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Equity Research 25 June 2020
Payments & Fintech The transition to cash-light societies The emergence of COVID-19 is accelerating a transition to cash-light societies that is already under way across the most digitally-advanced economies. We model a global tipping point in 2025, after which we expect absolute cash usage to begin to decline. This trend represents a structural tailwind to our global payments and fintech coverage, but it will also raise complex societal challenges.
European Software & IT Services U.S. Payments, Processors & IT Services James Goodman Ramsey El-Assal +44 (0)20 3134 1038 +1 212 526 7144 james.goodman@barclays.com [email protected] Barclays, UK BCI, US
*For list of authors, see page 2. Barclays Capital Inc. and/or one of its affiliates does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. This research report has been prepared in whole or in part by equity research analysts based outside the US who are not registered/qualified as research analysts with FINRA. Please see analyst certifications and important disclosures beginning on page 71. Barclays | Payments & Fintech
Barclays European Payments & Fintech Conference
Monday, 21 September 2020
We look forward to inviting you to the Barclays European Payments & Fintech Conference, to be held on Monday 21 September 2020 in a virtual format.
Presenting at our ninth instalment of this conference will be a variety of public and private companies across the Payments & Fintech sector. The format of the event will be fireside chats and panel discussions, with a schedule of one-on-one and small group investor meetings running in parallel.
Report authors
European Software & IT Services
James Goodman Sven Merkt, CFA Corey Gayle Orson Rout +44 (0)20 3134 1038 +44 (0)20 3134 1254 + 44 (0)20 3134 0594 +44 (0)20 3555 0636 [email protected] [email protected] [email protected] [email protected] Barclays, UK Barclays, UK Barclays, UK Barclays, UK
U.S. Payments, Processors & IT Services
Ramsey El-Assal Benjamin Budish, CFA Damian Wille +1 212 526 7144 + 1 212 526 2418 +1 212 526 2469 [email protected] [email protected] [email protected] BCI, US BCI, US BCI, US
Sustainable & Thematic Investing European Banks
Hiral Patel Aman Rakkar, CFA Grace Dargan +44 (0)20 3134 1618 +44 (0)20 3555 1425 + 44 (0) 20 3555 4065 [email protected] [email protected] [email protected] Barclays, UK Barclays, UK Barclays, UK
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FINTECH & PAYMENTS PRIMER VOL. 14: CASH IS KING NO LONGER
Across the most digitally-advanced economies, cash usage has already reached a tipping point and is declining on an absolute basis. Countries such as Sweden, where ATM transaction volumes have halved over the past five years, highlight just how accelerated the transition to a cash-light society can be where certain societal and technological factors are combined. There are significant benefits to widespread adoption of digital payment methods, but there will also be deep societal challenges to address from reduced access to cash. While payments investors are familiar with the topic of a secular tailwind from cash-to-digital substitution, and the potential demise of cash has leapt to prominence since the emergence of COVID-19, there is a lack of global data available; through a detailed examination of country-level cash trends, we have built our Global Cash Model, forecasting absolute cash usage and transaction share out to 2030 under a range of scenarios.
COVID-19 a clear accelerator of digital adoption – major changes in consumer habits are taking place There is strong evidence that COVID-19 is acting as a significant catalyst to further accelerate the substitution of cash by digital payment methods. Concerns around the cleanliness of cash, combined with increased online spending, have led to accelerated consumer adoption of a variety of digital payment methods, decreased merchant acceptance of cash and dramatic falls in ATM transactions. There will undoubtedly be a temporary effect to this – hard to quantify, but our base assumption is a 50% reversal of the substitution acceleration – yet we think persistent payments habits are being formed.
Contactless the true cash killer, while the rise of P2P provides structural support to cash-light societies The increased convenience of contactless payments attacks the key remaining stronghold of cash – the low-value transaction – and can, we believe, lead to something of a person-by-person tipping point entirely away from cash. This is especially the case post COVID-19, with the majority of card transactions outside the US now contactless. We see mobile payments, including Apple Pay, adding to adoption and further cementing changing behaviours. In addition, while this report is concerned primarily with retail transactions, it is increasingly clear that scaled digital person-to-person networks are a key secondary requirement for a truly cash-light society, addressing issues of gifting and non-retail transactions.
Our Global Cash Model post-COVID base case suggests a fall in cash’s share of value to 20% by 2030 The relative share of cash is in decline everywhere and, in the most digitally advanced economies, this is already resulting in absolute cash volumes contracting. However, across cash-centric economies, despite this loss of share, strong underlying spend growth is still driving absolute cash usage higher… for now. Our base case modelling suggests that a global tipping point will be reached in 2025, at which point we estimate cash usage will have fallen to ~30% of value, from ~50% in 2014. By 2030, we anticipate share declining to just 20%, and some 2-3pp lower than had COVID-19 not happened. In our most accelerated cash-light scenario, in which we apply a modest 20% premium to our annual country-specific digitalisation factors, cash usage falls to just 13% by the end of the decade. While the viability of fully cashless societies appears dependent upon policy, the transition to cash-light societies across digitally-advanced economies appears a near-certainty.
The decline of cash raises serious societal challenges – fintech will be required to bridge the gap In a comparison to digital payment methods, cash scores well on availability, acceptance & convenience, immediate settlement, anonymity and budgeting. This, combined with the fact that a staggering ~1.7bn people remain unbanked globally, means cash is still today essential to many people, and disproportionately so to lower-income and vulnerable communities. For this reason, against the strong tide of global pro-digital regulation, there is building concern around the consequences of drastically reduced cash access. However, access to mobile phones is greater than to bank accounts, and basic mobile money can transform economies. Fintechs are providing bank accounts and banking services, in some cases more broadly and cheaply than incumbents, and we believe fintech innovation, combined with increased mobile and internet penetration, could lead to a net improvement in financial inclusion medium term, and is key to solving these challenges.
Schemes and cash-market-focused acquirers benefit, a challenge for ATM and remittance providers We see the transition towards cash-light societies as a key positive driver for the majority of our global listed payments coverage. The schemes are well placed to capture the global trend, while the benefit to acquirers and processors is more powerful where geographic exposure is to still cash-driven markets, with a digitalisation tailwind ~3x higher. While there are obvious challenges to ATM operators and remittance providers over the longer term as a result of cash’s decline, we also see opportunities for vendors to offset this through increased outsourcing, solid execution and digital innovation.
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A SNAPSHOT OF BARCLAYS GLOBAL CASH MODEL
FIGURE 1 FIGURE 2 Global cash usage reaches a tipping point in 2025 in our … a year ahead of our undisturbed pre-COVID scenario, and global base case post-COVID cash model … resulting in 2-3pp of additional cash substitution by 2030 Cash Digital Cash usage Cash Digital Cash usage 250 250 48% 48%
200 200 40% 37% 32% 150 30% 150 22% 20% 100 100
50 50
0 0
FIGURE 3 FIGURE 4 While absolute cash usage is already in decline in the most ... cash-centric economies will continue to see absolute cash digitally-advanced economies … grow, but with a more powerful digital substitution factor
200 Cash Digital Cash usage Cash Digital Cash usage 29% 300 72%
250 150 56%
19% 200 45%
100 13% 150 29%
9% 100 50 50
0 0
FIGURE 5 FIGURE 6 As of now, there remain substantial differences in cash Our most extreme, accelerated cash-light scenario would usage by country, not necessarily linked to GDP suggest global cash usage could drop to just 13% by 2030 Cash Digital Cash usage 250 48%
200 36%
150 26%
100 13% 50
0
Source: Barclays Research estimates, combined with data from Bank for International Settlements, World Bank, ECB, selected central banks and Euromonitor
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GLOBAL STOCK IMPLICATIONS FROM A DECLINE IN CASH
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CONTENTS
FINTECH & PAYMENTS PRIMER VOL. 14: CASH IS KING NO LONGER 3
A SNAPSHOT OF BARCLAYS GLOBAL CASH MODEL ...... 4
GLOBAL STOCK IMPLICATIONS FROM A DECLINE IN CASH ...... 5
HOW CASH STACKS UP: A COMPARISON TO DIGITAL ALTERNATIVES ...... 7 Advantages of cash – widely accepted, instant, anonymous ...... 8 Disadvantages of cash – costly, inefficient, unhygienic ...... 10
ADOPTION OF CONTACTLESS, THE CASH KILLER ...... 13 Contactless: Not a new trend, but at a tipping point ...... 13 Pros of contactless go beyond both hygiene and pros of cash ...... 15 Mobile, the next evolution of contactless ...... 17
COVID-19: A CLEAR ACCELERATOR OF DIGITAL ADOPTION ...... 18 The cleanliness of cash is being called into question...... 18 Clear trend since COVID-19: a move away from cash ...... 18
P2P PAYMENTS NEGATING ANOTHER USE CASE OF CASH ...... 21 Interoperability and store of value are key to the cash debate ...... 21 National P2Ps gaining scale in digitally-advanced economies ...... 24
THE FUTURE OF CASH, BARCLAYS GLOBAL CASH MODEL ...... 28 Global Cash Model highlights march to cash-light societies ...... 28
ESG CONSIDERATIONS AND THE SOCIAL IMPLICATIONS OF CASH’S DECLINE ...... 33 Digital Payments a key thematic mega-trend for the decade ...... 33 Meeting the challenges of moving to a cash-light society ...... 34 But mobile and fintech beginning to bridge the gap ...... 37
REGULATORY SCALES COMING DOWN ON THE SIDE OF DIGITAL .. 41 Pro digital and anti-cash regulation, versus cash support ...... 41 Global regulation largely in support of digital payments ...... 42
BANKING CONSIDERATIONS FROM A DECLINE IN CASH ...... 48 Impact on banks: digital brings more opportunities ...... 48
CRYPTOCURRENCIES: CLOSER TO CASH THAN DIGITAL MONEY .... 51 Not all cryptocurrencies created equal ...... 52
COUNTRY AND REGIONAL CASE STUDIES ...... 55
APPENDIX: BARCLAYS GLOBAL CASH MODEL METHODOLOGY ..... 69
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HOW CASH STACKS UP: A COMPARISON TO DIGITAL ALTERNATIVES
While we can define money as a widely accepted medium of payment for goods and services, we refer to cash more specifically as money in note and coin format. This is an oversimplification, but it is an important distinction. In this report, we are concerned primarily with the future of cash, not money. Within this, we are especially focused on the use of cash in a retail point-of-sale (POS) setting. This is what has the most direct implications for payments businesses, making this topic of relevance to investors.
There are credible reasons why cash remains a leading payment method outside the digitally-advanced economies and, in this section, as an introduction to the topic of the decline of cash, we look at the case for and against.
In defence of cash are arguments including broad national acceptance, immediate settlement, anonymity (perhaps the factor with the greatest tailwind) and cash’s powerful use in budgeting and controlling spending habits.
For the prosecution, we look at the significant cost of cash acceptance (despite its perceived cost-free status), the challenges posed by e-commerce, issues with security, lack of credit facilitation and, finally, the unsuitability of cash for high-value payments.
As in all debates, there are established and compelling arguments on both sides. As shown in our framework below, digital payments, and especially mobile payments, are increasingly replicating the best aspects of cash, with more convenience, lower cost and additional value-added benefits.
How does cash stack up?
FIGURE 7 A comparison of cash versus its alternatives
Source: Barclays Research
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People use cash for a variety of reasons: habit, convenience, necessity and, simply because they want to. We have assessed cash versus its competitors on a scorecard that includes ten key aspects of payment. There are two sides to the debate, but we conclude that cash wins out on four of these aspects, which we discuss below.
Advantages of cash – widely accepted, instant, anonymous
Availability, acceptance and convenience: core to cash use case Acceptance of cash in-store is still a major convenience of cash globally. Cash is almost ubiquitously accepted, and, in contrast to card payments, requires little infrastructure on the side of the merchant. Cash is also easy to use and thus convenient for many customers. The fact that cash is not reliant on technology also makes it accessible to a larger proportion of society; cash can be used by unbanked participants, who often have difficulty accessing more formal channels of payment, such as cards.
FIGURE 8 The ubiquitous acceptance of cash, and lack of required technology infrastructure, are key advantages
Source: Barclays Research
Despite the fact that we regard this acceptance and convenience as a current advantage of cash, this should not be taken for granted. Even though cash is defined as legal tender in the majority of countries, this does not prohibit merchants from refusing cash in many countries. For example, in the UK and a handful of European countries (including Germany, the Netherlands and Ireland among others), cash can be declined by merchants, and there are increasing examples of this, as we discuss in this note.
Immediate settlement: a traditional benefit of cash Immediate settlement is a benefit of cash that has been particularly important to merchants. In contrast, the amount of time required for a card transaction to settle can vary depending on region, and such transactions are not instantaneous. Instant settlement options, instant account-to-account payments and the growth of P2P and mobile payments are bridging the gap between cash and alternative payments methods, while regulation including PSD2 is accelerating the innovation around such solutions. We view the space for instant payments as fiercely competed at the moment, with fintechs forcing banks to accelerate their services. Thus, while instant settlement has been a key advantage of cash, we believe that this competitive advantage is beginning to be eroded.
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Anonymity might just be cash’s greatest tailwind A more topical advantage of cash is that it allows for a high degree of anonymity. In a pure cash transaction, no digital audit trail is created (though clearly this does not hold when cash is deposited into a bank account, for example). Although some concern over black market facilitation is undoubtedly justifiable, we are of the view that, from a consumer perspective, the demand for anonymous payments may be a rational and perfectly legal choice. From a social and democratic perspective, we believe that it may be questionable to decommission cash if this is the only payment method allowing for anonymous transactions. This is, of course, a delicate topic, although we are of the view that, with increased scrutiny on data usage, consumer demand to remain anonymous in some transactions may be a reason for resistance to digitalisation of payments; it may also depend on political and cultural attitudes, which differ by region.
Budgeting and tangibility from the ‘realness’ of cash
FIGURE 9 Budgeting is easier with cash, and people spend less when they have to hand over ‘real money’
Source: Barclays Research
A major advantage of cash is its effectiveness in budgeting. With cash, users can pre-plan how much they want to spend over a given time period, and withdraw only this amount of money for the period. Of course, this does not completely inhibit compulsive spending; however, the access to additional resources is often significantly more difficult than with a card. The effect of dissociating the purchase moment from the time of payment, through credit cards for instance, has been called a ‘weak coupling’ effect1. Several studies have shown that the immediacy of a cash payment leads to more prudent decision-making. A payment on credit decouples the time of purchase from the time of payment, therefore reducing the pain of parting with money. In addition, the tangibility and ‘countability’ of cash also lead consumers to spend less aggressively2. This tangibility increases the pain of paying with cash as opposed to paying with other, less visible payment methods such as card.
Cash, in our view, is currently the leader when it comes to encouraging conservative consumption. Nevertheless, we believe that the digitalisation of payments, especially with the rise of mobile, is starting to pose a real challenge to the tangibility advantage of cash. Predictive budgeting, classification of outgoing payments, and user-friendly layouts are
1 Researched by Prelec & Loewenstein in several studies. 2 Raghubir, P., & Srivastava, J. (2008): Monopoly Money: The Effect of Payment Coupling and Form on Spending Behaviour. Journal of Experimental Psychology: Applied, 14(3), 213-225.
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starting to give users more accountability, and the (near) real-time nature of many transactions reduces the time-based decoupling effect, as users almost immediately see their expenditure reflected in an app.
The cost of cash: Part 1, the common perception A final, but in our view limited, advantage of cash is that there are no direct transaction fees associated with payments. This is seemingly an advantage for both the consumer, and for the merchant, as there are no card fees burdening either party. However, as we show in the following section, there are many indirect costs of cash that burden consumers, merchants, the government, and the economy as a whole. Moreover, other payment methods (notably credit cards) offer benefits to the consumer such as cash back and travel points, as well as valuable buyer protection and often a delayed credit mechanism, all at no cost. Therefore, while cash may well be ‘free’, alternative payment methods often have a negative cost to the consumer. In this way, it can be argued that cash is ‘regressive’ and that the underbanked who pay in cash miss out on these benefits. A separate, but valid argument, in our view, is that cash does provide hypothetical protection from negative interest rates.
Disadvantages of cash – costly, inefficient, unhygienic Having dealt with cash’s defence, we move to the arguments against; most crucial to us, particularly because of the common perception to the contrary, is the true cost of cash.
The cost of cash: Part 2, the reality
FIGURE 10 In contrast to the common perception, cash is a highly costly payment method
Source: Barclays Research
Cash, while often considered a cheap or even free transaction method, in fact has several hidden costs. For the consumer, the time spent to access cash is considerable. In addition, cash infrastructure, such as ATMs and branches, generates indirect operating and maintenance cost, and though the services frequently are free, consumers indirectly pay through fees on other costly banking services.
For merchants, there are several more direct costs associated with cash. Cash must be stored, guarded and safely transported; theft is a real cost too. Moreover, the cost banking of cash can also be significant; it is common for merchants to pay a fee in the range of 0.5% to 1% or more for paying in cash. In contrast, the pricing for card payments to the merchant depends on merchant size, with merchant acquiring fees typically ranging from >150bps for
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sole traders to 5-20bps for large enterprises. In addition, merchants pay an interchange fee, which varies by region (20-30bps in Europe, to ~2% in the US on credit cards). In our view, it is incorrect to generalise that cash is per se cheaper than other transaction methods for merchants. Even if variable costs may be slightly cheaper on a transaction basis, the additional security and administrative costs that are required for cash mean that the cost of acceptance is considerable. Merchants that refuse cash entirely can save considerably on a number of these semi-fixed costs.
For governments, the costs of printing cash, conducting quality controls and transporting cash safely are significant. A perhaps more crucial factor for governments is the impact of cash on under-reporting of taxes. For instance, in the US, under-reported taxes are estimated at ~$400-600bn per annum, of which 52% is estimated to be due to self- employed individuals3. Though it is unclear how much of this under-reported tax is a consequence of cash-based payments, they are likely play a very significant role, in our view. According to a Mastercard study, the cost of cash globally is estimated at 3.2%-4.5% of global GDP, and 2.2% thereof is attributable to missed tax revenue alone.
Remote and online payments: highly impractical for cash The perhaps most evident weakness of cash is that it is difficult to use for remote and online payments. In an increasingly globalised world, and with e-commerce consistently growing globally, the ways in which we transact have been fundamentally disrupted in recent decades. There are, of course, cash-based methods of remote payment, such as cash-on- delivery (very popular in certain regions, such as MEA), but this alternative is costly in terms of time, direct costs and supplier-related risks. Therefore, we view cash-on-delivery as insufficient competition to more advanced payment methods, even in emerging markets.
Safety and security: a different type of risk
FIGURE 11 Cash can be easily stolen, including by staff, and offers nothing in the way of buyer protection
Source: Barclays Research
Although cash is immune to cyber-attacks, we view its overall safety and security as a relative weakness. The risk of counterfeit cash, and more importantly risks related to robberies, currently make it a less secure payment method, in our view. In contrast, cards and mobile payments are increasingly equipped with multi-layered security procedures that utilise artificial intelligence, making use of broad data sets including location and biometrics. Most importantly, consumers are protected against fraudulent charges on stolen or lost
3 Chakravorti, B. (2014): The hidden costs of cash. Harvard Business Review.
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cards in many countries. Cash does not offer such protection. If faulty products are delivered, in the UK, consumers are covered by Section 75 for credit card purchases over £100, and they are covered most of the time by charge-back rules put in place by card schemes for credit card payments under £100, debit card payments and prepaid card payments. Mobile and other fintech solutions frequently offer similar protection, though these depend on the solution.
