The role of cash in government payments
Feb 23, 2022
Over the past two years we have seen a rapid digitalisation of consumers and businesses, which has been driven by (but isn’t an exclusive consequence of) the COVID-19 pandemic. And as we look ahead to the future this trend is only going to continue.
And as we have already discussed in previous articles, there are reasons why digitalisation needs to be addressed in the right way. Clearly one of the most significant of these is financial exclusion; as the world digitalises there is a risk that not everyone will be able to maintain access to services. This is particularly relevant to essential services such as government initiatives that require digital registrations or payments.
Financial inclusion is still an issue on the federal and local level
Conversations concerning combating global financial exclusion are usually focused on the developing world. And while it is true that there is a higher underbanked population in developing economies, financial exclusion is still a significant concern in the most advanced countries.
Take the U.S. for example. According to research, only 78% of U.S. adults are considered fully banked. The remaining 63 million Americans do not have equal access to financial products and services, and for somewhere between 6% and as high as 10% of U.S. adults this includes not even having a bank account.
For governments, this is a problem. And one that has been made worse and spotlighted by COVID-19. The financial and social consequences of the pandemic such as lockdowns and the shift to digital services has had a disproportionately severe effect on those that are unbanked and underbanked, and this is already a more disadvantaged portion of society (according to research only 3% of U.S. adults earning more than $40,000 per year are unbanked, compared to 14% earning less than $40,000). So the socio-economic gap between the richest and poorest in society is growing, and this will only increase as the journey towards a digital economy continues.
And there is a more direct reason governments should be taking positive action to combat financial exclusion as well. In addition to not being able to participate in growing areas of society, unbanked and underbanked citizens are more challenged to make and receive government payments. We have seen this be an issue already during the pandemic; unbanked U.S. citizens had to wait longer to receive their government issued stimulus cheque (if they were eligible to receive them at all), meaning that some of the most vulnerable members of society were pushed further to the margins and into more precarious situations due to not having a bank account.
But, of course, it is in receiving payments that governments are more likely to be interacting with citizens. This obviously includes paying taxes but also other payments such as fines, utilities, penalties, permits, and other business costs for those that are self-employed. If the unbanked and those that rely on cash payments are left out from making these payments as government services digitise then the consequences will be dramatic.
The need to integrate eCash
So what can be done about this? The long-term strategy may be to encourage financial inclusion through initiatives such as lower fees for banking services, and supporting all citizens to have as many options available to them as possible through access to all payment methods. But in the short term it must be to let cash consumers have the same facilities open to them as all other citizens by enabling safe and convenient cash payments in their online checkouts.
eCash solutions bridge the gap between those that rely on or prefer cash payments and the digital world. The consumer begins the transaction online through the online checkout experience but then completes the transaction in cash at a local convenient payment location. This means that cash-only customers remain on an equal footing to those paying via a bank account supported payment method.
Consumer payment preferences extend beyond financial inclusion
And it isn’t only unbanked consumers that are driving a diversification in online payment method preferences. According to research we carried out in 2021, 86% of consumers have changed their online payments behaviour during the pandemic and 59% have tried at least one new online payment method for the first time since the beginning of 2020.
There are a number of reasons consumers are generally moving away from credit and debit cards, including being unbanked but also because they do not feel comfortable sharing their financial details online.
Businesses have noticed this change in consumer demand and are acting accordingly. Two thirds (65%) of the 900 online businesses we surveyed in September 2021 said that COVID-19 has changed consumer payment preferences and 61% have accelerated their plans to upgrade their checkout experience because of this.
Government payments have mirrored this shift to some extent. For example, you can make some U.S. government payments such as fines and penalties using alternative payment methods such as digital wallets. But the scope of alternative payment methods could and should be much wider.
In the U.S. 54% of online businesses said that they either already enable customers to pay online via eCash or planned to enable this in their digital checkout within the next 12 months, and 59% of businesses that offer this solution said that the percentage of sales taking place in their online checkout via eCash has increased. Governments must consider following suit.
Next steps to digitalisation
As we look ahead to the next few years we expect to see the shift towards digital services continue to pick up momentum. But there is a real threat that this is creating in the U.S. a two-tiered society in which a significant percentage of vulnerable people are left behind and unable to access the goods and services of tomorrow.
Governments should be concerned about this, and so must take a stand and lead by example. Facilitating cash consumers and particularly financially excluded consumers to access digital services in the same way is critical to achieving a digital-first, ethically sustainable society.