15 September 2020

SUERF: Inclusive payments for the post-pandemic world

The Covid-19 pandemic has accelerated the shift to digital payments. In some cases, it may be undermining the acceptance and availability of cash. If this trend persists, it carries risks that unbanked and underbanked people will be left – further – behind.

Low-income and vulnerable groups, in particular, often do not have basic or trustworthy identification credentials, making it more challenging for them to access digital payments, and for the public sector to disburse government-to-person payments efficiently. Going forward, central banks will need to navigate multiple policy trade-offs. In particular, general purpose central bank digital currencies (CBDCs) and progress in digital identification can help fill the gap by ensuring access to a basic, trustworthy means to pay digitally and facilitating financial inclusion.

 

Covid-19 has accelerated the shift to digital payments

The pandemic and resulting economic crisis have led to marked changes in the use of cash and in retail payment behaviour. These changes in payment behaviour are visible through several channels (BIS (2020)). First, public concerns about viral transmission through cash2 and the temporary closure of many non-essential stores have led to a temporary decline in cash withdrawals (Graph 1, left-hand panel). At the same time, fewer opportunities to use cash and the economic uncertainty in the pandemic have resulted in higher cash holdings (centre panel). This can be attributed, in part, to higher precautionary holdings of cash, a trend that has been observed in previous periods of uncertainty (eg the Great Financial Crisis of 2007–09). Meanwhile, social distancing and increased transaction limits for contactless card payments have coincided with an increased use of contactless payments at the point of sale (right-hand panel).3 Meanwhile, the surge in e-commerce (right-hand panel) has driven increased remote use of payment instruments (eg card-not-present) in the domestic context, while travel restrictions have affected cross-border payments. For example, e-commerce spending in the United States grew by 93% year on year in May 2020 and e-commerce as a share of total retail sales reached a record of 33% in the United Kingdom in April and May 2020 (Mastercard (2020a)), while volumes of cross-border payments in international card schemes fell by over 40% year on year in April 2020 (Mastercard (2020b), Visa (2020)).

If the acceptance of cash decreases, households without access to digital payment means could face barriers to making and receiving payments. The additional decline in cash use due to the pandemic could accelerate a reduction in automated teller machines (ATMs) and physical bank branches. A reduction in access to cash could disproportionately impact groups of people who do not have access to digital payment mechanisms. This includes senior citizens, individuals with special needs, (undocumented) migrants, people living in or moving out of extreme poverty or homelessness, inhabitants of rural and remote areas, and those with limited financial capability (Ceeney et al (2019)). Many of these groups lack access to bank accounts, (contactless) payment cards and to mobile devices for remote payments. As a result, they rely on cash to make and receive payments. Public entities and international organisations are therefore considering the need for preserving access to cash as well as improving digital financial inclusion.

The need for efficient government-to-person payments

Government transfers during the pandemic have highlighted both progress and shortcomings in payments. As of 10 July 2020, a full 200 countries had planned, introduced or adapted social spending measures in response to the pandemic (Gentilini, Almenfi and Dale (2020)). The majority of these responses are social assistance measures, which are weighted towards cash-based transfers (Graph 2, left-hand panel). Most governments have relied on credit transfers – electronic deposits directly into a recipient’s bank account – to make their government-to-person (G2P) payments (centre panel). Credit transfers enable fast and direct delivery at lower cost than paper-based means. They also increase transparency, as governments can monitor that the full amount of the payment is delivered to the recipient. Furthermore, credit transfers can improve longer-term financial inclusion by potentially acting as an on-ramp to transaction accounts and other financial services (right-hand panel). Mobile money and general purpose prepaid cards can have similar benefits. However, during the pandemic, some governments have reverted to traditional (token-based) payments such as banknotes, cheques and limited-purpose prepaid cards alongside credit transfers. These token-based payments help to serve the digitally excluded in the short term, but are slower, suffer higher “leakages” (ie fraud and losses) and do not aid long-term financial inclusion.

G2P payment programmes face challenges to identify the rightful beneficiary and ensure that beneficiaries receive their funds quickly, safely and cheaply. An estimated 1 billion people worldwide do not have basic identification (ID) credentials, and many more have IDs that cannot be trusted because they are of poor quality or cannot be reliably verified. Most of the affected individuals live in lower-middle-income and low-income economies. Further, an estimated 3.4 billion people have some form of ID but with limited ability to use it in the digital world. And even the 3.2 billion people with a legally recognized identity may not be able to use that ID effectively and efficiently online (McKinsey Global Institute (2019). Lack of ID makes it difficult for citizens to access financial services, for financial service providers to on-board customers and for governments to efficiently transfer funds to the rightful beneficiary. Additional barriers to financial services include high fees, geographical distance from bank branches, inability to access digital services due to the cost of obtaining connection devices and data, lack of mobile or broadband internet coverage, and of lack of digital literacy.

Governments have used a variety of payment instruments to reach unbanked and underbanked people during the pandemic. Alongside traditional paper-based payment methods, governments have used new methods to reach the unbanked, the underbanked or those who have not provided their bank account details to the government during the pandemic. In particular, improvements in access to non-bank transaction accounts, POS terminals and ATMs in recent years (Graph 3, left-hand and centre panels) have allowed new methods for G2P transfers. The governments of Indonesia, Italy and Korea have allowed recipients to pick up banknotes from collection offices. Even in highly banked countries, the absence of a comprehensive and interlinked government payment programme has presented challenges to distributing funds to large portions of the population at short notice. For example, in the United States the government has made 120 million credit transfers, mailed 35 million paper cheques and sent 3.7 million prepaid cards. As of early June 2020, in the US an estimated 30–35 million eligible people had not yet received G2P payments (US House Committee on Ways & Means (2020)), and 1.1 million payments (for USD 1.4 billion) had been made to deceased individuals (US GAO (2020)).

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