Hygiene: the COVID-factor A further clear disadvantage of cash, which has come to light especially since the emergence of the COVD-19 pandemic, is hygiene. Pre-COVID, it might have been considered niche to argue that cash’s lack of cleanliness could be a key disadvantage and a driver of the adoption of digital payments. However, we believe that the way in which cash is viewed as a consequence of COVID may well have long-lasting consequences rather than simply driving a temporary adjustment. As we conclude in a later section on this topic, we believe it is likely that the pandemic has materially shifted societal attitudes towards cash, thereby amplifying the already strong adoption of digital payments.
Access to credit: where the money is made Although loans in cash are, of course, possible, getting explicit credit in cash is often less convenient than it is on a card. On a credit card, consumers have instant access to credit, which can be convenient in certain circumstances. It is beyond the scope of this report to dive into questions of whether, and for whom, credit is advantageous from a societal perspective, but we note that the relative difficulty of issuing credit with cash versus other payment methods clearly makes it a less versatile and flexible payment medium.
Higher-value payments viewed sceptically in cash by regulators In many countries, high-value payments made in cash are viewed with mistrust. Though this varies by culture, it can make cash impractical for many high-value transactions as it can create distrust between parties. This ties into buyer protection, as cash payments create no audit trail and are therefore more difficult to verify. In many countries, the extent to which large value payments can be made is regulated. In the UK, for instance, merchants accepting cash payments exceeding €10,000 must register with the HMRC as high-value dealers.
Overall verdict – in favour of the alternatives In conclusion, we find a detailed comparison of cash versus its competitors more complicated and more nuanced than we had anticipated. The immediately obvious advantages of cash, including instant settlement and universal acceptance, we view as less compelling upon further analysis. Moreover, they are now being eroded through technological advancements such as instant payment networks and by the generally negative cash trend itself, with increasing numbers of merchants (especially during and following the COVID-19 outbreak) no longer accepting cash. Perhaps the stronger supports for cash will be consumers’ desire to keep their spending data private and to use cash as a budgeting tool. However, we do expect privacy to become a greater focus for fintechs (and for tech companies in general), while we also anticipate greater budgeting capabilities and an increase in the ability of the unbanked access bank-like services through mobile apps. The strongest arguments against cash, in our view, are its hidden costs (especially as these relatively fixed costs – to consumers, governments and merchants – will have to be spread over a decreasing number of cash transactions), the increased consumer (and merchant) convenience of electronic payment methods (especially contactless and mobile payments) and the decreased utility of cash as a payment method in an increasingly online retail sector. Overall, we believe the tide has turned meaningfully in favour of the digital alternatives.
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ADOPTION OF CONTACTLESS, THE CASH KILLER
In the long-standing battle of cash versus card, the rise of contactless represents an almost unfair advantage in support of digital adoption; it’s the proverbial gun at a knife fight. One of the last remaining advantages of cash – the convenience factor of giving the right change for a coffee rather than request the chip and pin machine be brought out from under the counter – is fundamentally undermined by the introduction of a near-instant contactless communication standard, combined, crucially, with scheme rules that do not require pin or signature authorisation. In time, contactless’ big brother, mobile payment, will become ever more relevant and drive contactless authorisation of higher-value transactions, but for now it is the increasing consumer usage of contactless card technology that is driving out cash, in some markets at a more rapid pace than ever before. Contactless has its sights set squarely on low-value cash payments, and we think it is the most crucial modifier of consumer payment habits and accelerator of digital adoption.
Contactless: Not a new trend, but at a tipping point The use of radio-frequency identification (RFID) and near-field communications (NFC) for payments is not a new phenomenon. The Seoul Bus Transport Association launched a contactless chargeable card back in 1995. Gas stations also adopted early, with Mobil’s Speedpass, a prepaid key accessory, launching in 1997 and only retiring last year. The Oyster card in the UK was only launched in 2003, eight years after the first-mover in Seoul, Mastercard introduced contactless cards in the same year and Visa PayWave was introduced in 2007. In 2011, the first contactless mobile payment options came to market in Europe, with Barclays and Orange launching Quicktap, Mastercard and Visa both releasing their mobile phone certifications, and Google Wallet also launching. The key technology and vendors are therefore far from new.
FIGURE 12 The early history of contactless technology introduction
Source: Barclays Research
The adoption of contactless payments thus far has been region-dependent. This is due primarily to the fact that contactless payments, like card payments more generally, require an existing infrastructure for them to be useful to consumers. Merchants have to offer contactless payment terminals for consumers to be able to pay with their cards or mobiles, though we also see broader infrastructure and transportation projects as a key accelerator in the adoption of mobile payments. For instance, South Korea, the country that first adopted contactless payment systems for the Seoul Bus Transport Association, is relatively
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advanced, with 79% of consumers stating in a small poll conducted by DMC Media in 2019 that they used mobile payments methods at least once in the past six months. An impressive ~96% of cards in South Korea were contactless in 20194. The government and The Bank of Korea have also been supportive in their move away from cash.
Similarly, in the UK and specifically London, where consumers have been used to contactless transactions for London Transport in form of the Oyster card for almost two decades, adoption of contactless payments has been ahead of the pack. In the UK, contactless accounted for more than 40% of all card transactions in 2019. Furthermore, 85% of debit cards and 74% of credit and charge cards were already equipped with contactless functionality in the UK in 20195. While younger, digital natives are undoubtedly more likely to use contactless and mobile payments, even 68% of the segment of the population that is at least 65 years old reportedly made contactless transactions in 2019, according to UK Finance. Of the entire UK population, 79% now use contactless.
FIGURE 13 Early adopters further in the adoption cycle in contactless and mobile
Source: DMC Media, UK Finance, Barclays Research
For Mastercard globally, contactless payments as a percentage of card-present transactions accounted for only 1% in 2012, while by 2018 this had increased to 22%. Since 2018, this has increased to more than 30% and COVID has been supportive of growth recently, as we consider in the next section. Visa has similarly seen a strong trend towards contactless, even pre-COVID. In Europe, contactless penetration in face-to-face transactions grew at a CAGR of 88% between 2015 and 2017, with contactless accounting for 11% of face-to-face payments in 2015, and a starkly increased 39% by 2017. For Visa, Europe has generally been fastest to adopt the technology, with contactless accounting for 39% of face-to-face payments in 2017, versus 28% in APAC.
Contactless adoption lags in the US for a number of reasons Elsewhere, adoption of contactless lags behind early adopters such as the UK and South Korea. However, even in the US, which has been a laggard, a gradual shift is happening. In January, Mastercard talked about ~70% of its cards being reissued in the coming 12-14 months, and we believe that this will consequently mean that a significantly higher proportion of cards in the US will be equipped with contactless abilities. COVID-19, which we discuss in detail in the next section, will likely also be a key factor in US adoption, with the City of New York, for example, urging people to use mobile payments where possible.
4 Contactless cards are just catching on in the US — years after the rest of the world, CNBC News, 12 April 2019 5 UK Finance: UK Payment Market Summary 2019
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At the same time, the US may see a longer adoption cycle for contactless cards than other countries where the technology has already taken firm root. For example, we believe that in many markets where cash was displaced due to contactless, the simultaneous regulation/capping of interchange rates helped to improve adoption by expanding the number of previously-cash-only merchants entering the payment card ecosystem. We believe the adoption of contactless payments in markets such as UK, Continental Europe, and Australia moved in parallel with significant interchange reductions in these same markets. As we do not foresee further interchange regulation in the US, this driver of adoption is unlikely to boost adoption.
Likewise, we note that contactless provides a better consumer experience in card markets where PIN numbers are universally required to be input by the consumer for both credit and debit in-store purchases. In other words, tapping a contactless card is certainly a noticeably improved consumer experience versus swiping/dipping and keying in a PIN, but it is less of an improvement relative to a swipe/dip alone with no PIN required.
In the US an increasing number of transactions do not require user-initiated authentication (like a PIN or signature) at the POS. In April, 2018 Visa and Mastercard eliminated the signature requirement for signature debit and credit card transactions. Even before the rule change, debit transaction categories such as ‘pin-less’ and ‘pin-over-signature’ already meant fewer and fewer transactions required consumer authentication (American Express did away with signature authentication in 2012). We therefore see contactless as representing less of an improvement to many (though not all) existing US card payment user experiences than was the case in other high-adoption markets.
Lastly, cash usage in the US is already low on a relative basis (~17% in our Global Cash Model, versus a global average of ~40% and close to even a high contactless-adoption market such as the UK at ~14%). The displacement of low-ticket cash transactions has already come quite far in the US, despite the lack of broad contactless adoption. For this reason, we see contactless likely displacing a higher percentage of existing card transactions (as opposed to cash transactions) than would have been the case a decade ago, when the network first tried – and failed – to replace card ‘swipes’ with card ‘taps’ at the POS.
Pros of contactless go beyond both hygiene and pros of cash Mastercard reports that 80% of contactless payments are of a value under $25, which is a price range that would have typically been dominated by cash. This is the key reason why we view contactless as a cash killer, as its utility for low-cost transaction makes it a direct competitor to cash. In the prior section on the advantages and disadvantages of cash, we observed that card and mobile payments’ relative strengths compared to cash are their overall costs, the ability to pay remotely and online, safety and cleanliness, access to credit, and use for high-value transactions. However, we argue that, with the development of technology, a further relative advantage of cards and mobile, driven by the adoption of contactless, will be acceptance and convenience.
Contactless is particularly suited to what we would deem a higher-tech setting. A good example of this is ticketing systems, many of which are in the process of adapting to contactless, or have already done so. In such multi-contact settings, we see contactless as having clear advantages:
For consumers, it saves time queuing and avoids the need to carry additional cards or tickets that can be lost.
For businesses operating these systems, the move to one-stop contactless payment systems allows for a more efficient, automated process that requires less maintenance.
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FIGURE 14 Contactless in practice: a quick and cleaner alternative
Source: Barclays Research
Apart from public transport, there are several other ticketing systems that are seeing a reduction in administrative and/or personnel costs as contactless becomes more widely adopted, including toll roads and parking meters. Other payment infrastructures that are not directly ticketing systems, such as vending machines, are also increasingly seeing a drive towards contactless due to efficiency gains.
Moreover, contactless payment systems are evolving. The presence of mobile wallets such as Apple Pay or Google Pay is increasing. We are already seeing more contactless payment systems integrated in watches, wristbands, cars and even more novel items such as re- usable coffee cups. In Sweden, thousands of people have inserted microchips into their bodies to be used as payment methods. While such examples sound intriguing, and may indeed become a widespread reality in the distant future if physical items such as phones become less visible (for example, through smart lenses), we do not see an immediate or strong benefit to such methods of payment today, beyond mobile phones and perhaps smart watches.
FIGURE 15 Contactless integration proliferating, but strong use cases limited to phones and watches
Source: Barclays Research
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Mobile, the next evolution of contactless Traction of early in-store mobile payment solutions in most markets was admittedly slow, and use cases and acceptance of these solutions outside of P2P payments were lacking. However, the subsequent rise of contactless card acceptance and spread of NFC-enabled terminals are a major catalyst for in-store mobile payment adoption. The combination of contactless technology and biometric identification is an elegant solution to the challenges of authentication requirements and risk management of higher-value payments.
Large tech is now leading this development, and Apple, Google, Samsung, Alibaba and Tencent all have established solutions. Many of the global wallets, such as Apple Pay, Google Pay and Samsung Pay, utilise the existing card infrastructure, with the mobile wallet merely being the wrapper around existing payment schemes6. China is ahead and has been a prime example of the mobile revolution, with mobile becoming the leading form of payment method in the country, even in-store. In China, the leading wallets now account for over 50% of payments, according to the ECB. China’s rapid growth has largely been made possible through its adoption of QR code technology, reducing the need for costly POS hardware on the side of the merchant. While this, like NFC, is contactless, it does not share the same speed and convenience advantages, but has still proven highly effective at driving out cash. Outside of China, momentum is also growing. The run-rate of Apple Pay transactions is now exceeding a staggering 15bn a year, some ~5% of global card transaction volume outside China, with transactions more than doubling y/y in the prior quarter. This most likely puts Apple considerably ahead of Google Pay and Samsung Pay, although specific volume metrics are not available.
“The ability to go and tackle cash payments is broader than it has ever been before” (Nicolas Huss, CEO Ingenico)
7
In developed markets, regulatory requirements including strong customer authentication (SCA) under PSD2 could further benefit next-generation authentication methods such as biometrics and this could advance mobile wallets over other digital payment means8. An unintended consequence of SCA may be a dramatically better e-commerce experience on mobile than desktop due to a smoother process achieved through biometrics. Even in store, mobile will likely have an advantage over contactless cards. Contactless will require a pin entry every five transactions or every €150, unless an online transaction in the interim authenticates the card and restarts the counter. However, many wallets, including Apple Pay and Google Pay authenticate every time, providing an ease-of-use advantage over contactless and ensuring payment never requires use of the terminal keypad. Of course, large-value transactions can also be made in this way, above the contactless limits.
In summary, while contactless cards are the true cash killer, targeted at the lowest-value payments, the next decade will be about in-store mobile payment adoption across the spectrum of transaction sizes. China has shown it can be done, and we see it as inevitable that mobile payments will be yet another significant contributor to the decline of cash.
6 For a more in depth differentiation of alternative payment methods, please refer to Fintech & Payments primer vol.12: Invisible payments pressuring incumbents, 18/7/20. 7 Barclays Payments and Fintech Corporate Day, 19/5/20 8 Due to COVID-19, the UK Financial Conduct Authority (FCA) has authorised a second delay in implementing its SCA system; the deadline has now been pushed out further to September 2021.
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COVID-19: A CLEAR ACCELERATOR OF DIGITAL ADOPTION
Until relatively recently, it might have seemed outlandish to suggest that hygiene could play a key role in the pace of digital payments adoption. However, COVID-19 has brought the question of the cleanliness of cash sharply into focus. While the evidence so far is probably best described as inconclusive, the perceived risk has been sufficient to already lead to rapid and significant changes in regulatory, business and consumer behaviour. To varying degrees, countries have encouraged the use of digital payments and, as a result of COVID-19, payment companies have increased contactless limits, businesses have reduced cash acceptance and consumers have accelerated their adoption of digital payments methods. While there is no doubt a temporary element to all of this, we expect that underlying this is an acceleration of a shift already well under way; we expect COVID-19 to be a lasting driver of digital payments growth.
The cleanliness of cash is being called into question There has been widespread pandemic-related advice that has focused on the disadvantages of cash from a sanitary perspective. The scientific response on the impact cash can have in transmitting the virus may, at this stage, be viewed as inconclusive. While some pre-COVID studies indeed found that there is a possibility of pathogenic agents surviving on, and being transmitted through, banknotes and coins, the Bank for International Settlements (BIS) notes that scientists generally believe that the probability of transmission through cash is low9. The use of card terminals with non-contactless cards may indeed pose an equal or greater risk, as the pin pads may have a similar risk of virus transmission. The WHO, however, has urged a switch to contactless payments, citing a decreased risk of COVID-19 transmission versus cash. As a caveat, the risks and scientific details of the novel COVID-19 have not yet been fully decoded, hence we view it as entirely possible that the scientific consensus on the transmissibility via cash may still shift in coming months.
The response from central banks and governments has also, in reality, been mixed. The Bank of England and Germany’s Bundesbank have downplayed the risk of transmission through cash, stating that the risk of the medium transferring the virus is minimal, and the Bank of Canada has even actively encouraged retailers not to refuse cash payments. In contrast, other central banks have taken precautionary measures, with the People’s Bank of China sterilising banknotes, the Fed quarantining cash coming from Asia for a period, and others, such as South Korea, Kuwait and Hungary, taking similar measures. Governments and central banks in some countries, including Georgia, India and Indonesia, have gone a step further and encouraged the use of cashless payment methods.
Clear trend since COVID-19: a move away from cash We are of the view that current data, responses from the private sector and government, while not unequivocal, clearly show a trend: COVID-19 will accelerate the adoption of digital payments. LINK, the largest ATM network in the UK, released a statement at the end of March in which it delineated that cash usage in the country had halved due to COVID-19. While the decreased usage of cash does not in itself indicate a shift towards card, since POS volumes have generally decreased starkly since the pandemic has hit economies, there is clear and direct data that does demonstrate a shift to digital. For instance, in South Korea payment with card and mobile grew by ~30% in the months of January and February 202010. Worldline, on its Q1 results call, spoke of having seen an acceleration in the
9 BIS Bulletin #3: COVID-19, cash, and the future of payments 10 European Parliament: The rise of e-commerce and the cashless society
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adoption of digital payment methods as a result of COVID-19, equivalent to one to two years of typical substitution.
In response to COVID-19, the major card schemes and regulators have raised contactless payment limits across many countries around the globe. 29 countries across Europe have either taken permanent or temporary decisions to raise the limit of contactless payments. Australia has also raised its contactless limit, to AUD 200 from AUD 100 and Canada has raised its limit to CAD 250 from CAD 200; these are significant transaction sizes. Early data shows that these increases in contactless payment limits have been met with high demand. Barclaycard, for example, processed over 7 million transactions above the previous limit in UK & Ireland in less than a month, and average transaction size increased by more than 50% to £14. Mastercard has spoken of a clear increase in contactless payments due to COVID- 19, with a >40% increase in contactless transactions globally in Q1. A consumer poll conducted by the company, polling over 17,000 customers from 19 countries, found that nearly 8 in 10 are now using contactless, with safety and cleanliness stated as the main advantage among users. In Europe, the company reported that 78% of transactions are now contactless. Visa has also seen a clear increase in contactless transactions and recently commented that, outside the US, 60% of transactions in-store are now contactless.
“ATM withdrawals were down 80% across Europe, cash machines were full” (Gilles Grapinet, CEO Worldline)
11
The direct sanity traits of contactless seen as an advantage, but so is the increased speed of payment, which allows consumers to spend less time in store and reduce the risk of contact. We believe that contactless mobile wallets have also seen a significant uptick, with Google commenting that its Google Pay business has grown strongly over the last year and Apple concluding a number of new partnerships. Bloomberg12 reports that contactless mobile payments have surged as a consequence of COVID, and could lead to contactless gaining 10% to 20% additional market share for transactions at stores. Some large retailers have also supported the uptick in contactless payments, with Walmart, for example, expanding its checkout options for consumers across its stores and increasing the infrastructure for contactless payments, as well as for its Walmart Pay application with the use of QR codes.
It has also been reported than many stores have taken the decision to no longer accept cash as a security measure. In some countries, including Germany, large retailers have not banned cash outright, but are asking shoppers to use digital payment methods where possible. COVID-19 has had a strong impact even in regions with a high share of cashless payments, such as the Nordics, where contactless already enjoyed high penetration. In the first 16 weeks of 2020, contactless volumes grew by 12%, from 57% of all card transactions to 69%, according to Nets.
11 Barclays Payments and Fintech Corporate Day, 19/5/20 12 Contactless Payments Skyrocket Because No One Wants to Handle Cash, 16 April 2020
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FIGURE 16 The cleanliness of cash called into question
Source: Worldline, April 2020
This trend towards a cash-light society is atypical for a crisis situation, as the demand for cash normally would be expected to increase in times of financial or broader crises, due to the fact that it is viewed as a safe, stable store of value. Even though central bank responses, as well as scientific evidence, are not clear cut as of this moment, we see a clear trend in consumer behaviour. News relating to COVID-19 surviving up to 24 hours on cardboard and longer than that on other hard surfaces may be sufficiently alarming to many, even if the scientific verdict on cash specifically is still out. The BIS has shown that internet search interest in the cash / virus relationship has significantly increased since the COVID-19 pandemic. Many may never previously have considered the hygienic implications of cash, and we think COVID may intrinsically modify society’s attitude towards notes and coins. We also believe that, whatever the reason for trying digital payment alternatives such as contactless or mobile payment methods, these rapidly become habit. Overall, we expect COVID-19 to have caused a largely permanent acceleration in the pre-existing trends of digital payments adoption, the decline of cash and evolution towards cash-light societies.
