems are becoming increasingly cashless. In the European Union (EU), one in five of all daily purchases in 2022 took place online, and one-third were made using a card.¹

The preference to use cash or digital methods varies. For example, in Sweden 15% of all in-person purchases were made in cash 2019; in Greece the figure was 88%.² All told, the trend for cashless payments is set to accelerate as the digital revolution goes increasingly global. For instance, in Sweden already only half of bank branches accept cash deposits and in 2022, Europe’s leading six largest online-only banks had more than 34 million customers.³ In parallel, emerging markets are digitalising their economies, transitioning from cash to digital payments and bypassing the intermediate “card age”.⁴ In Kenya, more people use mobile money transfer applications than own a bank account.⁵ In many nations in Sub-Saharan Africa, mobile money accounts are more common than bank accounts.⁶

De-cashing the economy could bring many benefits. With the elimination of notes and coins, a larger share of money supply would be in form of virtual bank deposits. If banks have access to a larger digital money supply, they can increase the volume of loans they make and improve lending costs. In addition, going cashless would make the economy more responsive to central bank monetary policy changes, as cash at home is less sensitive to changes in interest rates than bank deposits. It should also improve fiscal revenues as tax-evasion becomes harder.

However, digital payments require infrastructure: for example a network, electricity and functioning hardware (phone, smartphone, card etc). Failure in any of these can paralyse a whole economy. At the consumer level, payment system outages would mean transactions at a restaurant or the cashless check-out in a supermarket, among others, would be blocked. Further, it could be that salaries are not/ cannot be paid, or that an entire payments system is down for days. Major disruptions triggered by cyberattacks, power outages and natural disasters are a main threat to the cashless economy. But they also bring new risk pool opportunities like cyber and digital fraud insurance.

Another risk is that many cashless/digital payment systems are privately run. This leaves households dependent on private players to access money and for day-to-day transactions. In case of a private payment company going bankrupt, the guarantee of access to one’s e-wallets may be at risk. With individuals losing the ability to save in physical currency, their virtual savings might be more vulnerable to financial crises or collapse of private banks. And some sectors that rely heavily on cash transactions (eg, housing construction) may struggle during transition to cashless.⁷ This could see a rise of new a business for re/insurers: coverage for deposit guarantees designed for non-bank payments providers, and digital wallet insurance.

A cashless economy will exclude some parts of the population that are not digitally equipped. Everyday needs like purchasing a bus ticket will be difficult to access without a card or smartphone. This could lead to consumer protection groups filing discrimination lawsuits against private companies, municipalities and/or the state. A cashless economy also brings with it a certain loss of personal privacy. Digital payments leave digital traces, as personal data is shared and stored across multiple vendors and platforms. There are examples of where digital credit decisions are taken based on unclear data and nontransparent processes.⁸ Cyber security incidents resulting in leaked personal data are more common when more personal data is stored by financial institutions.⁹ Further, financial crimes based on social engineering are reportedly increasing with growing online access to personal data.¹⁰