It’s Time to Update Our Payment Systems
The way we make payments is rapidly evolving. Traditional payment methods such as cash, checks, and banking are being challenged in this technologically advanced era, and traditional financial institutions are trying to stay ahead. A closer look must be taken to find comprehensive solutions to help move the industry forward and stay relevant.
The Decline of Traditional Payment Methods (Cash/Checks)
A big challenge to banks worldwide is that the use of cash is declining. For example, in Australia, banks are trying to contend with the fact that people are using less cash. The pandemic sped up the decline of the use of cash in Australia.
Since most people are using digital options, the cost-effectiveness of cash handling is declining. Because of the high fixed costs, shareholders question traditional banking models. In addition, the consolidation of armored car companies has raised awareness that urgent new solutions are needed to address the challenges of declining cash transactions.
The story wasn’t much different in the U.S. Before the pandemic, the use of cash had already declined. Then, once the pandemic hit, there were seemingly more reasons why cash wasn’t used anymore. Lockdowns kept people inside, and they mostly bought online. When people did venture out to make purchases in person, many were hesitant to use cash because of the contact involved with the transactions and the perceived but unfounded risk of virus transmission through cash.
In 2020, U.S. cash use fell to 19% of all payments. A steep decline from 26% the year before. However, the drop did stop. In 2021, cash use accounted for about 20% of all payments, and then in 2022, 18%. Experts believe cash has found its floor and won’t fall below this for a while. However, it still doesn’t mean the cost-effectiveness of handling cash isn’t a problem in the U.S.
The Cost Of Cash And The Decline Of Checks
It’s not just financial institutions that are losing money on cash transactions. A research and advisory firm named IHL has estimated that the cost of cash transactions for a business ranges between 4.7-15.3% value of the cash.
The industry causes the percentage to vary, but there are multiple reasons for the cost to be this high. Obviously, time is an issue: time is spent opening cash drawers, balancing drawers for shifts, and reconciling end-of-day transactions. Cash transactions also take a bit longer compared to credit card transactions. When you also consider the fact that transporting cash is an added cost/risk and that employees can potentially steal cash more easily, it’s clear why the cost of cash transactions can increase for businesses.
In addition, when customers use cash, they spend less than they do when purchasing with credit cards. Customers typically only spend about $22 per transaction with cash, compared to $112 when using a credit card.
Similarly, the use of checks is diminishing. Despite advancements like image exchange technology, operational costs remain high, and many financial institutions continue to support outdated systems.
Outsourcing has only slightly mitigated these costs, prompting a reevaluation of reliance on check-based transactions. The cost of processing a check can be between $4 and $20, not accounting for the time spent managing these transactions. These numbers don’t even account for the time spent writing, mailing, and reconciling the checks written by the business.
Modernizing Legacy Infrastructures
Pre-authorized debits, bill payments, and legacy systems present another layer of complexity in the modernization journey. For example, in Canada, the reliance on the Electronic Data Interchange (EDI) to pay bills highlights the vital need for upgrades to the system.
Legacy platforms are obsolete, which calls for investments in modernization efforts. Payment processors and financial institutions will have to work together in order to find solutions to outdated infrastructures and lead the way to better payment processes.
Embracing Innovation: Technology-Driven Solutions
Because of the above-mentioned challenges, financial institutions are working toward new solutions to modernize payment systems. Central bank digital currencies are one promising solution that solves the limitations of cash transactions, but hurdles to implementing central bank digital currencies have to be overcome.
Payments-as-a-service (PaaS) platforms help banks adapt to changing consumer preferences without the difficulty and problems of maintaining in-house systems. Cloud-based solutions, such as IBM® Payments Center®, utilize technology to help make operations more efficient and streamline payment processing.
In Australia, the PayTo service helps with pre-authorized debits and bill payments. Implementing real-time payment systems with service overlays helps to bring modernization to finance. Implementing such digital transformations helps financial institutions innovate and grow while increasing the trust of shareholders and consumers.
The Way Forward: Embracing the Digital Future of Payments
There is no doubt that payment systems need to be modernized. As time marches on and the financial landscape evolves, embracing innovation is critical. From central bank digital currencies (CBDCs) to PaaS platforms, it’s clear that there is plenty of room for innovation.
Collaboration, innovation, and embracing change are how the finance industry will ensure it stays relevant and resilient to future trends. Now is the time to seize the opportunity and shape the future of financial payments for generations to come.
About the Author
Howard Davidson is the CMO of Almond FinTech
Almond FinTech is a B2B fintech company transforming cross-border payments by empowering financial institutions and their customers with the best possible rates and near-instant FX settlements across all corridors globally. With Almond technology, institutions can guarantee fast, affordable, and transparent cross-border transactions. Finally.