For cash-first countries to benefit from rapid digitisation, there must be a way for new participants to gain access since, too often, access is determined by governance of the payments system. So, what are the hurdles to overcome if a country wants to prioritise digital payments and tap into ‘paytech for good’ solutions? And do the pros outweigh the cons? Arjeh van Oijen, Head of Product Management at Icon Solutions, discusses how rapid digitisation can be properly implemented to help cash-first countries.
When the COVID-19 pandemic hit, countries already committed to a digital-first approach to payments were ahead of the game. Beyond the obvious public health benefits, going cashless offered consumers fast, secure and convenient ways to pay. And while valid concerns about inclusion and access in all-digital economies exist, research indicates that the pandemic-fuelled race towards digital transactions prompted significant advances in financial inclusion. In 2021, the percentage of adults globally with an account at a bank or other financial institution hit 76%, jumping from 68% in 2017. According to the World Bank, approximately two-thirds of the world’s population now makes or receives digital payments, with the share in developing countries increasing by 22% from 2017 to 2021.[1]
So, as more countries look to cut cash—particularly those in developing economies—the discussion has become less about “why?” and more about “how” to harness the benefits of digital paytech transformation to benefit the entire payments ecosystem.
For starters, countries that wish to go digital must be strategic about creating a truly vibrant payments system—one that benefits both consumers and the financial services sector. This requires levelling the playing field between banks and non-banks, to stimulate the competition needed to build a flexible real-time payments infrastructure that promotes innovation and encourages access for new participants.
Unfortunately, too often, access is determined by governance of the payments system. In these situations, countries fail to create access to modern payments infrastructure because of perceived risk by existing participants and unwillingness on the part of regulators to intervene.
The result? The lack of new participants limits the growth of competition in the market, squashing innovation in the process. Instead, expanding access to digital payments must be top-of-mind for cash-first societies since digital payments often represent the first point of access for many people to the wider financial system. To further ensure accessibility and avoid monopolies, authorities must remain committed to promoting interoperability between different payment service providers.
India’s Unified Payment Interface (UPI), operated by a specialised division of the Reserve Bank of India (RBI) provides a good example of how a swift pivot to digitisation can usher in tremendous benefits for citizens when implemented strategically. UPI separates customer experience from account ownership so customers can use the app of any bank or non-bank for UPI-based payments. This means participation in the underlying infrastructure becomes irrelevant. But at the same time, the standards (like APIs) as defined under UPI ensure full accessibility and easy switching between providers.
Additionally, the RBI updated the access rules to the Real Time Gross Settlement (RTGS) and national electronic funds transfer (NEFT) systems for non-banks. By extending access to payment systems to more entities, the central bank provides a strong impetus to digital payments, promoting both innovation and competition. This means that authorised non-bank payment system providers, including prepaid payment issuers, card networks and white label ATM operators can participate in central payment systems. Direct access for non-banks to payment systems lowers the overall risk in the payments ecosystem and brings advantages to non-banks like reduction in cost of payments, minimising dependence on banks, reducing the time taken for completing payments, eliminating the uncertainty in finality of the payments as the settlement is carried out in central bank money.
Financial services regulators and authorities can have an optimal strategy to promote competition, innovation, cooperation and access in place, yet without a modern payments infrastructure to support it, everything falls apart.
When banks and financial institutions must rely on outdated and unsustainable technologies that can neither cope with modern-day challenges nor offer consumers rich payments experiences, they are unable to compete with fintechs. Yet infrastructure modernisation can require hefty capital outlays without achieving meaningful agility or scalability.
Instead, achieving true paytech transformation depends on operators willingness to consider wider technological shifts and anticipate the rise of new digital payment instruments, including central bank digital currencies (CBDCs) and cryptocurrencies. Accommodating these shifts requires adopting a flexible, cloud-native payments framework that empowers countries to adapt to changing dynamics, support access, and spurs innovation across the entire payments value chain, regardless of whether cash is involved.
[1] https://www.worldbank.org/en/news/press-release/2022/06/29/covid-19-drives-global-surge-in-use-of-digital-payments
