Cash payments and digital payments: a SWOT analysis

Universal acceptance: Notwithstanding a gradually increasing subset of businesses that do not accept cash, it is fair to say that cash is accepted practically anywhere, and indeed major currencies, in particular the USD, often become the de facto or at least dominant currency of trade in countries with high inflation.

Anonymity: The anonymity and privacy of cash affords privacy for users who are concerned with data security or surveillance.

Tangibility: Physical cash provides a tangible asset that users can hold. This provides both a sense of control, but is often important for users of cash in personal budgeting processes.

Immediate settlement: Cash payments are instant, avoiding delays in settlement times associated with some digital payments.

No technology dependency: Cash payments do not require internet access, electricity, or digital devices, making it reliable in regions with weak infrastructure or during power outages.

Low transaction fees: Typically, no additional fees are imposed on users by merchants accepting cash, unlike the prevalence of digital payment surcharges.

Public trust: As legal tender, cash is highly trusted by practically everyone, and for some in the community, particularly skewing to vulnerable people, cash is often trusted more than digital currencies.

Cost of handling and security: Physical cash requires secure storage, transport, and handling, which incurs significant costs, at a system level and especially for banks and retail businesses. These costs are usually absorbed by the business.

Lack of traceability: While cash’s anonymity is an advantage for privacy, it also facilitates illicit activities such as tax evasion, money laundering, and criminal transactions.

Inconvenient for large transactions: Cash is impractical for large transactions.

Limited remote transactions: There are few if any mechanisms to use cash for online shopping, mobile payments, or other forms of remote transactions, limiting its utility in an increasingly digital world.

Financial inclusion: Cash has historically played, and can continue to play a crucial role in ensuring access to payment methods for individuals without bank accounts, smartphones, or internet connectivity. It acts as an important safety net for payments.

Crisis resilience: Cash has historically and will continue to play an important role in crisis situations, whether they be natural disasters, digital outages or cyberattacks. Many of the strengths of cash point to it as being an important and relatively unique payment solution in times of crisis.

Decline in usage: With the ongoing growth of digital payments and broader innovation in payments that is mostly centred around digital means, cash usage is steadily declining in most countries. In developed countries where cash as a share of payments is <20%, this trend is threatening its role in the payment ecosystem.

Digital payments push: Governments and financial institutions are increasingly promoting digital payment systems as a means to improve efficiency and transparency.

Cashless societies: Whether by public policy or commercial interest, in some countries there is a drive toward being completely cashless. This is seen with growing numbers of businesses refusing or limiting cash acceptance, banks reducing access to cash transactional services, and governments adopting digital payments in social welfare programs.

High-cost infrastructure: As cash usage declines, maintaining the cash infrastructure (bank branches, ATMs, logistics, cash processing), which is relatively fixed, becomes more expensive relative to its volume.

Convenience and speed: Digital payments are quick and convenient, allowing for instant transactions without the need to carry physical money. The growth of real-time payment networks reinforces this strength.

Global reach: While national payment networks are still in their early stages for cross-border activity, card scheme payments are instant at a global level, and cross-border account transfers are readily accessible, albeit with at times lengthy periods for settlement.

Enhanced security: Digital payments are generally encrypted and can use biometric authentication and financial institutions are some of the most digitally secure entities which means users can have confidence in protection from theft.

Traceability: Digital payments leave a record of transactions, making them transparent and easier to audit, useful for personal budgeting, tax compliance, and business operations.

Scalability: The scalability of digital payment systems is high, if not limitless (noting the scale challenges of crypto payments), making them an important backbone for trade and commerce.

Integration with technology: The integration of digital payments into the digital economy has been hand-in-glove, along with a wide and growing range of products and innovation in the payments ecosystem such as loyalty programs, promotional models and consumer choice of payment.

Dependence on infrastructure: For the vast majority of digital payments there is a reliance on infrastructure including telecommunications, power, and the availability of each step in the digital payment chain. Some of this infrastructure is more reliable than others.

Security and fraud risks: Despite the high resilience of financial systems, digital payments are still susceptible to cyberattacks and data breaches, while digital payment fraud is one of the most significant challenges for the financial services and payments industries.

Exclusion of the unbanked: To access digital payments users either need a bank account with means of digital payment (eg. debit and/or credit cards), or a mobile phone to access nascent but growing independent digital wallet payment networks. A large portion of the global population, especially in developing countries, remains unbanked or underbanked, limiting their access to digital payments.

Transaction fees: Transaction fees for digital payments are high relative to cost, scale with payment value, and are disproportionately borne by small businesses (if absorbed) and consumers (if surcharged).

Potential for over-reliance: A heavy dependence on digital payments can result in an inability for many people to make payments if there is a crisis event or payments system outage.

Digital divide: There is a risk that populations with low technological literacy, without access to smartphones, or who are unbanked/underbanked may be left behind, exacerbating inequality.

Expansion of financial services: Digital payment platforms can serve as a pathway to other financial services like savings accounts, loans, and investments, particularly for the underbanked population.

Innovation in payment methods: There is widespread innovation in payments across the globe, in end-user innovation, payment simplification, and the creation of new payment methods such as real-time payments, cryptocurrencies and central bank digital currencies (CBDCs). Innovation provides an opportunity to materially improve economic growth and consumer wellbeing.

Data monetisation: Digital payments create a significant amount of data, which can be used to understand trends, consumer preferences, spending patterns, etc. While this poses considerable risk, if used well this data enables businesses and governments to develop more personalised services and improved operation of payment systems and businesses more broadly.

Regulatory challenges: Governments are grappling with how to regulate the rapidly evolving digital payment landscape, notably around issues such as merchant fees, cryptocurrencies and fintech disruption. Regulation has the potential to significantly change the digital payments landscape.

Competition and fragmentation: The digital payments space is dynamic and crowded, with a mixture of traditional banks, fintechs, and tech giants. This leads to duplication of innovation, market fragmentation and the potential for monopolies and concentrated oligopolies to form.

Privacy concerns: The high data footprint of digital payments raises significant concerns over data privacy and the misuse of personal financial information.

Cybersecurity threats: Increasing reliance on digital payments heightens the risk of cyberattacks, ransomware, and financial fraud, which undermines trust in these systems.