“Card acquirers of the world will recover ahead the economy, as cash transactions won’t come back” (Rob Cameron, CEO, global head of Payment Acceptance Barclays)
13
13 Barclays Payments and Fintech Corporate Day, 19/5/20
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P2P PAYMENTS NEGATING ANOTHER USE CASE OF CASH
Cash-to-card substitution at the POS is by far the leading driver of cash-light societies, and is therefore the focus of this report. However, we believe that any eventual migration beyond cash-light towards a truly cashless society would be dependent upon a second pillar: a ubiquitous, digital P2P solution. Widespread adoption of such P2P systems hits secondary uses of cash, such as personal transactions and gifting.
There are already significant examples of P2P success, in many cases clearly adding to cash displacement, notably China with its all-encompassing wallet solutions and the powerful Nordic examples. The US has seen meaningful adoption, but not with the same widespread embrace of the technological, while some other digital markets such as the UK are simply laggards.
From these examples, we conclude that stored-value functionality increases financial inclusion and is a further accelerating effect in currently cash-centric markets. In already digitally-advanced societies, we believe interoperability is crucial to widespread adoption, and will only gain in importance as we look out towards the breaking down of country borders and the increasing internationalisation of digital P2P.
Disruptive apps can offer more than cash in P2P use case Although the primary focus of this report is to highlight the decline of cash at POS, we believe that in consideration of potentially true cashless societies, the digitalisation of peer- to-peer (P2P) payments must play a major role. Cash’s use for P2P transactions has been deeply ingrained in societal and payment habits over centuries, but it is being called into question by disruptive, increasingly-ubiquitous P2P technologies. These solutions enable users to seamlessly transfer money, improving on some of the friction and costs of cash identified in this report.
The physical nature of cash, often cited as a reflection of its ‘realness’, carries clear limitations for a P2P use case. For instance, if one person wants to pay another a certain amount, this requires access to the specific denomination of coins and notes. Divisibility can no longer be taken for granted, especially in countries in which the shift to digital has progressed quickly. There is a clear trend of people reducing how much cash they carry. In the UK, a Mastercard study found that Britons on average carried less than £5 at any given time and 10% of Britons no longer carried a wallet. The less people use cash, the more it loses its usefulness. In this way, we see the increasing adoption of P2P apps as compounding to the shift away from cash at POS.
Whether linked to a bank account or based on a wallet with stored-value, divisibility is not an issue for digital P2P apps. Additional functionalities, such as bill-splitting and requests for payments, also add functionality over the traditional push payment, with innovation in these apps continuing. A recorded history of transactions allows for less error and a more practical solution to P2P payments. Instead of immediately settling debts among peers after every payment, a more pragmatic solution can be to build more informal habits of settling amounts net over time. As more and more people become accustomed to the convenience benefits such solutions bring, even more are likely to follow, in our view.
Interoperability and store of value are key to the cash debate P2P can mean different things to different people and there are a broad range of payment solutions, FX applications and alternative payment methods that can be grouped in with the category P2P. In differentiating between such apps, we have in the past assessed offerings
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across the characteristics of: 1) stored value or pass-through; 2) funding mechanism; 3) closed or open loop; and 4) independent or existing infrastructure. The two that we think are particularly relevant lenses through which to assess the risk of a P2P solution to cash are 1) stored value or pass through and 3) closed or open loop.
FIGURE 17 Four key attributes to categorise P2P solutions, and what matters for the cash debate
Source: Barclays Research
Stored value crucial in aiding financial inclusion Many P2P payment offerings enable value to be stored. That is, the money defaults into a specified wallet, instead of requiring an underlying bank account or debit card as a store of value. PayPal arguably pioneered the stored value model, allowing users’ money to be stored in the PayPal wallet. Most non-traditional bank offerings, such as Venmo, neo-banks such as Revolut and Monzo, and also the Chinese Alipay and WeChat Pay, function on this basis of providing users an app where value can be stored.
With ~1.7bn people still unbanked in 2018 14 , we see stored value models as key to alleviating the global problem of financial exclusion, and there is a large market that allows for significant growth. For cash to be replaced by digital P2P payments, it is necessary that even those with no access to formal financial institutions can partake, and stored value P2P offers a solution to this. It is easy, particularly for those in digitally-advanced markets, to underestimate the global shifts to increase financial inclusion; we address the societal implications of a decline in cash, and the consequent opportunity for mobile and fintechs, in a later section of this report. For currently cash-centric markets, stored-value appears a promising option.
In contrast to stored value solutions, many bank-sponsored offerings, such as Zelle, Pingit, PayM, MobilePay or Swish are based on a straight-through-processing model, meaning that money is deposited automatically back to a bank account or debit card15. Even though the straight-through-processing model is less technologically disruptive, and does not address the issues of financial inclusion, in digitally-advanced markets, where bank inclusion is extremely high, the advantage of not needing a separate account or solution could outweigh the stored value advantages. Banks have an incentive to tie users into their own ecosystems. The drive by banks (and sometimes other organisations) to combine forces to bring national, bank-offered P2P solutions, such as Zelle (US), Swish (Sweden) and Twint (Switzerland), is, in our view, partially an attempt to fend off competition from neo-banks and fintechs. The large and existing customer networks of banks have the clear advantage that scale is easier to achieve, which is essential for P2P solutions to be effective. Especially in highly developed countries with small unbanked proportions of the population, straight- through-processing models led by banks have thus been crucial for the quick dissemination
14 World Bank 15 There are also hybrid models, such as the Swiss app Twint (owned by Worldline, SIX, a consortium of Swiss banks and Postfinance) which is primarily based on straight-through-processing model if the user downloads the app associated with their bank, though there is also a prepaid option that does not require an associated bank account.
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of P2P apps. So, in our view, interoperability is more important than stored-value in digitally-advanced markets, as we address below.
Open loop critical to widespread adoption and cash replacement In payments generally, a ‘closed-loop’ model relates to the situation in which an operator takes both the merchant acquiring and the issuing side of the payment chain; that is, intermediaries such as a commercial card scheme are cut out. With open loop, which has become highly normalised, the merchant and the consumer are independent of each other, comparable to a cash use case.
For pure P2P payments without a merchant, the distinction between closed loop and open loop systems becomes more complex and is closely tied to stored value versus pass- through. In our view, a distinction must be made, though, between stored value closed systems and pass-through processing closed systems. The former indeed requires both users to download the same P2P app (for example, M-Pesa in Kenya, Venmo in the US, or Alipay and WeChat Pay in China) for the parties to exchange value. However, this is not an issue where any such solution becomes extremely successful. It is, however, clearly an issue in a fragmented market.
For pass-through-processing systems, however, and especially for those that are led by a large number of banks, it is perhaps easier to think of the P2P app as an add-on to a bank account. If that bank only allows transfers with other members of that financial institution, it is clearly closed and early solutions were hampered by this. Open bank-led systems such as Swish (Sweden) or MobilePay (Denmark) can be used for transfers regardless of which underlying bank is attached to a P2P account.
A true open loop environment, however, would allow complete interoperability between any solutions.
FIGURE 18 Interoperability key to driving adoption, especially in digitally-advanced markets
Source: Barclays Research
Industry associations such as the European Payment Council are also attempting to open up the dialogue to create pan-European interoperability of P2P solutions, with equensWorldline selected as the preferred SEPA Proxy Lookup (SPL) service provider, which creates
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interoperability between P2P payment services. SPL allows data to be exchanged to enable P2P mobile payments by linking a phone number to an IBAN, which is intended to overcome the fragmentation of national P2P players. This could fundamentally change the landscape of P2P, since currently many solutions are limited by country borders.
National P2Ps gaining scale in digitally-advanced economies There are a growing number of examples, concentrated among the digitally-advanced economies, where P2P apps have gained considerable traction. Perhaps the best example of this in Europe is Swish in Sweden (see following case study), which ~81% of Swedes use. According to research by the bank-owned Zelle, the adoption of P2P is now being driven not only by younger, typically tech-savy generations – it found that, in the US, 50% of first- time P2P users are 45+16. The higher degree of trust in banking institutions that is typically shown by Generation X and Baby Boomers will, in our view, make these potential users more likely to adapt to pass-through processing, bank-led solutions – indeed the Zelle study found that 76% of Gen X and 74% of Boomers ranked the fact that P2P was being offered through a financial institution that they use as the key reason for trialling the solution. Nevertheless, while Zelle found that older generations are increasingly using P2P for the first time, Gen-Z and Millenials are still the generations that on the whole use P2P more actively, and P2P makes up a larger proportion of their total payments.
FIGURE 19 FIGURE 20 First-time US users by age US P2P usage by generation in 4Q18
15% 77% 78% 18% 22% 20% 74% 29% 15% 17% 15% 20% 52% 23% 21% 15% 13% 20% 21% 21% 27% 22% 22% 18% 10% 10% 8% 29% 26% 6% 22% 18% 11%
2014 2015 2016 2017 2018 Gen-Z Millenial Gen-X Boomers
18-24 25-34 35-44 45-54 55-72 Active Usage Use of P2P for % of total payments
Source: Barclays Research, Zelle Source: Barclays Research, Zelle
The US is an interesting example, as there has been a relatively high proportion of people that have trialled P2P technology. In 2018, 82% of US online consumers reported that they had tried P2P payments in their lifetime, according to the Zelle study. However, use of P2P as a percentage of total payments still remains relatively low. This highlights that something in the US has hampered overall adoption, versus perhaps the Swedish and Chinese examples. An intriguing aspect of the US P2P landscape is that the two most dominant players, Venmo and Zelle, represent clearly opposed technologies. While Venmo is a stored- value option, owned by PayPal, Zelle functions on a straight-through-processing model and was developed by more than 30 US banks. Zelle is already integrated into many of the participating banks’ online banking apps, underlining our view that straight-through- processing P2P can be viewed as something of an add-on to online and mobile banking. Zelle does not charge fees, while Venmo charges a 1% fee for instant transfers, and a 3%
16 Zelle: Digital Adoption Study 2019
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fee for credit-card-linked transactions, though transfers funded through the Venmo balance, debit cards and bank accounts are also free.
Venmo gained a large proportion of the market early on, as it already launched in 2009 versus Zelle’s official launch in 2017 (though Zelle’s predecessor, clearXchange, was also on the market since 2011). Both companies have been growing rapidly: in 2019, Zelle processed $187bn in payments and 743m transactions, representing 57% y/y growth in value and 72% growth in transactions. Meanwhile, Venmo processed $102bn for FY19 but is growing slightly ahead, at 65%. However, as our colleague Ramsey El-Assal outlines in Venmo, Cash App, and Zelle: One of These Things Is Not Like the Others, 8/3/19, the volume metrics are not an apples-to-apples comparison, and these headline numbers do not tell the whole story about the competitive dynamics17. For us, more important is that the category is clearly enjoying very strong growth.
Venmo, which includes a social messaging system, and a social media-esque newsfeed, where transactions can be shared with friends, may be seen as specifically targeting younger users. Research by Cornerstone Advisors in 4Q18 confirms that precisely among the age groups between 21 and 38, Venmo still has a clear advantage in terms of adoption.
FIGURE 21 FIGURE 22 Venmo and Zelle processing volumes, $bn Venmo and Zelle P2P adoption
187 34%
26% 119 25% 102 20%
75 14% 62 55 11% 10% 35 18 5%
2016 2017 2018 2019 21-29 30-38 39-53 54-72
Venmo Zelle Venmo Zelle
Source: Barclays Research, PayPal, Zelle Source: Barclays Research, Cornerstone Advisors 4Q18
A region where P2P adoption is more progressed than in the US is in the Nordic countries. In Sweden, Swish has become widespread, with ~81% of Swedes using Swish. Swish transaction values amounted to SEK 200bn in 201918, or ~€19bn (small versus the US, but higher on a per capita basis). Swish is used primarily for P2P payments, but is also moving into merchant acceptance. MobilePay in Denmark has also seen notable success, with more than 4m users in Denmark, or more than ~82% of Denmark’s adult population and an additional 800k users in Finland. MobilePay passed DKK 100bn, or €13.5bn in transaction volume, in 2019, though this was also helped by increased usage in-store and online. Nevertheless, we estimate that the vast majority of MobilePay volume is still P2P. Vipps in Norway has more than 3m users, accounting for ~68% of the adult population.
17 First, Zelle’s growth metrics include pre-existing (pre-Zelle) bank P2P volume from in-house solutions that has been moved onto the Zelle platform in tranches. Next, we believe that, in addition to P2P payments, Zelle is utilised by member banks for corporate disbursements, insurance-related payments and other non-P2P use cases. Finally, it has been reported that individual banks, specifically Bank of America, include both BAC-originated outbound Zelle transactions as well as inbound Zelle transfers sent from other banks in their overall metrics. We note that individual banks’ Zelle growth metrics may appear artificially enhanced by this practice. 18 European card payments growth slows to 2.7% as digital payments start to bite, paymentscardsandmobile.com, 04. February 2020
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Swish, MobilePay and Vipps are all bank-led straight-through-processing solutions: Swish was launched by six large banks and in coorperation with the Riksbank in 2012, MobilePay was developed by Danske Bank in 2013 and Vipps was launched by DNB in 2015. However, these solutions grant access to users with almost any bank account in the respective country. A primary reason why these straight-through-processing solutions have been so successful in the Nordic region is because an extremely high proportion of the population is banked in these countries, and there is generally high confidence in banking institutions .
Case Study: Swish, the second pillar in Sweden’s transition to cash-light Swish is Sweden’s successful mobile payments platform, which was launched as a P2P solution in 2012 by six of the largest banks of the country and in cooperation with the Riksbank. It has become one of the leading P2P payment solutions in Europe, with 6.9 million users, or ~81% of Swedes aged 15 or over. Since its launch, it has also extended to allow merchant acceptance for both online and offline payments, and thus it has contributed to the shift to digital at POS also. This advance into merchant acceptance was driven initially by very small organisations that would usually use cash due to the fact that an initial investment in the required infrastructure for card acceptance would be high, such as churches, farmers’ markets, informal organisations and local sports clubs. In our view, this is also where the line between P2P and POS begins to blur, as the informality of some organisations essentially means that transactions are more akin to P2P transactions than true merchant transactions.
Swish’s technology relies on pass-through processing, as the account must be connected to a bank account of one of the 11 participating banks. A second mobile app for security and electronic ID must also be downloaded by the user. Therefore, Swish does not fulfil the purpose of serving the unbanked, as access to a formal financial institution is required. However, despite this potential disadvantage, this is not an issue in Sweden, which has an almost 100%-banked society.
Transfers are processed through Bankgirot’s clearing system, which offers both speed and availability, with transactions processed in real time 24/7/365. The real-time nature allows cases of P2P payments that were historically dominated by cash to be digitalised. For private users, the service is entirely free, and there are no hidden costs that would put consumers at a disadvantage versus using cash. For merchants, a standard fee of ~2 SEK (~$0.20) is applied, though this can vary depending on size and requirements of the merchant. Payments are made via mobile phone numbers or at a merchant, with QR presenting a further option.
Swish’s rapid dissemination through the associated banks has created immense network effects and, coupled with the real-time nature of the payments, this has allowed for a digital P2P system that has largely replaced cash. People use Swish not only for very specific use-cases, such as splitting a bill, but also throughout their daily lives. From paying pocket money to children to charity payments, bill splitting and merchant payments, Swish has contributed significantly to the decline of cash in the country in almost every way.
The success of bank-led solutions in the Nordic region, however, does not signify that adoption of P2P payments will be driven by straight-through-processing globally. Indeed, China is perhaps the key example of a country that has seen exponential adoption of AliPay and WeChatPay (both serving more than 1bn active users), both stored-value, non-bank solutions. These applications have allowed both banked and unbanked users to profit from the services. Both Alipay and WeChat (by Tencent) are highly powerful apps that are used throughout everyday life, and are by no means pure P2P payment apps, as they have
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become equally integral for merchant acceptance with their QR systems but also to modern Chinese culture. Users chat, consume media and shop on these platforms, with consumers deeply engaged in a broader ecosystem. This creates additional value for the P2P use-case, since network effects are crucial and the more people use an app, the more useful it becomes. Arguably, some Western applications such as Facebook are trying to replicate this model, with the company recently announcing the consolidation of its payments brands, Facebook, Messenger, Instagram and WhatsApp, which were operating as silo brands, under a single brand and single processing platform called Facebook Pay.
Global direction yet unclear, but P2P a crucial second pillar P2P apps are undoubtedly going to be an integral ingredient in any migration towards true cashless societies, though the precise direction that P2P will take globally remains unclear. While P2P can quickly disseminate nationally through banks, as has been the case with the Nordic straight-through-processing model, countries with less developed banking infrastructure and a larger unbanked population, such as China, can also see and benefit from rapid increases in P2P with stored-value solutions.
Interoperability remains an issue. With the world becoming ever more connected, it is questionable how national P2P apps will compete with neo-banks that offer some comparable features, but on a global basis, and with free FX services. Regulation and cooperation, as exemplified by the European Payment Council’s SEPA Proxy Lookup (SPL), could help create inter-country usability. Development and growth has thus far been largely country-specific, with some interesting laggards. The UK, for example, does not have a large P2P specific user base, with PayM by far less prevalently used than its Nordic counterparts. Regional differences are complex, and P2P apps overlap with many other fintech services, including digital remittance and neo-banks (both described in more depth in the section of this report that addresses the social implications of the decline in cash), both of which can also allow services that are similar to P2P payments. In addition, many P2P apps are also pushing into the merchant acceptance space, and are thus starting to also compete with traditional card payments, as well as Apple Pay and Google Pay, among others. P2P can mean different things to different people, but what is clear to us is that it is combining powerfully with digital POS acceptance to accelerate the decline of cash.
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THE FUTURE OF CASH, BARCLAYS GLOBAL CASH MODEL
Using a combination of ATM and card transaction data, aligning this with global retail spend, and then comparing to a wide range of country-specific studies, we have built our Global Cash Model. We look at how the absolute and relative use of cash has trended in recent years and, using country-specific digitalisation factors, forecast this out into the future under a range of scenarios.
We find that across all the major countries relative cash usage is in decline. However, by grouping countries into cash-centric and digitally-advanced, as opposed to emerging and developed, we see that the global picture hides two very different trends. In the most digitally-advanced economies, absolute cash usage has already been in decline for some time, and the structural growth afforded through digital substitution is becoming modest. However, in cash-centric economies, powerful underlying economic and consumption growth is causing cash usage to continue growing in absolute terms, despite a far more powerful substation factor of ~3x. On a global basis, our post-COVID base case suggests that a tipping point will be reached in 2025, at which point overall absolute cash usage will begin to decline, with cash penetration dropping to 20% in 2030, from ~40% today. In our most accelerated, cash-light scenario, we believe cash usage could drop to just 13% over this timeframe.
Global Cash Model highlights march to cash-light societies Cash usage varies significantly by market and country; however, there has for some time been a clear trend towards a higher share of non-cash payments. It is increasingly, in our view, more a question of when and where, not if, the first truly cash-light societies emerge. In this section we provide our base case estimates and flexed scenarios for the future of cash usage, based on our Barclays Global Cash Model.
Cash losing market share, but still growing… for now Our data indicates that, on a global basis, cash throughout the historical period has lost significant market share to digital payments. However, due to economic and consumption growth, the usage of cash has still been growing. Hence, while cash is declining on a relative basis, it has continued to grow on an absolute basis. However, there is a stark difference between what we define as the cash-centric markets and digitally-advanced payment markets. In the digitally-advanced payment markets, cash usage peaked already in 2017 on an absolute basis, while for cash-centric markets we expect cash on an absolute basis to continue growing until 2027 (following a COVID-19-related dip).
