Digitising Finance: Fintech and the true cost of going Cashless
Since our first civilisations and structured societies started forming, we developed a system of tokens used to facilitate trade, what we now call currency. From rocks, copper, gold pieces and silver coins to, most recently, notes. All these were used as a medium of exchange and a store of value, facilitating trade and industry.
Move towards cashless
Yet, most money now is made up of digits in an increasingly integrated system of global finance. The use of physical cash is on the wane as technology allows everyone to upload their wallets into their mobile phones. Sweden is the pioneer of this trend towards a cashless society, with less than 20% of consumer payments being in cash last year.
The UK, the hub of the European financial sector, has embraced the fin-tech revolution as well. It slightly lags behind Sweden, with the UK Finance Report finding that 23% of all payments in the UK were in cash in 2019. The report predicted that by 2028 only 9% of UK payments would be in notes and coins, as more people move towards cards and mobile payment services.
The Coronavirus pandemic has accelerated this process. Cash, having a tangible physical presence, can become a carrier of the virus through its circulation amongst the general population. People have become more sceptical about its use due to the uncertainty of whether droplets containing the virus can attach to the surface of a banknote or a coin and infect others.
Lockdowns and stay-at-home orders further reduced the use of cash. As people stayed home, the hospitality sector, which accounted for a large proportion of cash transactions, ground to a halt. Informal payments, such as tips and street-performers, effectively disappeared overnight. Significantly, people did not move just their payments online, but whole markets were uprooted and set up in the web. The transition from physical shops to digital markets meant that cashless electronic payments grew at an even faster pace than they would have otherwise.
Is going cashless a good thing?
The benefits of the move away from cash are clear. The risk of counterfeit notes is eliminated, criminal activity becomes harder to finance and easier to recognise for law enforcement agencies and the risk of transmitting viruses is reduced. Importantly, electronic payments show up on records, allowing consumers to draw up their budgets more accurately.
It is those records, though, which pose the most significant problem for cashless societies. Cash transactions do not tie the paying individual with the transaction and cash payments are often untraceable. This conferred a level of privacy to those using cash that will now be lost through the use of alternative payment methods.
Banks and online payment service providers charge transaction fees to make a profit out of the move away from cash, but the data they get on each individual’s purchasing history is far more valuable to them. Data is quickly becoming the most sought-after resource of the 21st century and payment service providers stand to gain the most out of the switch to cashless.
Right to privacy
In Europe, the right to privacy is a fundamental human right. Within the EU, the GDPR has enhanced the protection afforded to private data, including the need for pseudonymisation and the requirement to obtain the consent of individuals for the collection and processing of their private data. Such protection is not afforded in most of the world outside Europe.
Yet, even in Europe the requirement for consent has become nothing more than an additional procedural step for organisations who collect, process, and monetise the spending data of their customers. Under the GDPR’s provisions, consent must be valid, freely given, specific, informed, and active. The enforcement of these requirements, though, is questionable. Individual customers have little to no power when it comes to negotiating the use of their data with banks and payment service providers. Frequently, the requirement for consent becomes nothing more than a tick-box exercise and refusal to consent bars individuals from using the relevant service all-together.
Hence, most individuals consent to the use of their data when using a card or an online payment service without much consideration or understanding of the impact of their consent. Their data is processed and sold to businesses and advertising companies. Whilst social media platforms decipher what their users are interested in buying through their likes and searches, banks already KNOW what their customers are willing to spend money on. This gives them a significant advantage which has not, yet, drawn the general public’s attention in the same way as the data collection committed by social media platforms.
Compiling a person’s transaction history is a significant breach of trust on its own. This is exacerbated by its combination with personalised marketing, influencing an individual’s behaviour and spending patterns in a highly intrusive manner, all of which is driven by the end-goal of maximising corporate profits.
More sinister is the sharing of this data with governments. The most prominent example of this danger is the ‘Great Firewall’ in China and WeChat, a Chinese application which combines messaging, social media, and mobile payments. Under Chinese law, companies in China are obliged to share private data with the government when requested to do so. This power has been used consistently to construct a system of mass surveillance in which the Chinese government knows the location and spending habits of the application’s over 1 billion active users.
Whilst there is little evidence to suggest that other governments have unwarranted access to the transaction history of their citizens, the move towards cashless payments will exacerbate concerns regarding the death of privacy. Banks and other payment service providers are already collating a huge amount of data on each of their customers and it is not hard to envisage that a government might be tempted to use that data for improper purposes.
In Europe and beyond the right to privacy is considered a fundamental one. It is for that reason that the GDPR was introduced, but more must be done to ensure that the shift towards a cashless society complies with the right to privacy. More investigative powers and a robust enforcement system are needed to ensure that the data collected by banks regarding non-cash transactions are not abused. Amendments to the GDPR might soon become necessary to keep the right to privacy alive or else we might witness the end of privacy when it comes to our transactions and spending patterns.
Want to learn more about how tech is transforming the Finance sector?
You can read more on how tech systems are currently being employed and recent M&A activity showcasing this digital transformation here.