In contrast to a growing number of countries in Europe and internationally, through central Europe and eastern Europe, the use of cash continues to be widespread, perhaps even the dominant payment method.
Sources: ECB, Statista, RBA, UK Finance, Worldpay
Despite the contrasting resistance of consumers and businesses alike to digital payment methods, payment environments across central and eastern Europe will continue to transform, to become more complex, and in all likelihood will see cash make up a declining share of consumer payments, even if there are comparatively high levels of usage in the long term. That said, because of the more modest rate of change in payment behaviour, there is an opportunity to proactively chart a course through the changing landscape in a considered manner, rather than being forced to react to rapid change. What are some of the key change considerations needed to manage change?
A continuing decline in cash usage in real terms, balanced with widespread usage
There is observable widespread community support for cash across much of central and eastern Europe. That said, central and eastern European countries that participated in the ECB’s SPACE study saw a decline in cash usage from 2020 to 2022 of some 8% on average. It is undeniable that the role of cash will diminish, though continue to play a central role in the payments landscape. It is this change process that underlies much of the planning needed, as economies transition to varying types of ‘less-cash’ environments.
An imbalance in the unit economics of various payment methods
Both cash payment and digital payment infrastructures and service models tend toward a proportionately high fixed cost model. In the case of cash infrastructures, fixed costs, or at least those that are very sticky, include cash centres, logistics fleets, ATM fleets and bank branches. These costs can vary with volume over time to a point, but there is a minimum infrastructure requirement for the payment system to work. In the case of digital payment infrastructures, fixed costs tend to centre around technology – maintaining payment networks and links, along with a range of protections around cybersecurity, fraud and financial crime. As consumer payment behaviours change, the unit economics on cash will mean that each unit of cash payment will continue to increase in real terms, while on the other hand, each unit of digital payment will decrease in real terms. This growing imbalance can be seen to put significant pressure on cash payment infrastructure, with the experience of Australia being of particular note. If changes are managed effectively and proactively at an industry level, the change in unit economics can be balanced such that cash and digital payments are sustainable into the long term. If changes are not managed well, risks around the cash system will increase.
Progressive redesign of the cash cycle
The trends observed with payment behaviour together with implications for unit economics of cash payments all point to a need to progressively redesign the cash cycle. In line with the earlier point around the high fixed costs of the cash infrastructure, much of which is capital expenditure in nature, planning for change rather than simply asset refresh models provide a real opportunity to determine what the right path is for the cash cycle in the long term, which then informs three and five year investment cycles. The ‘right path’ should consider payment trends, key industry participants and their changing role, demographic and geographic observations and change, and ongoing innovation around payments more broadly. Some aspects of a redesign will be tweaks to existing models, while other aspects will be step-change innovation. In most cases, there is a need for deepening industry engagement and collaboration.
Awareness of and policy-making/regulation around digital payments and fintechs
Digital payments and fintech-led innovation and products provide real benefits to economic growth, to commercial enterprise and to society as a whole. However, regulation and policy making frequently struggles to keep pace with the new products and innovation that exists in the payments ecosystem. This results in consumers and businesses being exposed to unquantified or unidentified risks. System-level policy making is key, as emphasised by the UK’s ‘Access to Cash Review’ which warned against the ‘dangers of sleepwalking into a cashless society.’ Ongoing industry engagement along with taking a whole-of-system view of payments, covering cash, traditional digital payments, and payments innovation, is critical if regulation is going to appropriately protect consumers and businesses.
Public trust and financial inclusion
While there are many drivers for the ongoing popularity of cash in central and eastern Europe, two that are of note are public trust and financial inclusion. In the case of public trust, physical currency plays an important and unique role for trust in the financial and payments systems. Indeed, it is the central bank’s role to maintain and protect public trust in money, and fundamental to this is central bank-issued money, either ubiquitously cash, or potentially in the future central bank digital currencies. As citizens rely on cash to maintain trust in the payments system and in the economy, policy settings and operational/commercial decisions must be such that trust does not faulter.
Turning to financial inclusion, historically physical cash has been a cornerstone of financial inclusion because it does not rely on any other access to financial systems or technology. There is encouragingly significant inroads being made to improve broader-based financial inclusion in many countries, including broader access to financial products and services, growth in access to basic technology (in particular mobile phones), and the development of non-bank financial products such as digital wallets. However, financial inclusion is still elusive for many, and this highlights the importance of cash to ensure ongoing financial inclusion.
Conclusion
Cash usage and consumer behaviour is changing in central and eastern Europe as it is across the globe. There are unique features to the change patterns and underlying dynamics, but lessons can be drawn from other countries and regions to inform decision making. Most countries in central and eastern Europe are in a somewhat enviable position in that cash usage is comparatively high, the rate of change is slower than elsewhere, and there is an effective and engaged industry (including central banks, commercial banks and operators) who are minded toward achieving positive outcomes for consumers and businesses. We see the key pillars as understanding payment trends, being clear on the unit economics of payment systems over time, anticipating how the cash cycle should look across multiple horizons and redesigning proactively, and ensuring public policy and regulation take a whole-of-system approach across cash and digital payments.
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