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Barclays Global Cash Model methodology summary There are numerous approaches to determine cash usage versus digital payments. They are based mostly on surveys and estimates and the data is very complex, generally inconsistent between sources and often not clear if it refers to value or volume. Crucially there is a lack of reliable time series data. We, therefore, created our Barclays Global Cash Model based on ATM withdrawal and card payment transaction value data, which is broadly available, reliable and in a time series format. While ATM withdrawals are not a perfect proxy for cash spend, the ECB estimates that there is 93% overlap, which we see as a sufficiently strong relationship. We briefly review our approach here – for a more detailed overview, please refer to the appendix.
The combined historical ATM withdrawals and card spend data drive our total consumer spend and historical cash usage measures. For future periods, we use third- party retail spend projections to forecast total consumer spend growth. Our total consumer spend growth forecasts, combined with a digitalisation factor, drive our digital spend growth forecasts, allowing us to back out implied cash usage. The digitalisation factor is the absolute percentage factor on top of consumer spend growth representing the substitution of cash by digital payments. These factors vary significantly by market, given the differing degrees of digitalisation, and are helpful in forecasting digital payment growth. For 2020 and 2021, we adjust retail spend growth for the impact of COVID-19. We also model a higher additional digitalisation factor for 2020, of which we reverse half in 2021.
We aggregate country data into regional and global forecasts. We also provide a breakdown for cash-centric and digitally-advanced payment markets rather than emerging and developed markets, as some emerging markets (such as China) are already largely digital, while developed markets such as Germany and Italy are still cash-centric. We normalise our data through indexing it at 100 in year one.
Cash-centric economies will continue to see absolute cash growth, but with stronger substitution Our cash-centric grouping includes those economies that rely on cash for the majority of their transactions. While these countries have a clear preference for cash, the transition to digital payments is also under way, and is simply at an earlier stage.
In 2014, we find cash usage was at 73% in cash-centric economies and remained broadly at this level in 2015 before starting to decline on a relative basis to 61% in 2019, an already fairly steep decline. However, on an absolute basis, cash continued to grow from an index level of 73 in 2014 to 100 in 2019, or a ~7% CAGR. This growth reflects the disproportionate number of emerging market countries in the aggregate, with their related higher economic growth, mix shift within the economies towards consumer spend, and higher inflation. On the other hand, digital payments grew from an index level of 27 to 64 in 2019, representing a ~19% CAGR. This drove the relative mix shift towards less cash usage.
Going forward, following a COVID-19-related dip, we expect cash to continue to increase on an absolute basis until the middle of the decade (2026) to an index level of 102, which represents only a modest increase from 2019 onwards. Cash would represent at this time only ~42% of total spend. After that, we expect cash to decline on an absolute and relative basis to ~29% of total spend in 2030 – roughly the level of digital markets five years ago.
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FIGURE 23 Cash-centric economies base case cash curve
73% 72% 300 Cash Digital Cash usage 66% 65% 63% 61% 250 56% 55% 53% 50% 48% 45% 200 42% 39% 36% 33% 150 29%
100
50
0
Source: Barclays Global Cash Model (based on Barclays Research estimates, combined with data from BIS, World Bank, ECB, selected country central banks and Euromonitor)
Digitally-advanced economies already see absolute and relative cash decline Digitally-advanced economies are economies in which the transition to digital payment methods is well under way and in many instances cash usage is already declining on an absolute basis.
In 2014, cash usage was at 31% in digital economies, before starting to decline on a relative basis to 22% in 2019. However, on an absolute basis, cash was flat at an index level of 31 from 2014 until 2017, before declining to 29 in 2019. Over the whole five-year period, cash declined at a 1% CAGR. On the other hand, digital payments grew from an index level of 69 in 2014 to 102 in 2019, representing an ~8% CAGR. This drove the relative mix shift towards less cash usage.
Going forward, we expect cash to continue to decline on an absolute and relative basis. On an absolute basis, we expect cash to decline from an index level of 29 in 2019 to 22 in 2025 and 17 in 2030, representing a 5% annual decline. Cash usage on a relative basis we forecast to decline from 22% in 2019 to just 9% in 2030.
FIGURE 24 Digitally-advanced economies base case cash curve
31% Cash Digital Cash usage 200 29% 28% 26% 24% 150 22% 19% 19% 17% 16% 100 14% 13% 12% 11% 11% 10% 9% 50
0
Source: Barclays Global Cash Model (based on Barclays Research estimates, combined with data from BIS, World Bank, ECB, selected country central banks and Euromonitor)
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Worldwide cash usage to decline by 2030 to levels of digital markets today On a global basis, cash represented 49% of the total transaction value in 2014. From the 49 index level, it has grown at a CAGR of ~4% to 60 in 2019, reflecting 41% of the total transaction value in that year. In the meantime, digital payments have outgrown cash spend, increasing from an index level of 51 to 86, implying a CAGR of ~11%.
Going forward, we expect cash globally to marginally decrease on an absolute basis from 60 in 2019 to 57 in 2025, after which the decline starts to accelerate for cash to reach an index level of only 48 in 2030. On a relative basis, we see cash usage declining from 41% in 2019 to 30% by 2025 and 20% by 2030. In the meantime, we see digital payments increasing from an index level of 86 in 2019 to 134 in 2025 and 195 in 2030, implying a CAGR of ~8%.
FIGURE 25 Worldwide base case cash curve
Cash Digital Cash usage 250 49% 48% 45% 44% 42% 200 41% 37% 36% 35% 33% 31% 150 30% 28% 26% 24% 22% 20% 100
50
0
Source: Barclays Global Cash Model (based on Barclays Research estimates, combined with data from BIS, World Bank, ECB, selected country central banks and Euromonitor)
In addition to our base case, we provide below a ‘pre-COVID’ scenario analysis to assess the impact of COVID on the digitalisation of payments. For our pre-COVID scenario, we use pre- COVID retail spend growth estimates and assume an unaffected digitalisation factor for 2020 and 2021. In this scenario, cash usage would have dropped only to 22% by 2030 versus 20% in our base case. The other way to look at this is that COVID has roughly accelerated the digitalisation of payments by one year, on our estimates.
FIGURE 26 Worldwide cash curve (pre-COVID scenario)
Cash Digital Cash usage 250 49% 48% 45% 44% 42% 200 41% 40% 38% 37% 35% 33% 32% 30% 150 28% 26% 24% 22% 100
50
0
Source: Barclays Global Cash Model (based on Barclays Research estimates, combined with data from BIS, World Bank, ECB, selected country central banks and Euromonitor)
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Accelerated cash-light scenario indicates global cash usage drops to only 13% by 2030 In our base case, we assumed a relatively modest digitalisation factor relative to the country-specific history. To stress-test what might happen if digitalisation were to accelerate, we provide an accelerated cash-light scenario below by increasing the digitalisation factor by 20% (i.e. a 1.0% digitalisation factor increases to 1.2%). Such a scenario would likely be driven by ongoing higher digitalisation due to COVID-19, policies favouring digital payments, an increasing number of shops accepting digital-only payments and increasingly difficult access to cash. In addition, an acceleration in e-commerce over bricks-and-mortar retail would be supportive to faster digitalisation. In our accelerated cash-light scenario, cash usage declines to only 13% in 2030 compared to 20% in our base case. Compared to our base case, payment digitalisation accelerates by 2-3 years, with our base 2030 target of 20% already achieved in 2027/2028.
The vast majority of the reduction is driven by faster digitalisation of cash-centric markets as further digitalisation in digitally-advanced economies isn’t moving the needle much on a global basis. Cash usage declines to 19% in cash-centric markets and 6% in digitally- advanced payments markets by 2030, versus 29% and 9%, respectively, in our base case. This highlights that cash-light societies appear, to us, to be a near-certainty in digitally- advanced economies and do not rely on an accelerated scenario such as this; the global picture is more sensitive to what happens over the coming ten years in the cash-centric markets.
FIGURE 27 Worldwide cash curve (accelerated cash-light scenario)
Cash Digital Cash usage accerlated scenario Cash usage base case 250
200 49% 48% 45% 44% 42% 150 41% 36% 35% 33% 31% 29% 100 26% 24% 21% 19% 50 16% 13%
0
Source: Barclays Global Cash Model (based on Barclays Research estimates, combined with data from BIS, World Bank, ECB, selected country central banks and Euromonitor)
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ESG CONSIDERATIONS AND THE SOCIAL IMPLICATIONS OF CASH’S DECLINE
When Barclays’ Sustainable & Thematic research team look out to 2030, digital payments & fintech is, of 150 key trends, seen as one with the near-highest combination of impact and probability – we agree. That said, the corresponding decline in cash usage and accessibility that we expect to result from this is not without challenges and potential negative effects, likely falling disproportionately on some of the most vulnerable segments of the world economy. A staggering ~1.7bn people globally remain unbanked, and for these communities cash plays a key role in financial inclusion and the ability to transact, store wealth, budget and more. It therefore seems right, as we examine in the next section, that regulators, which for so long have been focused on the digitalisation of payments, are beginning to pay consideration also to the risks associated with an accelerated pace of evolution towards cash-light or even cashless societies.
Moreover, we believe there are potential solutions to these challenges, made possible through mobile and internet adoption, and the impressive innovation taking place within the fintech community: access to mobile phones is greater than to bank accounts, and M-Pesa has shown the transformation that can be made possible in a developing economy through mobile money; digital remittance can be offered at a fraction of the cost that physical services need to charge to cover their costs, lowering an effective tax that falls on some of the lowest-income groups; and neo-bank offerings are beginning to bring true financial inclusion, with less discrimination and lower costs. There will be friction costs to an accelerated transition towards cash-light societies, but we believe fintech offers a credible path to bridge the gap in the medium term, and to ultimately drive net higher financial inclusion.
Digital Payments a key thematic mega-trend for the decade Contributing analyst: Barclays’ 2030 Thematic Roadmap: 150 Trends, 12/2/20 outlines 150 trends across six Sustainable & Thematic Investing thematic paradigms that Barclays’ Sustainable & Thematic Investing team believe will Hiral Patel dominate their discussions with investors over the next decade. While some trends are more +44 (0)20 3134 1618 [email protected] speculative, others build on risks that have already begun to crystallise. As shown overleaf, Barclays, UK these 150 trends are plotted across six thematic paradigms: i) Technology & Innovation; ii) Consumer, Food & Retail; iii) Industrials; Manufacturing & Transportation; iv) Health & Modern Science; v) Energy & Environment and vi) Society & Culture.
Digital payments & fintech is one of only seven trends to score in the part of the chart that signifies the largest impact and the highest probability. We are, as this report makes clear, in complete agreement with our Sustainable & Thematic colleagues that the transition from cash to digital payments is likely to continue, aiding financial inclusion, economic participation, transparency & security, cost savings and convenience & accessibility.
As previewed in the more recent note, 2030 Thematic Roadmap: COVID lens, 28/5/20, and discussed in detail in this note, we see COVID-19 further accelerating the transition to a cash-light society and digital inclusion. The shift will likely be higher in the developing world, as emerging economies further embrace mobile and digital payments/banking.
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FIGURE 28 Barclays’ 2030 Thematic Roadmap
Source: Barclays Research
Meeting the challenges of moving to a cash-light society In this section, we consider the societal challenges associated with an accelerated shift towards near-cashless societies. While in theory the shift will facilitate financial inclusion, in practice the impact may not be felt equally given there are additional factors to consider in respect of societal inequality and cultural norms. While we acknowledge our discussion relates primarily to the emerging markets, there are several groups within the developed world that would still be considered vulnerable if cash were truly to become obsolete – specifically, those who are poor or in debt, the elderly, disabled people and the rural population.
The primary risk from a societal perspective is whether the acceleration happens too quickly, given that many could face increased risks of isolation, exclusion and exploitation. Though we believe that fintech will help to bridge the gap, there is also the need for inclusive regulation, especially in respect of mobile and internet connectivity going forwards as digital and financial inclusion are becoming heavily intertwined.
Regional disparities – banked versus underbanked ~1.7bn people globally are still unbanked 19 . Although there has undoubtedly been a decrease in recent years from ~2.0bn in 2014, there are still regions in the world where more than half of the population has no access to formal financial institutions. Emerging regions such as Africa, South America and parts of Asia, where there is frequently a lack of electronic and internet infrastructure, are most affected. Nearly half of the world’s unbanked
19 World Bank
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population live in Bangladesh, China, India, Indonesia, Mexico, Nigeria and Pakistan alone20. The World Bank found that the main reasons for people being unbanked were a lack of monetary resources, costs of accounts, distance to financial institutions, a lack of documentation and religious concerns.
FIGURE 29 Unbanked population concentrated to emerging markets, but an issue elsewhere too
Source: Barclays Research, World Bank: The Global Findex Database 2017
While the majority of unbanked people globally can be clustered into emerging regions, some developed countries have perhaps surprisingly high numbers of people that are unbanked or underbanked. In the US, 6.5% of households were unbanked in 2017, with a further 18.7% underbanked21. Underbanked refers to people that have an account at an insured institution, but also require financial services outside the banking system, such as money orders, international remittances, payday loans or refund anticipations loans.
Even in the UK, which the World Bank ranks ninth globally in terms of banking inclusion, 1.5m remain unbanked, though it must be noted that only approximately half of the unbanked population in the UK would like a bank account22. Thus cash does give users the freedom to choose, and does not push people into using a digital infrastructure. While a small proportion of the population is unbanked in the UK, still 17% of adults say that they would struggle if the country were to become entirely cashless23. Furthermore, 47% would find it problematic if cash were no longer an option.
20 World Bank: The Global Findex Database 2017 21 2017 FDIC National Survey of Unbanked and Underbanked Households 22 Financial Inclusion Commission UK 23 Access to Cash Review: March 2019
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Other demographic factors to consider: age, gender, socioeconomic status Regional disparities in cash use play a major role, though there are other demographic factors that are equally important. Even in developed countries, older people may be more reluctant to switch away from cash. Cash, for many, has become as much a habit as a mere method for payment, with people that did not grow up with alternatives often using cash as an effective budgeting tool. Thus, cash can be of considerable value to those that have formed their saving and payment habits around the physical nature of cash, as we explored in the section comparing cash to digital payment methods.
"Cash is the best budgeting and planning tool" (Edward West, CEO Cardtronics)
24
Cash is currently more important to women than to men, as women globally are less likely to have a bank account. Women globally are 7pp behind in terms of account ownership, according to the World Bank, and the difference is larger still at 9pp in developing economies. In some countries, including Algeria, Jordan, Lebanon and Nigeria, the differences in account ownership between men and women are considerable: for example, in Algeria, 56% of men have an account versus only 29% of women. Women in these countries, therefore, are still more dependent on cash, and a shift away from physical payment forms, if not coupled with a simultaneous increase in accounts owned by women, could have negative social implications. Even though it may seem unlikely that developing nations will move away from cash quickly, therefore leaving a disproportionate number of unbanked women behind, both China and India, where ~60% of the unbanked population is female, are in the process of doing exactly that.
There are further groups in society that are inherently at risk from a decline in cash. Homeless people often are reliant on small change and in many cases don’t have access to phones or other methods of digital payments. People with disabilities may struggle in a completely cashless society. The use of cash, even in countries that are relatively far along in the transition to cash-light, such as the UK, has a strong correlation to social standing and income, with people in financially worse off positions being more reliant on cash. In a worst-case scenario, a cashless society has the potential to hinder people from transacting freely, for instance in oppressive regimes. Without careful mitigation, there are clearly possible negative social consequences of a complete shift to cashless, harming those that are already most excluded financially and therefore amplifying social inequalities.
FIGURE 30 Percentage of UK population reliant completely on cash by income group >15% 2.5%
Income under £10,000 annually Income above £10,000 annually
Source: Barclays Research, Access to Cash Review, March 2019
24 Barclays Payments and Fintech Corporate Day, 19/5/20
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But mobile and fintech beginning to bridge the gap An adjacent issue relating to unbanked populations is that mobile and broadband connectivity is required for some cashless systems. While in high-income countries, up to 82% of adults have both a mobile phone and access to internet, according to the World Bank25, only 40% of adults in developing economies have access to both. With economies moving rapidly towards cash-light societies, it is important, in our view, that the pace of transformation coincides with the adoption of underlying technologies such as mobile phones and internet that are required for a digital infrastructure. Despite the fact that we see the potential for negative social impacts from the decline of cash, our view is that mobile and fintech will largely be able to counteract these negative consequences, and in some cases, adoption may even lead to a net positive impact for the most vulnerable groups in society.
Pure mobile payment systems effective even if internet penetration low Even though only 40% of adults in developing countries have access to both internet and mobile phones, the proportion of adults with mobile phones is significantly higher. In developing economies 84% of men and 74% of women own mobile phones26. So, while there is still a significant gap in mobile phone ownership between men and women, both men and women are far more likely to own a mobile phone than to have access to a bank account in many developing countries. Indeed, according to the World Bank, two-thirds of unbanked adults globally own a mobile phone.
FIGURE 31 Proportion of people with access to mobile phones trumps access to accounts
Source: Barclays Research, World Bank: The Global Findex Database 2017
This is crucial, as simple pure mobile payment systems have shown that, even without access to internet, people with access to mobile phones can benefit from financial inclusion. Pure mobile payment systems have become popular in both Africa and Asia. The players providing these systems are usually licenced to transfer money and process payments, though they are not usually regulated in the same way that a bank is. While services may also offer internet-connected solutions, such as apps, the distinguishing detail that is
25 World Bank: The Global Findex Database 2017 26 World Bank: The Global Findex Database 2017
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relevant for financial inclusion is whether they can enable payments by carrier billing, for example through SMS or Unstructured Supplementary Service Data (USSD).
Geographically, such mobile money options are practical compared with cash, as developing countries often lack an ATMs or banking infrastructure, and this assures that, even in rural areas, the number of people that are excluded financially can be reduced. M- Pesa in Kenya is perhaps the prime example of how a relatively simple pure mobile payments system has changed the landscape of the economy.
Case study: M-Pesa M-Pesa was founded in 2007 by Vodafone and Safaricom, the leading mobile network provider in Kenya. It is a peer-to-peer mobile money transfer service that initially targeted the Kenyan remittances market. However, M-Pesa expanded quickly, allowing users to purchase airtime through the service, and the user base grew rapidly. Today, M-Pesa has over 37m active users and a network of active agents of almost 400,000. The company has expanded from Kenya into six other countries in Africa. In FY19, 11bn transactions were made using M-Pesa, and it has become Africa’s largest payments service.
M-Pesa customers sign up for the service at one of the 400,000 agents, which are often mobile phone stores or retailers. The customer is able to deposit cash, and in exchange, receives electronic money through the M-Pesa service. All transactions are completed by entering a PIN, and both the sender and receiver get SMS confirmation of the amount of money that has been transferred. The recipient receives the electronic money instantly and is able to redeem it by visiting an agent, or can decide to keep the money in the M-Pesa ecosystem and pay other merchants with electronic money. M-Pesa now also functions on a smartphone app, using a QR code system.
M-Pesa’s model has proven that even the most basic mobile devices can be supportive to financial inclusion. The quick spread of the technology, and its viral nature, ensured self-sustaining mass and scale. Today, M-Pesa is used to pay for virtually anything, and the company is looking to expand further throughout the African continent.
M-Pesa, overall, has had a positive impact on the Kenyan economy and society. While relatively high transaction fees and a lack of competition have been criticised, research by Suri and Jack27 has estimated that M-Pesa alone has lifted 194,000, or 2%, of Kenyan households out of poverty, simultaneously increasing consumption. 73% of adults in Kenya have a mobile money account and, according to Suri and Jack, M-Pesa has had an immense impact, especially for women, changing financial behaviour and habits, increasing savings and even allowing more choice in occupation, as women in Kenya have started to move from agriculture into business.
