“Is cash the only real king? The future of payment transactions in Switzerland”
At first glance, payment transactions appear to be a minor and straightforward area of business for banks. But looks can be deceiving. New and established providers are revitalising the payment market with innovative products and services, thus challenging the processes and infrastructures which have evolved over decades. Could this mean that we will ultimately have to rethink our underlying understanding of money?
Switzerland, a “cash nation”, is experiencing an ongoing transformation
The Swiss Payment Monitor 2020 published by the Zurich University of Applied Sciences and the University of St. Gallen finds that debit cards unequivocally remain the most popular means of payment in Switzerland. A closer look at transaction volumes shows that last year, around 28 percent of spending was paid for with debit cards, 23 percent in cash and 21 percent with credit cards. Measured according to the number of transactions, cash took the lead, accounting for around 45 percent of all transactions.
But even in Switzerland, which has traditionally had an affinity for cash, the importance of this form of payment is steadily dwindling. The fact that the frequency of cash withdrawals has decreased is in line with this trend. According to the Swiss Payment Monitor, each Swiss citizen carries an average of around CHF 70 with them. This money is mainly used to pay small or very small amounts of up to CHF 20. However, contactless and mobile payment methods as well as prepaid cards are being used more and more frequently for such amounts. The corona crisis has further impacted this behaviour in favour of contactless payment methods, as was found in an analysis by the SBA. Currently, mobile payment solutions are most frequently used in connection with mobility-related services (especially for public transport and parking). Examples thereof include payments via the TWINT and SBB apps. Meanwhile, awareness of payment solutions offered by large technology companies such as Apple, Google and Samsung continues to increase and is fuelling competition for customer interfaces for digital payment transactions.
A glimpse into the future: paying in restaurants with data or tokenised assets
The displacement of cash by digital payment solutions will most likely continue to increase. Against this backdrop, SIX last year identified a number of possible future scenarios with varying degrees of probability in its white paper Future of Money. Overall, the authors predict that cash holdings will decline. According to this thought experiment, this will be fuelled primarily by the fact that the demand for cash as a means of payment will decrease by up to 70 percent.
In what SIX considers the most likely scenario, digital payments will be seamlessly embedded into digital services that can be directly executed by an increasing number of IoT devices (Internet of Things). This development would lead to instant settlement, i.e. the delay-free settlement and execution of payments, becoming the new normal. Banks would open their APIs (application programming interfaces) and compete for customer interfaces. Credit and debit cards would disappear as payments would be made exclusively via digital user interfaces (UIs) or mobile devices. Plastic cards would lose their authentication function, since users would be able to identify themselves biometrically directly via their end device. Due to the interest rate environment and other factors, people would leave less and less money on their current accounts and instead invest it in assets. Non-monetary digital investments would therefore pose an increasing challenge to the “store of value” function of traditional currencies. Furthermore, these assets would increasingly be used as means of payment. It would then, for example, be possible to pay for a meal in a restaurant with one’s own data or tokenised assets. In this scenario, due to the reduced demand for cash, the authors believe that the number of ATMs would drop by up to 40 percent and that it would no longer be possible to withdraw money from bank branches. In rural areas, the cost pressure on the cash infrastructure would lead to the emergence of an almost circular cash economy – a so-called crowd-sourced cash infrastructure.
Banks will continue to drive innovative offerings and partnerships with third-party providers
Even if to some observers, these developments sound like they are still a long way off, the speed of the transformation should not be underestimated. The exponential increase of contactless payment options that can already be observed could rise even further, especially in light of COVID-19. In order to benefit from the growth in this segment, banks will have to drive innovation and partnerships in the payment transactions space as well as even better understand customer needs and cater to such. The developments in open banking and open finance are in particular an important step in the right direction and can help propel product innovation and efficiency gains. Banks should not hand the payment transactions business over to third-party providers without putting up a fight, as that would mean surrendering important advantages such as customer loyalty and the ability to benefit from personal finance management analyses. In the more distant future, however, financial services providers will have to fundamentally consider the function of money and possible emerging alternatives. True disruption in the area of payment transactions will become reality at the latest when the data economy and the tokenisation of non-monetary assets become well established.