Most people in the world are still dependent on using cash for making basic payments, meaning that benefits such as reduced costs and greater speed of transactions are being missed out on, according to new research.
The reliance on paper money is also a barrier to "boosting financial inclusion among the world’s two billion unbanked", a new digital money report by Citi and Imperial College London (32-page / 7.52MB PDF) said. The report published a new digital money index which ranked individual countries on how supportive the environment for digital money transactions is.
Finland, Singapore, the US, the UK and Hong Kong made up the top five best ranked on the index, with those countries being among those rated as being "materially ready" for digital money solutions. Chad, Angola and Ethiopia were listed at the bottom of the index and were deemed as being "incipient" in the context of digital money.
The report said that if 25% of existing paper-based transactions were digital it could deliver "up to $400 billion in annual savings, as well as powerful social benefits". However, it said cultural, socioeconomic, financial and political factors are among the reasons behind "people’s devotion to cash". According to the report, there is "tangible evidence of culture working as an accelerator to adoption, but also as a barrier".
"Countries we might have expected to be well suited to digital money showed lower adoption," the report said. "By contrast, countries we might have expected to struggle with digital money had instead embraced it. Clearly a country having a propensity to adopt does not mean that it will."
"Like the love of cash itself, the reasons for this are complex. Sophisticated cultural dynamics are at play, overlaying the work of governments and companies to establish the foundations. By themselves, digital money solutions are not enough. They need to go hand-in-hand with initiatives – again from governments and businesses – to encourage people to adopt," it said.
The report identified regulation as a potential enabler of more digital money transactions in developing countries when matched with the necessary infrastructure and cultural approach.
"A number of less mature countries start out by making opportunistic progress, developing the necessary infrastructure, but then get stuck: reaching an 'adoption plateau' where even the right groundwork can’t shift some weighty cultural barriers," the report said. "Surmounting these barriers will require affirmative action, perhaps in the form of regulation."
In the EU new payment services laws recent came into force. The revised Payment Services Directive (PSD2) is aimed at supporting digital innovations in payments.
Financial services and technology expert Yvonne Dunn of Pinsent Masons, the law firm behind Out-Law.com, said that PSD2 could help improve take-up of digital money services in all EU countries, from countries already seeing a rise in digital money transactions, like the UK, to less mature financial services markets like Romania and Poland which were ranked lower down the digital money index.
The Citi and Imperial College London report also identified the interoperability of payment systems as being "critical" to any increase in digital money transactions.
"Successful digital money solutions should: meet the needs of the market by filling a critical gap (perhaps even one that we didn’t know existed); address muscle memory in users, becoming second nature to them and hitting the all-important tipping point for adoption; and confront structural challenges by addressing multiple flows or connecting multiple use-cases to keep users away from the temptation of paper money," the report said. "As the journey continues, the more these crucial features are evident, the closer we get to releasing the flow of digital money."
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