27 Suri, T., & Jack, W. (2016): The long-run poverty and gender impacts of mobile money. Science, 354(6317), 1288- 1292.
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Digital remittances significantly reduce cost and waiting time Remittances are another aspect of the global economy where digital and mobile have improved conditions for the socially disadvantaged. Remittances have traditionally originated offline, at either the provider’s own store or kiosk, or via an originating agent who receives a commission for processing the transaction. However, the digitalisation of remittances has given rise to website- and app-based remittance services, eliminating the need for an originating agent, although a pay-out (disbursement) network is often needed if the recipient is only able to take cash.
Digital is both cheaper and more efficient, while a physical pay-in and pay-out infrastructure is expensive. However, economies of scale and competitive pressure of online and in-app have resulted in pricing pressure, though there has been some stabilisation in pricing since 2014. As part of its initiative to lower remittance fees globally, the World Bank tracks quarterly remittance pricing across all the major corridors. The aim of this is to increase transparency and competition and, in turn, to lower fees for consumers.
FIGURE 32 Global remittance pricing still relatively high despite decreasing trend
% Global average total cost to send $200 USD equivalent 10 9.7 9.1 9.1 9.1 8.7 9 8.4 7.7 8 7.5 7.5 7.1 6.9 6.8 7
6
5
4
Source: World Bank, Barclays Research
Mobile solutions are fundamentally changing the competitive landscape for remittances, reducing costs and offering a more convenient solution that does not require access to a bank account. GSMA finds that mobile remittances cut costs in half28, and this is in line with findings from PayPal and Xoom, which estimate that average costs of digital remittance are at less than 4%. A BCG study29 even estimates that the reduction in time spent and travel with mobile financial services can lead to a 1% income saving. Digital remittances therefore provide a vastly more efficient way to service the ~800 million remittance recipients around the world30.
Challenger banks offer easy access and intelligent budgeting at a discount Challenger banks such as Revolut, Monzo, N26 or Nubank offer three key advantages that could help in the reduction of financial inequality. First, most of these incumbents grant easy access to an IBAN number and sort code and, while many in developed countries may use these accounts as a secondary account, they can undoubtedly be used as a primary account. The ease of creating an account reduces the burden of becoming financially included, and, with the number of people owning smartphones continually increasing, we see a clear chance for the simplicity of these offerings to reduce the number of people that
28 GSMA: Driving a price revolution: Mobile money in international remittances 29 BCG: The Socio-Economic Impact of Mobile Financial Services 30 UN: Remittances matter: 8 facts you don’t know about the money migrants send back home
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are currently unbanked, especially in the pockets of developed societies that are still unbanked, such as in the US.
Next, their easy-to-use interfaces make it very intuitive to budget and gain oversight over one’s finances. Tools such as categorisation of purchases into merchant types, real-time balances or predictive budgeting give users capabilities that are not possible with cash. Open banking will only increase the power of budgeting apps, as apps accessing bank-held data will be able to help customers better understand their budgets. While we do see cash’s physical nature as beneficial to budgeting, we believe that, as society becomes increasingly accustomed to technologically enhanced solutions, the use of smart banking apps will allow budgeting and personal finances to achieve a new level of efficiency.
Finally, challenger banks offer their services at a cheap price, and often free. This allows those that are financially disadvantaged, even in developed countries, to access services at cheaper rates than would usually have been possible even with premium accounts. From a consumer perspective, we believe that this is beneficial, not only to those that are unbanked or using challenger banks, but also to those using traditional bank accounts, as the competitive threat creates, and will continue to create, pressure on traditional players to provide competitive services. In China, the super apps Alipay and WeChat Pay, though not directly comparable to challenger banks, have also had a significant effect on financial inclusion, with people using the platforms for both merchant payments and P2P activities.
Overall, the move to digital is a positive for financial inclusion We do believe that cash still has a significant role to play from a social perspective, especially for budgeting and due to its accessibility, which makes it a viable option for less tech-adopting consumers. Cash allows for choice, and does not force consumers into a digital infrastructure. However, mobile payments are currently in the process of building on the benefits of cash. We predict that, even for many consumers who would not have believed that it was possible to pay and budget more efficiently, the shift to a less cash- heavy society may well have unexpectedly positive consequences.
Growth in mobile phone ownership and access to the internet is likely going to continue. This is supportive to our thesis that, while cash currently may have some benefits from a social perspective, mobile and fintech is bridging the gap and even offering solutions that ‘out-cash’ cash. Cash may level the playing field for some that are financially excluded, but we believe that mobile and fintech can be a greater equaliser, drastically reducing the number of unbanked people globally. From pure mobile payments systems such as M-Pesa to full-service challenger banks, there are a range of offerings that can help different economies depending on their stage of development. The increased speed, efficiency and better price of some mobile services, such as remittance and banking substitution, underline the positive impact that digital can have, and we see these as key drivers in improving the lives of millions. These considerations also play a major role, in our view, in the global regulatory landscape increasingly incentivising a move towards digital payments, which we describe in greater depth in the following section.
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REGULATORY SCALES COMING DOWN ON THE SIDE OF DIGITAL
Broadly speaking, we can categorise regulation which impacts upon the cash versus digital debate into three buckets: on the one side, we have pro-digital regulation (that as a consequence supports cash to digital substitution), as well as specific anti-cash regulation. On the other side, and largely aligning to the societal considerations we identified in the last section, there is small but growing regulatory support for cash access. This section of the report is not intended to be an overview of the global payments regulatory landscape; rather, we aim to highlight key relevant regulatory initiatives by region, categorised into the above framework, in order to provide a snapshot of the regulatory puts and takes to the cash versus digital debate. In conclusion, it is clear that, for now at least, intended or unintended, regulation is providing a broad and significant tailwind to the digitalisation of payments, and thereby the decline of cash.
Pro digital and anti-cash regulation, versus cash support
FIGURE 33 The regulatory scales are coming down firmly in favour of digital, for now at least
Source: Barclays Research
Countries around the world have taken very varied approaches to regulation of the payments sector. The broad trend of regulation, though, has been supportive to digitalisation of payments and financial services. To generalise, such regulation is typically implemented with an intention to:
Tackle financial crime and reduce tax evasion
Reduce the cost of payment acceptance
Support financial inclusion
Improve efficiency, allowing economic agents to increase speed and convenience
Support economic growth overall
In addition to this primary category of pro-digital policies – that as a consequence are supportive to cash-to-digital substitution – are some specific policies aimed at reducing cash usage. We consider these categories of policy together by region, before going on to look at the small but growing area of pro-cash regulation.
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Global regulation largely in support of digital payments Below we address the different polices that institutions around the globe have implemented in support of digital payments. In some specific instances, this has come directly from attempts to lower cash usage, for example in countries such as India and Indonesia. However, the majority of cases cover the broad modernisation of payment infrastructures and improved digital services that have come on the back of it – the UK and Europe are good examples of this, with SEPA and the introduction of real-time payments. More recently, and in aid of supporting consumers’ increased usage of contactless payments driven by COVID-19, regulators have reacted by increasing contactless limits around the globe. While not a direct attempt to lower cash usage, this becomes an unintended but supportive consequence. In addition, we cover interchange regulations, aimed at reducing the cost of digital payment acceptance, as well as demand-side policies to stimulate digital payments, and increase financial inclusion.
Europe, leading the way in payment infrastructure modernisation Europe’s payment market has been heavily influenced by regulation, which has come at both European-wide level as well as at a country level. As part of the European project to create a union, bodies like the European Payment Council (EPC), the aim of which was to create the single payments union supported by EU regulation, introduced SEPA in 2004. The European Commission investigated interchange fees, which led to legislation from the European Parliament in 2014. The European Parliament also revised the payment service directive, with PSD2 in place from 2016. At country level, we have seen the UK and Switzerland become early adopters of instant payments in Europe.
Infrastructure is making digital attractive versus cash SEPA was introduced in 2004 by the European Payments Council to harmonise payment infrastructures across the Eurozone. In 2008 the EPC introduced SEPA payment instruments, SEPA Credit Transfer (SCT) and SEPA Direct Debit (SDD). These systems became the mandatory infrastructures for the Eurozone on 1 August 2014 and also for non- euro European countries on 31 October 2016. As part of this development, the European Banking Authority (EBA) developed a pan-European Automated Clearing House (ACH) called STEP2. STEP2 links all local ACHs and creates interoperability in the Eurozone.
SEPA was broadly successful in harmonising payment systems and this led to the commercialisation of ACH and processing assets across Europe as well as one of the first steps to modernising payment infrastructure to make digital payment forms more seamless across the region. SEPA was about driving innovation in digital payments, making cross- border payments cheaper to complete.
Modernisation of payment infrastructures across Europe has not stopped there. The requirement to update ACH systems for real-time settlement was present across the region in an attempt bring even greater efficiency to the way we pay. The UK was an early adopter, with the introduction of Faster Payments in 2008, and other early adopters in Europe included Switzerland and Turkey. Instant payments for the euro came in 2017 with the introduction of SEPA instant credit transfers, building on the initial developments of SEPA. In the Nordic region, Sweden began utilising TIPS, an instant payments infrastructure introduced in Europe in 2018. It enables payment service providers to offer fund transfers to their customers in real time and around the clock, every day of the year. Sweden utilised the service to enhance mobile fund transfers in the country, given the growing popularity of mobile as a payment form, and further enhanced the Bankgirot instant payments infrastructure and created competition. TIPS can be harmful to cash usage as, with instantaneous fund transfers, it may attract cash users to substitute to digital formats, especially if one of the main reasons for cash use is instantaneous settlement. Although infrastructure modernisation is not directly about driving lower cash usage, the
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modernisation of infrastructures makes digital payment systems more attractive and cheaper to use than cash in some cases.
PSD2 fostered innovation and competition across European payments PSD2 was first proposed in 2015 and put in place from 2016. This was regulation implemented by the European Parliament. The European Parliament wanted to break up the monopoly on bank account information and foster innovation. Banks were required to provide third parties access to payment accounts for Payment Initiation and Account Information Services using APIs. The regulation enabled new market entrants to create more competition and placed pressure on pricing. This supply-side policy also imposed stricter rules on traditional payment players to ensure stronger security and finally there was a ban on the surcharge for using card. This was all done with the purpose of increasing supply, lowering cost of digital payments for both merchants and consumers and making the payments safer to allow consumers to be more comfortable when using them. This has been an important regulation in Europe and a key driver of the payment landscape helping increase supply and demand. For more detail, please refer to Sleepwalking into 3DS2.0 and PSD2, 12/11/18.
Interchange regulation making card payments cheaper across Europe The European Commission started investigating interchange fees from 1992 and in 2007 MasterCard was found guilty of inflating the fee. From this point, Visa and MasterCard started to lower interchange fees. However, the European Parliament stepped in to make card payments cheaper permanently. In December 2015, regulation was introduced capping interchange at 0.2% for debit card transactions and 0.3% on credit card transactions. On debit card transactions, schemes can implement a minimum fee per transaction of up to 5 cents, but on average this must not exceed the equivalent of a 0.2% fee. In addition, the PSR in the UK launched a review into acquiring fees but no results have come from the review thus far.
Incentive through fiscal policy Italy is a textbook example of the government using fiscal policy to stimulate both demand and supply of digital payments. In the Italian budget for 2020, a series of policies were set out to try to achieve these goals. From 1 July 2020, merchants with revenue below €400k will receive a 30% tax rebate versus the fees they pay for card acceptance. There is going to be a reduction of the limit for cash payments to €2k from €3k, with a further reduction to come in 2022 to €1k. Cash incentives for consumers are being introduced, with €3bn set aside for the policy. Consumers who pay digitally will be rebated. The exact amount is unknown but it currently equates to about €30 per issued card (and therefore considerably more per card-using consumer). The Italian government has also introduced tax deductions against medical expenses and mortgages but these require such payments to be completed digitally. Finally, a lottery has been introduced to encourage registration of transactions and minimise tax avoidance. Additional prizes will be available to those who pay in digital currency.
Asia, targeted regulation to leapfrog away from cash Regulators across Asia have taken varied approaches to implementing policy in aid of supporting digital payments and cash-light societies. Across the region, infrastructure modernisation has been important and we have seen the introduction of instant payment systems and next-generation infrastructure in Japan, China, India and across some countries in south-east Asia. Financial inclusion has been a popular agenda in Asia, and regulators have seen digital payment as a contributor to this – India has been very active, introducing the JAM trinity and demonetisation, while Indonesia is another country in favour of lower cash usage and government- and central-bank-led campaigns have pushed this agenda in aid of supporting financial inclusion and economic growth in the country
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Infrastructure modernisation Japan was early in bringing a next-generation payment infrastructure, introducing the Zengin instant payments infrastructure to the nation in 1973 – Japan was the first country globally to operate real-time payments. Taiwan and South Korea followed in 1995 and 2001, respectively, introducing their own real-time payment infrastructures. Taiwan introduced CIFS and South Korea introduced HOFINET. In 2010, China and India both introduced their real-time payment infrastructures. China’s was called IBPS and India’s was called IMPS. The payment infrastructure updates were mandated by law in the respective countries to enable instant settlement of funds and provided support to a wide range of digital payment channels.
In 2016 India launched the Unified Payments Infrastructure (UPI), a mobile-based payment infrastructure that enabled interoperability between mobile wallets and digital bank providers. The UPI was an attempt by the Reserve Bank of India to capitalise on the more developed mobile infrastructure in India, given the underdeveloped card infrastructure, as part of its bid to drive digital payments and support the cashless agenda. In 2020, Indonesia launched a new standardised QR code payment infrastructure to capitalise on its mobile infrastructure – a very similar approach to India. Mobile wallet/payments providers in Indonesia were required to replace their own QR codes with the new QR code set out by the central bank. Finally, given the organic development of mobile payments in China, the central bank launched a new clearing house for mobile payments that required WeChat Pay and Alipay transactions to pass through the infrastructure.
Fees related to digital payments are being encouraged lower China implemented fee caps on issuers’ fees and card network fees to support the adoption and supply of digital payments, seeing the cost as a stumbling block. The issuer fee for a debit card transaction is capped at 0.35% of the transaction amount and the issuer fee for a credit card transaction is capped at 0.45% of the transaction amount. Aggregate fees collected by a card issuer for a single debit card transaction shall not exceed 13 yuan. Issuer fees on credit card transactions are not subject to a similar aggregate yuan cap. Payment network service charges on both debit and credit card transactions are capped at 0.065% of the transaction amount, and the obligation to pay network charges is shared 50/50 by the card issuer and the merchant – the rate of payment network service charges is capped at 0.0325% of the transaction amount for both issuers and merchants. In Indonesia, to encourage the adoption and use frequency of debit transactions, the central bank issued a law banning surcharges on debit transactions. The aim was to remove the cost to the consumer of using digital transactions to encourage more frequent use and to encourage a transition away from cash transactions. Also in Indonesia the central bank capped merchant discount rates at 0.7% for regular ‘on us’ and ‘off us’ QR code transactions. This was done to make the new QR code infrastructure more attractive and cost-effective, but also to encourage merchant adoption.
Financial inclusion and digital adoption is high on the agenda in Asia India is a textbook example of pursuing financial inclusion through using much lower cash, with government campaigns like Digital India and Cashless aimed at supporting the development of a digital infrastructure. India launched a financial inclusion programme that gave each member of the population a bank account and access to basic financial services through the chosen distribution channel of mobile. This was linked to Aadhaar, a biometric ID system launched in India. Mobile wallets linked to bank accounts not only give the central bank better oversight of financial activity in India, they are also helping to encourage adoption and use as members of the population had greater access to digital services. In a more direct attempt to drive higher digital payment usage, the Indian government announced demonetisation, which occurred in 2016. 80% of the country’s physical currency was withdrawn from circulation in a bid to push members of the population to
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adopt digital payments. The policy was effective and did drive an acceleration in digital payment growth but some of the policy effect was temporary. As new notes were issued post demonetisation, some consumers returned to old habits. For more detail please refer to India: The Digital Divide, 11/9/17.
Indonesia launched its national cashless movement in 2014, with the central bank actively promoting the benefit of digital payments. In 2018, all toll road payments in Indonesia were required to be paid digitally and limits were placed on the maximum cash transactions made by government agencies in 2014 at 100m rupiah, from no limit previously.
Americas, in some ways behind in a coordinated effort to digitalise The payment landscape and level of cash usage across the Americas differs in the north versus the south. This is partially explained by the different regulatory landscapes, but the direction of travel is homogenous, with the region overall largely in support of pushing lower cash usage and more digital transactions. Infrastructure modernisation has come across all of the Americas, with instant payments being adopted in Brazil, Mexico and the US. Some interchange regulation changes have come in to make digital payments cheaper for merchants to accept – this has occurred in Brazil and in the US. Card is a popular form of payment across the Americas due to the developed banking sectors and good card infrastructure – largely in North America.
Infrastructure modernisation Brazil was the first country to introduce real-time payments in the Americas in 2002 and it was followed by Mexico in 2004. Both countries looked to modernise their payment infrastructures to support digital payments. Brazil introduced SITRAF, a retail real-time payment system, but the service is only available between the hours of 7:30-17:00. Mexico introduced its own real-time payments system in 2004, called SPEI, which enabled real-time transactions 24/7/365. Brazil has set a target to modernise its infrastructure further, with a plan to introduce a QR-code-based instant payment system allowing residents to send/receive and pay instantly from a mobile wallet. The aims of these policies are to foster innovation and increase the supply of digital payments from either existing players or new entrants. The US has bought into real-time payment with the introduction of the RTP system, operated by The Clearing House (TCH). In a bid to further drive the adoption and supply of digital payments, the Federal Reserve has launched plans for its own infrastructure called FedNow, which is planned to go live in 2023. This infrastructure will compete with the RTP system, so there could be pricing pressure that may lead to an overall reduction in pricing for digital payment acceptance.
Interchange regulation On 29 June 2011, the Federal Reserve issued a law called the Durbin Amendment by Regulation II – this was the introduction of a price cap of 21 cents plus 0.05% of the transaction value when payments were made with a debit card. The Federal Reserve introduced this to make the acceptance of digital payments cheaper for merchants. The regulation has not been perfect in delivering this as acquirers have not always passed the pricing benefits on to merchants. In 2018, the Central Bank of Brazil introduced a cap on the interchange related to debit card transactions. The average fee cannot exceed 0.5%, and this was done because interchange fees had increased over time and were closer to 0.82% at the time of implementation. In 2018, Canada did not implement a law regulating interchange fees but secured new, separate and voluntary commitments to price reduction in interchange from Visa, Mastercard and American Express. The Canadian government exerted enough pressure to drive the changes without having to implement policy. There is always a risk the card schemes could increase fees again, but in our view this is low given regulatory trends.
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Cash support rests on access and ubiquity for consumers As some countries have transitioned to towards cash-light societies, questions have begun to be raised around the societal effects of cash’s decline, as we addressed in the prior section. Cash access has come under pressure, making it difficult for cash-reliant consumers to stay financially included and/or participate in economic activity – we have seen this in the UK and Sweden. Furthermore, those reliant on cash in some instances have found it difficult to transact, creating economic exclusion and regulation has looked to address these issues. That said, the support for cash is minimal across the globe today, in the context of the regulatory support in favour of digital payments.
Cash accessibility becoming an issue post tipping points Riksbank creates the requirement for financial institutions to hold and supply cash The Riksbank in Sweden introduced a law that required financial institutions to provide cash services from September 2019. Banks with operations in Sweden and with deposits of over SEK 70bn shall be given a special responsibility to ensure that there are functional cash services throughout the country – fines will be imposed on banks violating the regulation. The regulation was passed as some residents in Sweden were struggling to either access and/or transact with cash when not having the means to transact digitally. Despite this introduction, there is no guarantee that merchants will accept cash as they still have the right to reject cash.
PSR weighs in on ATM access in the UK In the UK, the ATM network operator is LINK, overseen by the Payment Systems Regulator (PSR). In 2018, LINK announced a planned phased 20% reduction in the interchange fee over the course of four years at 5% per year. Regulators and MPs in the UK, however, began to show concern for the implications the reduced interchange fee might have on access to cash. The ATM infrastructure is in decline in the UK, driven by ATM operators largely withdrawing free-to-use (FTU) ATMs where transaction numbers are low or in rural areas where access and maintenance is more expensive; ATM growth has been negative for the last three years, but slowed further in 2018 to -4.0% as the first wave of interchange cuts took effect. ATM operators reacted by reducing ATM estates where the economics no longer made sense. The PSR conducted research into LINK’s approach on the back of raised concerns. Following the research, LINK was required to do whatever it takes to protect the current broad geographical spread of FTU ATMs. Any cuts in interchange fees must be incremental and accompanied by close monitoring by LINK to understand the impact on the overall ATM estate – with action taken by LINK where the impact is not as expected. Finally, the PSR required a greater focus on the Financial Inclusion programme – to continue to fill gaps in the FTU ATM network. This resulted in LINK cancelling two of its planned fee reductions. Alongside the cancelled cuts to interchange fees from LINK, in 2019 LINK introduced increased fees for some ATMs in a bid to maintain cash access in the UK. ATMs in some rural locations and some with a low number of transactions now attracted enhanced interchange fees. The maximum fee received now can be up to £2.75 per transaction, as long as the cash machine does not exceed 199 transactions. If it does, the fee will be reduced to £0.81 per transaction and continue to scale down as more transactions occur at the machine. These increased fees are to be received alongside the standard interchange fee and are called enhanced premiums. If the cash machine has more than 4,500 transactions, then no premium on the standard interchange is received.
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Cash acceptance policy Merchants banned from refusing cash payments In the US across some states, as the push for digital payments intensified and more merchants began to see the benefits they offered, some took the decision to accept only digital payments. In a bid to make sure no economic agents are excluded from transacting, some states across the US have made it law that in-store merchants cannot refuse to accept cash as a payment form. Philadelphia was the first location to use regulation to ban merchants from refusing cash. New Jersey was next, introducing The Payment Choice Act 2019. At the beginning of 2020, California introduced a similar bill preventing the refusal of cash as a payment method; merchants not complying with the bill will face a fine of $25 to $500 per violation. China and Denmark also have similar policies in place to protect consumers who wish to continue using cash. This is clearly supportive to the use of cash and gives consumers the choice to pay with the method they desire.
In conclusion, some resistance, but largely futile Economic participation and financial inclusion remain high on all government agendas. There are widespread economic benefits to increasing digital adoption, as explored in this note, and this is where the vast majority of regulation is focused. It is more as a consequence of this, as opposed to a specific aim, that cash usage is reduced as digital substitution takes place. Modernisation of payment infrastructures, interchange and other regulation to lower the cost of payment acceptance and stimulus to encourage digital adoption all fall into this category and have been highly effective. This is by far the prevailing regulatory trend.
On top of this, there is regulation that addresses cash usage specifically. To generalise, in the most cash-centric countries, such as India and Indonesia, this regulation is designed specifically to reduce cash usage. In the most digitally-advanced economies, such as Sweden and the UK, the tide has turned the other way, and societal concerns are prompting regulation to support access to cash. We expect this to continue and find overall – especially in so far as it makes a difference to global cash usage (given anti-cash regulation affects highly cash-using countries and pro-cash regulation countries are already mature in digital adoption) – that regulation is clearly contributing to the decline of cash.
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BANKING CONSIDERATIONS FROM A DECLINE IN CASH
Across the most digitally-advanced markets, banks are already finding themselves in a challenging position on cash provision, with seemingly a societal responsibility to provide cash services to customers, much like the customary fee-free current account. At the same time, it is largely a cost, and one that becomes harder to justify for an increasingly smaller group of customers, as these countries transition to cash-light economies. This is why, in Sweden, where half of banks no longer accept cash deposits, the central bank has had to step in with the above-described pro-cash regulation. For the same reason, this becomes another competitive advantage for the digital neo-banks, with their lack of physical presence and their lack of responsibility to provide access to cash.
The corresponding increase in card usage, however, is positive for banks, with increasing interchange fees and additional credit transactions on which they can earn interest. Notwithstanding the interchange caps seen in many markets, banks are therefore clear beneficiaries of digital adoption. Much like acquirers and processors, those with exposure to currently cash-driven markets will see the greatest structural tailwind. Unlike these vendors, however, for banks there are other more important drivers of the overall equity case.
Impact on banks: digital brings more opportunities Contributing analysts: We think a move to cash-light offers a long-term opportunity for banks to reduce costs, European Banks with fewer ATM and physical cash servicing costs, and potentially drive revenues through Aman Rakkar, CFA higher customer engagement. However, this will likely need to be balanced with potential +44 (0)20 3555 1425 [email protected] societal impact considerations. Barclays, UK Cash is primarily a cost to banks Grace Dargan While ATMs are a key source of cash for customers, they are a significant cost for banks. If a +44 (0)20 3555 4065 customer withdraws from an ATM not operated by their own bank (referred to as a ‘not on [email protected] us’ withdrawal), the card-issuing bank must pay a transactional interchange fee to the Barclays, UK operator. For example, in the UK, only ~40% of ATMs are operated by banks or building societies (see overleaf), resulting in ~85% ‘not-on-us’ withdrawals31, incurring costs for the customer’s bank. Banks operating the ATMs themselves incur variable costs (such as refilling the machines) and underlying fixed costs (such as maintenance), which are impacted by a variety of factors, including the remoteness of location.
Aside from ATMs, in-branch cash services are costly for banks but fundamental for business customers and remain important to retail customers, especially those with limited access to cash machines or basic cash-only accounts. Banks incur costs for the staff needed for the physical handling of cash and the additional security measures required, noting that any cash interactions are slower and more susceptible to fraud/loss than digital payments. Therefore, we would anticipate that a reduction in cash usage could reduce the need for branches (see overleaf), though cost savings may take a long time to realise.
31 In 2018, not-on-us withdrawals accounted for 84% of the total volume of UK cash machine withdrawals. Source: UK Finance: UK Cash and Cash Machines Summary 2019
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FIGURE 34 FIGURE 35 We would expect the number of bank branches to reduce as In the UK, ~60% of ATMs are operated by non-banking cash usage falls entities charging interchange fees to banks
80% Cash usage as % value of transactions 20,000 Number of UK ATM by Operators* 17,500 29% 70% India 15,000 CardtronicsNon-bank operator Italy 60% 12,500 RBSBank/building society Germany 17% operator 50% 10,000
7,500 12% 40% 7% 7%
5,000 6% 4% 4% 3% 3%
30% 3% 2% 2%
2,500 1% United United 1% 20% China Kingdom* States - TSB 10% Sweden RBS HSBC Other Lloyds
Bank branches per 100,000 adults Barclays PayPoint YourCash
0% Santander Sainsburys Bank of Ire. Nationwide Cardtronics Virgin Money Virgin 0 1020304050 NoteMachine * UK only: World Bank data not available. Number of branches from Bank Branch * Based on ATMs operated by LINK members and ATM Statistics, House of Commons Briefing Paper, 30 Jan 2020; population Source: LINK: Statistics and trends data, Dec 2019 data from the UK Office for National Statistics Source: Barclays Global Cash Model (as before), World Bank data (latest data for 2018), ONS, Barclays Research estimates
Card payments can provide more opportunities to banks We think that banks generate limited direct revenue from cash outside some wholesale cash activities, though they can generate interchange fees on ATMs they operate from other card-issuing banks. In the near term, ATM profitability appears challenged as withdrawals fall. However, ATM-operating banks could benefit if competitor ATMs close.
As cash usage falls, we see scope for greater financial engagement, with opportunities for banks to grow customer balances and cross-sell products. We think banks will generate more revenue from debit and credit cards, which are likely the main substitute to cash transactions. As card payments increase, card-issuing banks can generate greater revenue from additional interchange fee (borne by the merchant), notwithstanding the interchange reductions seen in Europe in recent years and described in our regulatory section. Further, banks with credit card portfolios could see an increase in credit balances, potentially resulting in higher interest income (although we note cash transaction values are typically quite low32).
As payments effectively move ‘online’, we expect banks to develop a richer dataset using greater information from payments made by card and also capturing previously unbanked people in the financial system. This data can be leveraged to enhance product marketing and cross-selling.
Banks subject to public and political pressure to maintain cash networks While there is scope for banks to realise direct cost savings from a move to cash-light or fully cashless, there are potentially important economic and social cost offsets to consider. There is a risk that some members of society (those who rely on cash without access to the financial system, often considered most vulnerable) may find themselves excluded from day-to-day activities, as addressed in this report. As such, banks may find themselves under increased pressure to support cash in the community given their perceived responsibility to
32 In the UK, 57% of cash payments are for a value of £5 or less and 78% are for a value of £10 or less. Source: UK Finance: UK Cash and Cash Machines Summary 2019
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society. Banks may find some reprieve as the COVID-19 crisis expedites a move away from cash for those that might otherwise be most disadvantaged by the change.
A move to cashless may also have competitive implications. If high street banks respond to falling cash usage by closing bank branches, this could remove physical barriers to entry for digital challenger banks, which enjoy nimbler tech-based customer engagement (with little or no physical footprint). And if incumbent banks are unable to fully realise cost savings from a move to cashless (as a result of societal pressures, for example), digital banks may be able to exploit their end-state cost advantage over larger banks.
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CRYPTOCURRENCIES: CLOSER TO CASH THAN DIGITAL MONEY
While definitions of cryptocurrency vary widely, common characteristics of crypto systems typically include anonymity, controlled issuance of a specific number of unique coins and near-instant settlement. In many ways this sounds closer to physical cash than it does to digital money and, indeed, Satoshi Nakamoto described Bitcoin in its founding whitepaper as a “version of electronic cash”. In this section, we question whether cryptocurrency should be considered a digital evolution of cash, before considering what role it might play in the potential decline of cash and the rise of cashless or cash-light societies. In conclusion we argue that, while crypto is indeed closer to cash than digital money in many ways, the lack of a supportive ecosystem leaves it fundamentally lacking in comparison. We see limited opportunity for crypto to support or take over from cash, and instead see it as likely increasingly useful in a more limited number of use cases such as micro payments.
Cash’s uncanny digital replica: familiar, yet lacking support In the introduction to this report, we outlined that our focus is on cash, which we refer to as money in coin and note format that is in circulation, rather than on money more broadly. Cryptocurrencies have, by many, been compared to digital versions of either cash or gold. A key characteristic of cryptocurrencies is that each coin is unique, and the validity thereof is provided by blockchain technology. This may be comparable to the tangibility of cash, which also allows every coin or note to be verified. In contrast, broader money is based on a large and complex credit infrastructure. While cryptocurrencies are clearly intangible, in contrast to physical cash, we still see similarities between cash’s tangibility and crypto’s validation process that makes each virtual coin unique.
Even more comparable to many cryptocurrencies, especially those that have limited supply, is gold. Cryptocurrency, gold, and money all have limited intrinsic value of and by themselves. Cryptocurrency, like gold, gains its value among other factors from scarcity, though the scarcity of crypto can (in our view, rightly) be questioned. Both gold and cryptocurrency are, from an accounting perspective, distinctly different from cash since they are not a liability instrument (i.e. they are not to be found on the liability side of a central bank’s balance sheet, and are not backed by another asset).
While it is undoubtedly possible to focus on such and other differences between cash and cryptocurrency, highlighting issues such as technology, interrelationships with government entities and central banks, or the embedded security standards of each, we would argue that in terms of advantages, cash and cryptocurrency, especially when compared to other payment methods, still share some striking similarities.
Anonymity could provide the most support to cash, and crypto As we head towards an increasingly cash-light society, questions of anonymity and data usage, in our view, become ever more important. There are direct questions being posed to, and about, payment systems and the associated data collection. Credit checks are fundamentally changing, and this is perhaps most visible in China, where various social credit systems are either controlled by local governments or by corporations such as Ant Financial (formerly Alipay), which owns Zhima Credit, a credit scoring system that functions on an opt-in basis. While Zhima Credit is not the government’s official social credit system, which is in development, it still collects a vast amount of data, such as payment habits, number of hours spent playing video games (which can have a negative impact on credit scores), donations made, and family status. While such private systems are currently voluntary, the Chinese-government-led social credit system, planned to be fully
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implemented this year, will be mandatory. This is only one example, but it is clear that, for some consumers, it is undoubtedly an advantage to have a payment method that is not easily traced. Both cash and cryptocurrency are ideally suited to this. While cash and cryptocurrency are arguably not completely anonymous, especially if intermediaries such as banks or exchanges are used in the process, they do provide a sufficient standard of anonymity (or pseudonimity, in the case of some cryptocurrencies) to satisfy the demands of the vast majority of people engaging in legal transactions. Data-conscious consumers do not generally have to worry about their information being used to individually tailor credit scores or advertisements when transacting in cryptocurrency or cash.
FIGURE 36 Cash and crypto share aspects of anonymity
Source: Barclays Research
Direct settlement another commonality A further key similarity that we see between cash and cryptocurrency is in their time of settlement. Cash settles when notes or coins are passed from one person to another, a physical peer-to-peer network that has the benefit of simplicity, and does not require reliance on third parties. It is in light of this that Satoshi Nakamoto (the pseudonym entity that founded Bitcoin), in the white paper on Bitcoin, describes it as a “purely peer-to-peer version of electronic cash”. While the settlement period for cryptocurrencies is not zero, and depends on the exact cryptocurrency, settlement has become increasingly rapid.
The comparability of crypto to cash in these areas, anonymity and direct settlement, could lead to the conclusion that, based on the current payment system, crypto can fulfil some aspects of a digital cash, although it also lacks availability, acceptance and convenience, as well as budgeting capabilities, which we have described as key strengths of cash.
Not all cryptocurrencies created equal The term cryptocurrency, as it is still a novel concept, often gets used to describe various types of payment methods. In assessing the overlap to cash, it is also necessary to put different systems into context. Broadly defined, a cryptocurrency is any digital currency that uses cryptography to ensure safe payments and does not allow counterfeit or double-spend of the currency. For simplification purposes, we detail three key models of cryptocurrencies below, though these are by no means exhaustive.
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FIGURE 37 Three possible key forms of crypto
Source: Barclays Research
Decentralised – public ledger – blockchain based The first type, and perhaps the most commonly associated with cryptocurrencies, are decentralised cryptocurrencies including Bitcoin, Ethereum and Litecoin. All of these currencies run on blockchains, though there are still inherently different uses and characteristics. For the typical decentralised cryptocurrency, miners that solve mathematical problems essentially represent the processors of the system, and, unlike traditional finance, this network is a collection of independent, decentralised computers that belong to no one company or organisation. Anybody with a computer can become a miner, so the system is permissionless. We see this as close to cash in terms of anonymity/pseudonimity, but both the volatility of such cryptocurrencies and the often limited supply differ from cash.
Corporate – centralised – private (distributed) ledgers Facebook’s Libra project, which is a stablecoin, has drawn many comparisons to cryptocurrencies such as Bitcoin or Ethereum, though in many aspects they are quite different types of cryptocurrencies. Libra is a more or less centralised blockchain technology, and the Libra association is the collection of companies that have signed up to practice oversight and governance over this blockchain. It is, therefore, not permissionless, as it is not possible for anybody to mine Libra. Libra will also be backed against a basket of currencies, making it quite comparable to fiat currency from an accounting perspective, since it is not in and of itself the final asset, but is rather a liability that is created against the value of another asset. This makes the currency less volatile, which may be valuable for budgeting and store-of-value purposes and Libra will likely not be the last attempt at a more centralised, corporate-led cryptocurrency, in our view. For more detail please see Facebook's Project Libra: Devil's in the Details, 18/6/19.
Government-backed electronic money Similar to corporations dipping their toes into crypto, there has been a lot of discussion recently about Central Bank Digital Currencies (CBDC). Such e-money mechanisms do not necessarily have to rely on blockchain technology and are not by definition necessarily cryptocurrencies. However, some countries, including China, South Korea and Sweden, are implementing distributed ledger technology, and some of these projects may develop into national cryptocurrencies. Nevertheless, they will still be centralised, issued and controlled by governments, and many of these solutions will likely also not be permissionless. These aspects remind us of cash, although one of cash's key features, anonymity, is not a given for government-led solutions.
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Crypto potentially additive in specific systems of payment While merchant acceptance of cryptocurrency is still in its infancy, and arguably the average consumer is unacquainted with crypto, we see some clear use cases where cryptocurrency opens up potential new possibilities for availability, convenience and innovation. Therefore, in some sense, crypto is not really competing against cash or other payment methods directly to become the dominant payment method; rather, it could complement other payment options in tailored solutions for specific use cases, in our view.
FIGURE 38 Examples of use cases where crypto distinct characteristics could be advantageous
Source: Barclays Research
Micro payments could challenge current digital payment models, especially in media and for free-for-use products, where transparent and consent-based micro payments could replace the ad- and data-based models of today. If an infrastructure for very small payments were available, a whole new range of business models could be created. A ‘like’ on social media could be coupled with a voluntary 10th of a cent donation.
Smart contracts, or code that executes particular outcomes (for example, payments) when certain conditions are met, could increase efficiency and trust on a peer-to-peer basis, allowing intermediaries and costs to be cut, for example in the financial industry.
Privacy token and store of value: as discussed above, the pseudonymity of crypto is a key advantage. There is undoubtedly the danger of crypto being used for illegal black markets, but coins that are strong from a privacy standpoint may enable, for example, people oppressed by authoritarian regimes to store value.
Unalterable history of transactions may be a benefit stemming from blockchain that could also be integrated into other payment methods. If it becomes visible which inputs (including both material and time) go into a product, this transparency could enable consumers to better understand their relationship to consumption.
Parallel economies could be accelerated through cryptocurrencies. Novel concepts of valuing economic effort are not new, with systems such as time banking (an economic system that uses time, such as hours invested, to redefine contributions to communities) existing for almost 200 years. While such uses do not necessarily require crypto in theory, many of these movements are grassroots and, therefore, ideally suited to the decentralised, non-government-backed nature of many cryptocurrencies.
To conclude, cash and crypto do share many similarities, such as a high degree of anonymity, direct settlement, and the uniqueness of each coin. However, there are also traits of cash that crypto currently lacks: there is little infrastructure and very limited merchant acceptance of crypto. Moreover, the volatility of many cryptocurrencies makes budgeting challenging. Overall, while comparisons to aspects of cash are valid, we do not see crypto as a viable digital cash alternative, and see it potentially better suited to specific payments-related use cases, as described above.
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COUNTRY AND REGIONAL CASE STUDIES
Germany – a strong affinity with cash
FIGURE 39 Germany snapshot
Source: Barclays Research, World Bank, ECB, Barclays Global Cash Model (based on Barclays Research estimates, combined with data from BIS, World Bank, ECB, selected country central banks and Euromonitor)
Country overview Germany is still a cash-centric market, with digitalisation advanced but not yet surpassing the level of cash. Cash remains the preferred payment method in Germany.
The card infrastructure in Germany is based primarily on the local debit card scheme, Girocard, run by the German Banking Industry Committee (GBIC). International cards are also used, but primarily as charge and credit cards, with acceptance increasing over the last couple years. Girocard is structured as a closed loop ‘three-party model’ with 19 network service processors acting as Girocard acquirers on behalf of GBIC. The country has no mobile payment system that has gained significant scale. The payment infrastructure in Germany is fragmented, with four separate networks for ATM, POS and ACH transactions serving different groups of banks – Cooperative (Raiffeisen), Savings (Sparkassen), the Postbank and the private banks. These systems are interoperable at a central level, but users are charged if the ATM of another network is used.
According to Euromonitor, e-commerce penetration in Germany stood at 12% in 2019.
Payment statistics Germany has a well-developed and active banking market, with one of the highest numbers of banks per capita. The total number of cards in Germany with a payment function stood at 147m at the end of 2018, equating to 1.8 cards per capita. The POS terminal infrastructure in Germany is still lagging other European countries, with about half the number of terminals of the UK. Nonetheless, the number of merchants that accept cards, especially the number of supermarkets, has increased.
The number of card transactions has been growing at a decent rate over the past few years from 3.4bn in 2014 to 5.3bn in 2018, an 11.4% CAGR. Card transaction value grew somewhat more slowly, given the stronger growth in low-value transactions, from €235bn to €314bn, a 7.5% CAGR.
The growth in card payments had only a minor impact on ATMs. The number of ATMs dropped by 1k from the 2014 level to just under 86k in 2018, while the number of transactions grew slightly at a CAGR of 0.7% to just 2.2bn in 2018. The value of withdrawals grew even faster at a 3.5% CAGR over the period to €400bn – still larger than the value of card payments.
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Outlook – high digitalisation tailwind, supporting strong card TPV growth Germany remains a cash centric market; however, with the trends discussed in this note, we expect cash usage continue to decline. In our cash model, we estimate that cash usage was ~54% in 2019 and we expect this to decline to ~19% by 2030 in our post-COVID base case scenario. This is driven by a mid-single-digit percentage digitalisation factor, similar to the last couple of years.
FIGURE 40 Germany cash curve
200 Cash Digital
150
100
50
0
Source: Barclays Global Cash Model (based on Barclays Research estimates, combined with data from BIS, World Bank, ECB, selected country central banks and Euromonitor)
However, there are several factors that could impact the digitalisation factor.
The cultural preference for cash in Germany is driven partly by privacy concerns, given the history of intelligence service monitoring in the past. Older generations in particular have a preference, therefore, for cash. Younger generations tend to care less about privacy and data protection and it appears that over time this headwind will dissipate. However, should this factor continue to influence the payment preference for cash among future generations, the digitalisation factor could slow.
In Germany the increase of the contactless limit to €50 from €25 in March 2020 has the potential to have an impact on the digitalisation factor going forward. Contactless transactions have already increased since the limit was raised, but some questions are being raised around how permanent the adoption of digital transactions are. Adoption and use of contactless payments is much lower in Germany versus other European countries like the UK, so the argument remains that, even with a raised contactless limit, this in fact might have little impact on the digitalisation factor. This could lead to a higher cash share of transactions in 2030.
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Italy – cash-centric market with high digitalisation rate
FIGURE 41 Italy snapshot
Source: Barclays Research, World Bank, ECB, Barclays Global Cash Model (based on Barclays Research estimates, combined with data from BIS, World Bank, ECB, selected country central banks and Euromonitor)
Country overview Italy is currently a cash-driven market, with cash still the preferred payment. Card payments are increasingly in popularity and are the second most preferred payment method.
The card infrastructure in Italy is based on both international and local schemes, but international schemes are most popular in Italy. There is also a small mobile infrastructure with low penetration. Italy’s payment infrastructure is relatively well developed versus other countries globally. With Italy a part of the European Union, its payment infrastructure has benefited from instant payments introduced by SEPA and now live across Europe.
According to Euromonitor, e-commerce penetration in Italy stood at 6% in 2019.
Payment statistics Italy has well developed banking sector, with bank account penetration standing at ~94%. The total number of cards in Italy with a payment function stood at 85m at the end of 2018, equating to 1.4 cards per capita. The POS terminal infrastructure in Italy is well developed (due partly to the regulatory requirements). Italy is early in its contactless payments journey but adoption is growing as more terminals upgrade throughout the country.
The increasing shift from cash to digital payments is visible in the number of transactions, which increased from 2.0bn in 2014 to 3.2bn in 2018, an 11.8% CAGR. Card transaction value grew more slowly, given the stronger growth in low-value transactions, from €142bn to €200bn, an 8.9% CAGR.
The growth in digital transaction payments had an impact on ATMs. The number of ATMs dropped from just under 50k in 2014 to 48k in 2018. Despite this decline, the number of transactions increased as at a CAGR of 3.7% to 1.2bn in 2018. The value of withdrawals followed a similar trend, increasing at a CAGR of 4.7% over the period to €242bn. This is currently above the card transaction value in 2018 and is further evidence that cash remains the preferred method – but the mix is changing, as we discuss below.
Outlook – promising outlook for non-cash payments The Italian payment infrastructure is well developed and capable of facilitating digital payments supported by the broader European payment infrastructure and international card rails. However, cash has remained dominant as the preferred payment method, but we see this gradually changing. In our cash model, we estimate that cash usage was ~62% in
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2019 and we expect this to fall to ~29% by 2030 in our post-COVID base case. This is underpinned by a mid-single-digit percentage digitalisation factor.
FIGURE 42 Italy cash curve
150 Cash Digital
100
50
0
Source: Barclays Global Cash Model (based on Barclays Research estimates, combined with data from BIS, World Bank, ECB, selected country central banks and Euromonitor)
However, there are several factors that could impact the digitalisation factor.
From 1 July 2020, a new government policy will come into force that directly impacts cash usage. €3bn was set aside to offer rebates to consumers who pay digitally, businesses will be able to access tax relief against costs incurred as a result of digital payments and there will also be a lowering of the maximum cash transaction limit. This could accelerate digitalisation beyond what we are expecting.
Some merchants are still entirely opposed to accepting digital payments and still favouring cash. If the tax relief set out in recent government policy for costs associated with digital payments acceptance is not seen as attractive by Italian merchants, they may still actively promote cash payments at their places of business. Should this occur, it could lead to a lower digitalisation factor than our base case assumption.
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Sweden – at the forefront of cash-light societies
FIGURE 43 Sweden snapshot
Source: Barclays Research, World Bank, ECB, Barclays Global Cash Model (based on Barclays Research estimates, combined with data from BIS, World Bank, ECB, selected country central banks and Euromonitor)
Country overview Here we look at Sweden as a proxy for the Nordic region, given the similarity of these markets. Sweden is dominated by digital transactions, with card payment currently the most popular form of payment but mobile wallets seeing growing popularity following the introduction of Swish, which is taking share in the country (see case study in the P2P section of this report). Overall, Sweden, along with the Nordic region, is one of the most digitalised payment markets in the world, providing a roadmap for other countries towards a cash-light society.
The card infrastructure across Sweden is based on the international schemes. The mobile infrastructure is well developed also and utilising the instant payment infrastructures in Sweden. Sweden has well developed QR-code and POS-based infrastructure, making digital payments very accessible via card and mobile.
According to Euromonitor, e-commerce penetration in Sweden stood at 11% in 2019.
Payment statistics The banking system is extremely well developed in Sweden, where bank account penetration is a global leader at 100%. This has been helped by banking innovation and the investment into mobile, with banks offering online, mobile and traditional banking services. The total number of cards in Sweden with a payment function stood at 19.4m in 2018, equating to 1.9 cards per capita.
Card usage in Sweden is high and penetration is high, driving healthy developments of the volume and value of card transactions in the region. The number of card transactions increased from 2.6bn in 2014 to 3.5bn in 2018, a 7.9% CAGR. Card transaction value increased at a slower rate, at a 2.4% CAGR to SEK 1,079bn (€105bn).
The number of ATMs across Sweden has declined in line with digital payment adoption and lower cash demand. The ATM estate stood at 3,200 in 2014 and declined to 2,700 in 2018. The number of transactions at ATMs has declined at a CAGR of 15.5% to 111m in 2018. The value of the withdrawals has followed a similar trend, contracting at an 11.5% CAGR over the period to SEK 132bn (€13bn).
Outlook – fast progress towards a cash-light society Sweden is a mature digital payment market with high digital penetration, good connectivity, broad financial access. These characteristics operating in tandem with infrastructure
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upgrades and new technological solutions, have helped the adoption of digital payments in Sweden. In our cash model, we estimate that cash usage was just ~10% in 2019 and we expect this to decline to a low-single-digit percentage by 2030 in our post-COVID base case. This requires only an extremely modest digitalisation factor in the very low single digits, which we expect to decline to zero in the second half of the decade.
FIGURE 44 Sweden cash curve
150 Cash Digital
100
50
0
Source: Barclays Global Cash Model (based on Barclays Research estimates, combined with data from BIS, World Bank, Federal Reserve, selected country central banks and Euromonitor)
However, there are several factors that could impact the digitalisation factor.
In order to safeguard access to cash for those who wish to use it or rely on it in its entirety, regulation has been put in place requiring certain financial institutions to hold and supply cash to maintain cash access across the country. With this measure in place, the digitalisation factor could be lower than in our base case, or could theoretically even reverse.
Building on the prior points and taking account of regulatory trends, Sweden has already taken action to preserve cash access. There is a possibility that merchants will be banned from refusing cash in the country to maintain the economic participation of cash-reliant members of the population. No regulation is in place at this time, but it’s a consideration that, should regulation like this emerge, it could also drive a lower digitalisation factor in the future or create an earlier period of fading to zero. This would lead to higher cash share in 2030 versus our base case.
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UK – cash-light society status within reach
FIGURE 45 UK snapshot
Source: Barclays Research, World Bank, ECB, Barclays Global Cash Model (based on Barclays Research estimates, combined with data from BIS, World Bank, ECB, selected country central banks and Euromonitor)
Country overview The UK is a digital payment market with cash usage reaching very mature levels. The preferred payment method in the UK is cards, especially debit cards.
The card infrastructure is based on the international schemes with local schemes no longer in operation. The country has no mobile payment system that has gained significant scale. However, beyond that, the UK has one of the more advanced payment infrastructures in the western world, which has continued to develop over time. The latest update came with Faster Payments, which is an instant payment infrastructure. This is operated along with the ATM switch by VocaLink.
According to Euromonitor, e-commerce penetration in the UK stood at 18% in 2019.
Payment statistics The UK has a well-developed and active banking market. Bank account penetration is high in the UK (~96%), which supports the high penetration of debit cards. The total number of cards in the UK with a payment function stood at 162.5m at the end of 2018, equating to 2.4 cards per capita. The POS terminal infrastructure in the UK is well-developed and this has also gone through a series of upgrade cycles, largely to enable contactless payments.
Contactless was a key driver of the number of card transactions, which increased from 15.8bn in 2014 to 22.8bn in 2018, a 9.6% CAGR. Card transaction value grew more slowly, given the stronger growth in low-value transactions, from £791bn to £954bn, a 4.8% CAGR.
The growth in card payments has had an impact on ATMs. The number of ATMs dropped from just over 69k in 2014 to just under 67k in 2018, while the number of transactions declined at a CAGR of 10.4% to just 1.5bn in 2018. The value of withdrawals, on the other hand, was less impacted, declining at a CAGR of only 2.2% over the period to £173bn. This is now just a fraction of the card transaction value.
Outlook – cash usage to decline to low-single-digit levels The UK has already a very digital payment market and, with the trends discussed in this note, we expect cash usage continue to decline. In our cash model, we estimate that cash usage was ~14% in 2019 and we expect this to decline to a low-single-digit figure by 2030 in our base case. This is driven by a relatively modest ongoing digitalisation factor in low
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single digits and a phasing to zero towards the end of our forecast period. With cash usage already low, the UK looks set soon to become a cash-light society.
FIGURE 46 UK cash curve
150 Cash Digital
100
50
0
Source: Barclays Global Cash Model (based on Barclays Research estimates, combined with data from BIS, World Bank, ECB, selected country central banks and Euromonitor)
However, there are several factors that could impact the digitalisation factor.
In 2018, the PSR launched a review into merchant acquiring fees across the UK. The review was launched for the purpose of seeing if prices were anti-competitive or too high for merchants to accept. No full conclusions have been drawn from the review. However, it must be considered that, if regulation emerges as a result of this review, it could possibly place pricing pressure on the overall merchant service charge. This could possibly accelerate adoption and drive a higher digitalisation factor than we assume in our base case.
Furthermore, as highlighted in the regulation section of this report, ATM network operator LINK has cancelled its planned reduction in the interchange fee ATM operators receive, as well as putting in some price increases in place for special situations to support the ATM infrastructure. If the ATM infrastructure is maintained or increased, it’s possible that digital adoption could slow, driving a lower digitalisation factor than we assume in our base case.
Finally, with contactless limits raised to £45 in the UK in early 2020 from £30, contactless transactions have since seen early increases, but questions remain around whether the increased adoption will be sustained. If the contactless limit increase has driven greater permanent adoption of digital payments, this could lead to a higher digitalisation factor than we assume in our base case.
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US – digital market but with underbanked supporting cash
FIGURE 47 US snapshot
Source: Barclays Research, World Bank, Nilson Report (number of cards), Locational Study of ATMs in the U.S. by Ownership 2018, Barclays Global Cash Model (based on Barclays Research estimates, combined with data from BIS, World Bank, ECB, selected country central banks and Euromonitor)
Country overview The US is a digital payment market, with card the most popular method of payment. However, despite this, cash remains a popular payment method for certain segments of the population.
The card infrastructure in the US is based largely on the international schemes (Visa, MasterCard). The country has several providers of mobile payment systems, but none has gained particular scale. The payment infrastructure has been modernised recently, with the introduction of real-time account-to-account payment system called real-time payments (RTP), developed by VocaLink.
According to Euromonitor, e-commerce penetration in the US stood at 15% in 2019.
Payment statistics The banking system in the US is reasonably well developed, although behind other digital markets, with bank account penetration standing at 93%. Despite this high penetration, there remains a significant part of the population that is underbanked; the Federal Deposit Insurance Corp estimates around ~25%. The number of cards with payment function in the US is very high, at >1.4bn in 2018, equating to >4 cards per capita. The POS terminal infrastructure is also well developed across the US and this modernisation is ongoing in aid of supporting card transactions and increasingly contactless and mobile transactions.
Card usage and adoption has continued to increase across the US and this is seen in the development of the volume and value of transactions. The number of transactions increased from 96bn in 2014 to 131bn in 2018, a 8.0% CAGR. Card transaction value grew more slowly, given the stronger growth in low-value transactions, from $5.3trn to $7.1trn, a 7.5% CAGR.
There are ~470k ATMs in the US. The number of transactions at ATMs has declined since 2014 at a CAGR of 3.8% to 4.7bn in 2018. The value of the withdrawals, however, has bucked this trend and actually increased 3.2% over the period to $837bn. This could be driven by a declining number of ATMs and/or less frequent visits, but with consumers withdrawing larger amounts. Beyond ATMs, the usage of over-the-counter withdrawals is very popular in the US.
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Outlook – absolute cash usage to remain broadly stable Across the US, digital payments have seen support from infrastructure modernisation, as well as the acceptance costs becoming more attractive, with caps on interchange and new technologies. Credit remains expensive, though, for merchants to accept, with interchange regulation focused on debits. Nonetheless, the US adopted digital payments quite early versus the rest of the world. In our cash model, we estimate that cash usage was ~17% in 2019 and we expect this to decline only gradually to a high-single-digit percentage by 2030 in our post-COVID base case. This is driven by a modest sub-1% digitalisation factor, and results in absolute cash usage actually remaining broadly stable, in contrast to the majority of other digitally-advanced countries we look at. The core reason for this, in our model, is the challenges presented by the underbanked community.
FIGURE 48 US cash curve
250 Cash Digital
200
150
100
50
0
Source: Barclays Global Cash Model (based on Barclays Research estimates, combined with data from BIS, World Bank, Federal Reserve, selected country central banks and Euromonitor)
However, there are several factors that could impact the digitalisation factor.
Several states introduced laws making it mandatory to accept cash. Philadelphia, New Jersey and California have all put in place regulation banning merchants from refusing to accept cash. Other states across the US are exploring the option of following suit to prevent financial exclusion of cash-reliant members of their states. If such regulation is put in place elsewhere and becomes more widespread, the digitalisation factor in the US could possibly be lower than we assume in our base case.
The US has a high proportion of underbanked adults; if regulation or fintech adoption can better address this, digitalisation could accelerate beyond what we assume in our base case.
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China – dramatic digitalisation driven by mobile payments
FIGURE 49 China snapshot
Source: Barclays Research, World Bank, People's Bank of China, Barclays Global Cash Model (based on Barclays Research estimates, combined with data from BIS, World Bank, ECB, selected country central banks and Euromonitor)
Country characteristics and payment infrastructure China is the leading digital payment market in the emerging market category, with rapid digitalisation over the last 10 years. This was driven by the swift adoption of mobile payments, with Alipay and WeChat the leading providers.
The infrastructure for mobile payments has evolved over the last few years due to new regulation. Today, mobile payment wallets are generally linked with a bank account through a bank card, leaving banks in the loop. Beyond mobile payments, which represent over 50% of transactions, cards are the next important digital payment method. In China cards are generally issued under the local card scheme called UnionPay. UnionPay also runs the ATM network in China through CUPS, which is an interbank transaction settlement system developed by UnionPay. The POS network is largely connected via China’s commercial banks as well as third-party payment companies such as UnionPay.
According to Euromonitor, e-commerce penetration in China stood at 28% in 2019.
Payment statistics China has a well-developed banking system, but ~20%33 of population remains unbanked, predominantly in rural areas. While the number of cards provides insight into the digitalisation of payments, the high mobile penetration, too, is important, given the significant use of mobile payments in the country. The number of cards was 8.4bn in 2018, representing 6.0 cards per capita. The POS infrastructure in urban areas is well developed, but mobile payments are based largely on QR codes requiring less infrastructure investments than cards – one factor that has supported the rapid rise of mobile payments.
The number of card transactions has been growing at a remarkable pace, from 19.8bn in 2014 to 98.3bn in 2018, a 49.3% CAGR. Card transaction value has grown somewhat more slowly, but still at an impressive rate, from CNY42trn to CNY93trn, a 21.6% CAGR. The total card TPV represents broadly the GDP of China. In our view, neither the absolute number nor the growth rate reflects growth in real commercial spend, but rather increased use in cards for financial transactions such as loading money into WeChat and Alipay for insurances, funds or P2P lending. We therefore see the card transaction data as less insightful compared with other markets.
33 World Bank, 2017
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There are similar issues with the ATM data. The number of ATMs increased from 615k in 2014 to 1,111k in 2018 and is broadly at a similar level on a per capita basis as in other countries. The number of transactions declined from 13.7bn in 2014 to 12.4bn in 2018, while the value of transactions increased to CNY25.5trn in 2018 from CNY21.8trn in 2014. This represents a significant proportion of consumer spend, and we again expect that the number does not reflect underlying spend but some financial transactions. We expect that the ATM withdrawal value is in particularly impacted by the practice of gifting cash during events like Chinese New Year. Therefore, we see survey data providing more insight into the breakdown of payments methods for China.
Outlook – dramatic digitalisation leads to very low cash usage Within less than a decade China turned from a cash-centric into a digital payment market. Cash usage was ~20% in 2018 and we expect cash on an absolute and relative level to decline and stabilise around a high-single-digit percentage, as certain parts of the population still rely heavily on cash. We expect the digitalisation factor initially to be a low- single-digit percentage before decreasing to sub-1% towards the second half of the decade.
FIGURE 50 China cash curve
300 Cash Digital
250
200
150
100
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0
Source: Barclays Global Cash Model (based on Barclays Research estimates, combined with data from BIS, World Bank, ECB, selected country central banks and Euromonitor)
However, there are several factors that could impact the digitalisation factor.
While cash is legal tender and merchants have to accept it, there are an increasing number of shops and restaurants that no longer accept cash. If the regulation is enforced more widely, this could slow down digitalisation, while a relaxation or removal of the requirement could accelerate it.
Another factor for consideration in China is that, in a bid to maintain its use and reduce the fear of cash use during the COVID-19, banks in China were actively disinfecting cash before it was going into circulation. These actions by banks from early February may have slowed the adoption of some digital payment forms by consumers using cash as some may not have seen the requirement to substitute for a digital form. If this is the case, the digitalisation going forward could be lower than we anticipate.
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India – very early in its digitalisation, but outlook promising
FIGURE 51 India snapshot
Source: Barclays Research, World Bank, RBI, Barclays Global Cash Model (based on Barclays Research estimates, combined with data from BIS, World Bank, ECB, selected country central banks and Euromonitor)
Country overview India remains a cash-centric market, with cash still the most popular payment form in the country. However, mobile payments are growing in popularity and card adoption has also been increasing.
The card infrastructure in India is based largely on local schemes, but international schemes also have a presence in the country. The mobile payment infrastructure in India is modern and well-developed following the introduction of the Unified Payment Interface (UPI) in 2016. Overall the Indian payment infrastructure has gone through a series of upgrades in the last 20 years that have allowed the development of payment infrastructures to support digital payments either online or in-store and via card or mobile. The infrastructure in India also supports instant payment through retail payment and mobile payment infrastructure.
According to Euromonitor, e-commerce penetration in India stood at 5% in 2019.
Payment statistics The banking system is not as developed in India as in some western markets, but bank account penetration still stands at ~80%. This has increased over time, although many accounts have a zero balance and are essentially not used. Mobile is one of the most preferred payment methods, but cards also remain popular, especially the local scheme RuPay. The total number of cards in India with a payment function stood at ~1bn in 2018, equating to 0.7 cards per capita, which is still relatively low versus developed countries. The POS terminal infrastructure is underdeveloped, but this is partly compensated by the increased usage of QR-code-based mobile payments made possible through the UPI.
The number of card transactions increased from 1,738m in 2014 to 10,781m in 2018, a 57.8% CAGR. Card transaction value grew more slowly, given the stronger growth in low- value transactions, from INR3.3trn to INR14.1trn, a 43.5% CAGR.
Despite the increasing shift to digital payment, the ATM estate across India has grown to fuel the nation’s growing demand for cash use. The number of ATMs increased from just over 176k in 2014 to 203k in 2018. Along with the increase in the number of ATMs, the number of transactions increased at a CAGR of 9.0% over the period to 9.9bn in 2018. The value of the withdrawals followed a similar trend, increasing 10.4% over the period to INR33.2trn. This was above the card transaction value in 2018, evidencing India’s preference for cash use currently.
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Outlook – cash usage to materially decline but only relatively India has focused on the development of its payment infrastructure, as well as pursuing an active agenda to drive an increase in the use of digital payments. There has been clear evidence of digital transactions growing and increasing their total share of the transaction pie. We estimate that cash usage was ~68% in 2019 and we expect this to decline to a mid- 30% level by 2030. This is underpinned by a mid- to high-single-digit percentage digitalisation factor. We expect the absolute level of cash to remain broadly stable, however, driven partly by inflation and strong underlying consumption growth.
FIGURE 52 India cash curve
500 Cash Digital 450 400 350 300 250 200 150 100 50 0
Source: Barclays Global Cash Model (based on Barclays Research estimates, combined with data from BIS, World Bank, RBI, selected country central banks and Euromonitor)
However, there are several factors that could impact the digitalisation factor.
India has been very active in pushing a cashless agenda; however, more recently the RBI did launch a review into the interchange fees at micro-ATMs, asking the ATM regulator to make sure operators are fairly compensated in order to maintain the estate and cash access. No policy development has come off the back of this review, but if there is a continued trend to preserve cash access, this could drive a lower digitalisation factor than we assume in our base case going forward. This could lead to slower growth in digital transactions and to a higher cash share of transactions.
Historically, the digitalisation factor has been much higher (double-digit percentage in all years since 2014) than we assume in our base case. We think this level is not sustainable and we are more conservative looking forward; however, were this level to be sustained, digitalisation could progress much faster than we assume.
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APPENDIX: BARCLAYS GLOBAL CASH MODEL METHODOLOGY
Barclays Global Cash Model methodology There are countless studies and reports attempting to determine cash usage across various countries and regions. Given the nature of cash, though – i.e. non-digital and therefore not recorded – it is notoriously difficult to truly know how much is spent, how often and by whom. Most cash usage figures are based on survey data or estimates and are either expressed as percentage by value or volume, although this is not always made clear. Crucially, many figures are just a snapshot and are not available as a time series (at least not with a consistent methodology), and certainly not on a basis that is comparable across markets. Therefore, we decided to build our Barclays Global Cash Model, using consistent datasets of ATM withdrawal data and card transaction data, which are broadly available for nearly all countries, from reliable sources and as a time series. This is by no means a perfect measure of relative cash spend at POS, but it does allow us to determine the implied cash usage by value, which we find more insightful than volume, and crucially it enables us accurately to track changes in relative positions over time. We use data from the BIS, the ECB other local central banks and the World Bank for cash withdrawals and card spend.
We see ATM withdrawals as a sufficient proxy for cash usage. While on the one hand cash is sometimes withdrawn for financial transactions (e.g. to gift to another person or to settle debt), there is on the other hand cash spend that is not necessarily directly returned to banks, but in the case of sole traders or smaller businesses used for purchases (i.e. recycled). We see both effects as broadly offsetting each other, with the exception of Italy (high degree of cash recycling) and the US (significant over-the-counter cash withdrawals). The ECB noted in a 2017 report34 that “the estimated value of cash payments resulting from the study equals roughly 93% of cash withdrawals”, supporting our view. Card spend is by definition a complete dataset and also readily available from central banks.
We cross check whether our implied cash usage is broadly consistent with country-specific studies around the globe. In addition, we compare our total spend measure with retail spend data (physical goods online or in-store) from Euromonitor and consumer spend (total consumer expenditure including housing) from the World Bank. Both measures have disadvantages, for the purpose of this report, over our spend measure. Retail spend includes only goods but not services and therefore ignores a large proportion of consumer spend, while total consumer spend includes housing, which sits outside the scope for cash or card payments and instead within the domain of bank transfers. Nonetheless, both measures enable us to contextualise and sanity-check our spend measure.
This methodology works well for all countries with the exception of China, where ATM withdrawals and card usage combined are a multiple of GDP and consumer spend. We expect this is driven by the following two factors: 1) cash gifting is very common, which means that many ATM withdrawals are not for ultimate consumption; 2) card payments are used to load money onto wallets (WeChat and Alipay), which are often used for financial transactions (P2P lending, investments) and sending money to family and friends. We therefore take an alternative approach to our core methodology for China. We used detailed studies regarding cash usage over time and combine this with the consumer spend estimate from the BIS (normalised for housing).
For our forecast period, we use Euromonitor forecasts for retail spend growth to calculate total spend growth. We then make adjustments to the growth forecasts for 2020 and 2021, accounting for the expected impact of COVID-19. This total spend growth, combined with our estimate of the digitalisation factor for the transition from cash to card payments, drives
34 The use of cash by households in the euro area
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our card spend forecasts, from which we derive implied cash spend growth. This digitalisation factor is the absolute percentage amount that digital or non-cash payments are growing above consumer spend, reflecting the substitution of cash by digital payment methods, with future forecasts based on run-rate of substitution in that country combined with country-specific considerations affecting digital adoption. This factor helps us to model underlying digital payment spend and it varies significantly by country, given the various degrees of digitalisation. As a general rule, the most cash-centric countries have the highest digitalisation factors due to a lower base effect. This includes countries such as Germany, India and Italy. Meanwhile, the most digitally-advanced countries such as UK and Sweden have relatively modest digitalisation factors because the substitution from cash to digital payments is well advanced.
We make explicit forecasts for key countries, including those for which we provide profiles in this note – namely the US, India, China, Germany, Italy and the UK. For non-key countries, we apply the characteristics of what we consider the closest modelled proxy country. We use Euromonitor retail spend data for the weighting between different countries to aggregate the cash usage to a regional and global basis. We index cash versus digital spend at 100 in year one across countries and regions and globally to create cash curves. This approach allows us to show the breakdown between cash and digital spend on a normalised basis, but at the same time reflect the growth in the economy that allows cash still to grow in some markets, while cards outgrow and gain market share.
We furthermore split countries into cash-centric and digital-payment aggregates. Each group includes the countries with a higher weighting to the respective payment method. While there is a slight correlation between developed and emerging markets, it is not a clear overlap. Countries such as China, which would probably be defined as emerging markets, are digital payment countries whereas some developed countries such as Germany and Italy are cash-centric economies.
It is also worth mentioning that there are some limitations to the comparability between countries. For example, in some countries it wouldn’t be uncommon to pay for a car using card payment, while in others that wouldn’t be possible at all and consumers would pay via either cash or bank transfer. These big-ticket items obviously have a significant impact on implied cash usage. The vast majority of bank transfers are of a financial nature, as opposed to representing consumption, and are not an alternative to cash payments. We therefore exclude bank transfers from our total spend measure. However, in the example of a car purchase, such a payment would clearly be a consumption expenditure. In addition, in some countries it is not uncommon for merchants simply to invoice their customers and get paid via bank transfer, such as in Germany. However, these limitations to our methodology don’t cause significant deviation in the resulting cash usage from the expected results and other third-party data points.
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ANALYST(S) CERTIFICATION(S): We, James Goodman, Sven Merkt, CFA, Corey Gayle, Ramsey El-Assal, Hiral Patel, Aman Rakkar, CFA and Grace Dargan, hereby certify (1) that the views expressed in this research report accurately reflect our personal views about any or all of the subject securities or issuers referred to in this research report and (2) no part of our compensation was, is or will be directly or indirectly related to the specific recommendations or views expressed in this research report.
IMPORTANT DISCLOSURES CONTINUED
Barclays Research is produced by the Investment Bank of Barclays Bank PLC and its affiliates (collectively and each individually, "Barclays"). All authors contributing to this research report are Research Analysts unless otherwise indicated. The publication date at the top of the report reflects the local time where the report was produced and may differ from the release date provided in GMT. Availability of Disclosures: Where any companies are the subject of this research report, for current important disclosures regarding those companies please refer to https://publicresearch.barclays.com or alternatively send a written request to: Barclays Research Compliance, 745 Seventh Avenue, 13th Floor, New York, NY 10019 or call +1-212-526-1072. The analysts responsible for preparing this research report have received compensation based upon various factors including the firm's total revenues, a portion of which is generated by investment banking activities, the profitability and revenues of the Markets business and the potential interest of the firm's investing clients in research with respect to the asset class covered by the analyst. Research analysts employed outside the US by affiliates of Barclays Capital Inc. are not registered/qualified as research analysts with FINRA. Such non-US research analysts may not be associated persons of Barclays Capital Inc., which is a FINRA member, and therefore may not be subject to FINRA Rule 2241 restrictions on communications with a subject company, public appearances and trading securities held by a research analyst’s account. Analysts regularly conduct site visits to view the material operations of covered companies, but Barclays policy prohibits them from accepting payment or reimbursement by any covered company of their travel expenses for such visits. Barclays Research Department produces various types of research including, but not limited to, fundamental analysis, equity-linked analysis, quantitative analysis, and trade ideas. Recommendations contained in one type of Barclays Research may differ from those contained in other types of Barclays Research, whether as a result of differing time horizons, methodologies, or otherwise. In order to access Barclays Statement regarding Research Dissemination Policies and Procedures, please refer to https://publicresearch.barcap.com/S/RD.htm. In order to access Barclays Research Conflict Management Policy Statement, please refer to: https://publicresearch.barcap.com/S/CM.htm. Materially Mentioned Stocks (Ticker, Date, Price) Adyen (ADYEN.AS, 23-Jun-2020, EUR 1300.00), Underweight/Neutral, J Cardtronics, plc (CATM, 23-Jun-2020, USD 24.45), Overweight/Positive, J/K/M/N EVO Payments (EVOP, 23-Jun-2020, USD 23.87), Equal Weight/Positive, A/CE/D/J/L Fidelity National Information Services (FIS, 23-Jun-2020, USD 137.96), Overweight/Positive, A/CD/CE/D/E/J/K/L/M/N Fiserv, Inc. (FISV, 23-Jun-2020, USD 101.96), Overweight/Positive, CD/CE/J Funding Circle (FCH.L, 23-Jun-2020, GBp 75), Equal Weight/Neutral, J/K/N Global Payments Inc. (GPN, 23-Jun-2020, USD 177.21), Overweight/Positive, A/CD/CE/D/J/K/L/M Ingenico (INGC.PA, 23-Jun-2020, EUR 133.05), Equal Weight/Neutral, CD/FA/J/K/M/N MasterCard Inc. (MA, 23-Jun-2020, USD 306.88), Overweight/Positive, A/CD/CE/D/J/K/L/M/N MoneyGram International, Inc. (MGI, 23-Jun-2020, USD 3.32), Underweight/Positive, CD/FA/J/K/M/N Network International (NETW.L, 23-Jun-2020, GBp 459), Overweight/Neutral, J Nexi (NEXII.MI, 23-Jun-2020, EUR 15.16), Overweight/Neutral, A/CD/D/J/K/L/M/N PayPal, Inc. (PYPL, 23-Jun-2020, USD 172.79), Overweight/Positive, A/CD/CE/D/J/K/L/M/N PayPoint (PAYP.L, 23-Jun-2020, GBP 7.00), Underweight/Neutral, J/K/M/N Square, Inc. (SQ, 23-Jun-2020, USD 104.75), Overweight/Positive, CD/CE/D/J/K/L/M/N Visa Inc. (V, 23-Jun-2020, USD 197.97), Overweight/Positive, A/CD/CE/D/J/K/L/M/N Western Union (WU, 23-Jun-2020, USD 21.67), Underweight/Positive, CD/CE/J/K/M/N Wirecard (WDIG.DE, 23-Jun-2020, EUR 17.16), Rating Suspended/Neutral, CD/J/K/N Other Material Conflicts: We are suspending our rating, price target and estimates on Wirecard as we do not have sufficient information on which to base a credible rating and price target, given the lack of audit opinion and escalating concerns over the financial reporting Worldline (WLN.PA, 23-Jun-2020, EUR 71.20), Overweight/Neutral, A/CD/E/J/K/L/N Unless otherwise indicated, prices are sourced from Bloomberg and reflect the closing price in the relevant trading market, which may not be the last available price at the time of publication.
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IMPORTANT DISCLOSURES CONTINUED Stock Rating Overweight - The stock is expected to outperform the unweighted expected total return of the industry coverage universe over a 12-month investment horizon. Equal Weight - The stock is expected to perform in line with the unweighted expected total return of the industry coverage universe over a 12- month investment horizon. Underweight - The stock is expected to underperform the unweighted expected total return of the industry coverage universe over a 12-month investment horizon. Rating Suspended - The rating and target price have been suspended temporarily due to market events that made coverage impracticable or to comply with applicable regulations and/or firm policies in certain circumstances including where the Investment Bank of Barclays Bank PLC is acting in an advisory capacity in a merger or strategic transaction involving the company. Industry View Positive - industry coverage universe fundamentals/valuations are improving. Neutral - industry coverage universe fundamentals/valuations are steady, neither improving nor deteriorating. Negative - industry coverage universe fundamentals/valuations are deteriorating. Below is the list of companies that constitute the "industry coverage universe":
European Software & IT Services Adyen (ADYEN.AS) Alfa (ALFAAL.L) Amadeus (AMA.MC) Atos (ATOS.PA) Avast (AVST.L) AVEVA (AVV.L) Capgemini (CAPP.PA) Computacenter (CCC.L) Dassault Systèmes (DAST.PA) FDM Group (Holdings) plc (FDM.L) Finablr (FINF.L) Funding Circle (FCH.L) Hexagon AB (HEXAb.ST) Ingenico (INGC.PA) Micro Focus (MCRO.L) Nemetschek (NEKG.DE) Network International (NETW.L) Nexi (NEXII.MI) PayPoint (PAYP.L) Sage Group (SGE.L) SAP SE (SAPG.DE) Softcat plc (SCTS.L) Software AG (SOWG.DE) TeamViewer (TMV.DE) Temenos (TEMN.S) Wirecard (WDIG.DE) Worldline (WLN.PA) U.S. Payments, Processors & IT Services Accenture, Inc. (ACN) Automatic Data Processing, Inc. (ADP) Cardtronics, plc (CATM) CGI Inc. (GIB) Cognizant (CTSH) EPAM Systems (EPAM) EVO Payments (EVOP) Fidelity National Information Services (FIS) Fiserv, Inc. (FISV) Fleetcor Technologies (FLT) Global Payments Inc. (GPN) Green Dot Corp. (GDOT) MasterCard Inc. (MA) MoneyGram International, Inc. (MGI) Paychex, Inc. (PAYX) PayPal, Inc. (PYPL) Square, Inc. (SQ) Visa Inc. (V) Western Union (WU) WEX, Inc. (WEX)
Distribution of Ratings: Barclays Equity Research has 1568 companies under coverage. 45% have been assigned an Overweight rating which, for purposes of mandatory regulatory disclosures, is classified as a Buy rating; 49% of companies with this rating are investment banking clients of the Firm; 73% of the issuers with this rating have received financial services from the Firm. 37% have been assigned an Equal Weight rating which, for purposes of mandatory regulatory disclosures, is classified as a Hold rating; 43% of companies with this rating are investment banking clients of the Firm; 68% of the issuers with this rating have received financial services from the Firm. 15% have been assigned an Underweight rating which, for purposes of mandatory regulatory disclosures, is classified as a Sell rating; 32% of companies with this rating are investment banking clients of the Firm; 60% of the issuers with this rating have received financial services from the Firm. Guide to the Barclays Research Price Target: Each analyst has a single price target on the stocks that they cover. The price target represents that analyst's expectation of where the stock will trade in the next 12 months. Upside/downside scenarios, where provided, represent potential upside/potential downside to each analyst's price target over the same 12-month period. Top Picks: Barclays Equity Research's "Top Picks" represent the single best alpha-generating investment idea within each industry (as defined by the relevant
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IMPORTANT DISCLOSURES CONTINUED "industry coverage universe"), taken from among the Overweight-rated stocks within that industry. Barclays Equity Research publishes "Top Picks" reports every quarter and analysts may also publish intra-quarter changes to their Top Picks, as necessary. While analysts may highlight other Overweight-rated stocks in their published research in addition to their Top Pick, there can only be one "Top Pick" for each industry. To view the current list of Top Picks, go to the Top Picks page on Barclays Live (https://live.barcap.com/go/keyword/TopPicks). To see a list of companies that comprise a particular industry coverage universe, please go to https://publicresearch.barclays.com. Types of investment recommendations produced by Barclays Equity Research: In addition to any ratings assigned under Barclays’ formal rating systems, this publication may contain investment recommendations in the form of trade ideas, thematic screens, scorecards or portfolio recommendations that have been produced by analysts within Equity Research. Any such investment recommendations shall remain open until they are subsequently amended, rebalanced or closed in a future research report. Disclosure of other investment recommendations produced by Barclays Equity Research: Barclays Equity Research may have published other investment recommendations in respect of the same securities/instruments recommended in this research report during the preceding 12 months. To view all investment recommendations published by Barclays Equity Research in the preceding 12 months please refer to https://live.barcap.com/go/research/Recommendations. Legal entities involved in producing Barclays Research: Barclays Bank PLC (Barclays, UK) Barclays Capital Inc. (BCI, US) Barclays Bank Ireland PLC, Frankfurt Branch (BBI, Frankfurt) Barclays Bank Ireland PLC, Paris Branch (BBI, Paris) Barclays Bank Ireland PLC, Milan Branch (BBI, Milan) Barclays Securities Japan Limited (BSJL, Japan) Barclays Bank PLC, Hong Kong Branch (Barclays Bank, Hong Kong) Barclays Capital Canada Inc. (BCCI, Canada) Barclays Bank Mexico, S.A. (BBMX, Mexico) Barclays Securities (India) Private Limited (BSIPL, India) Barclays Bank PLC, India Branch (Barclays Bank, India) Barclays Bank PLC, Singapore Branch (Barclays Bank, Singapore) Barclays Bank PLC, DIFC Branch (Barclays Bank, DIFC)
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