Deutsche Bank Research has published the third in a series of three reports that examine the past, present, and future of the payments industry. The first two papers were discussed here. The paper analyses the results of a survey of 3,600 customers across the US, UK, China, Germany, France and Italy and forecast trends in cash, online, mobile, crypto, and blockchain.
CASH WILL BE AROUND FOR A LONG TIME
“When people discuss the future of payments they tend to predict the end of cash. Our view is different. Not only do we think cash will be around for a long time, we see the transition to digital payments as having the potential to do no less than rebalance global economic power.”
The report forecasts light speed growth of digital payments and focuses specifically on the increasing adoption of crypto-currencies and ongoing developments in terms of central bank digital currencies.
IS TOO BIG TO IGNORE
The sheer value of crypto-currencies – Bitcoin’s market cap now exceeds the $1 trillion mark – make them too big to ignore. Central banks and regulators regularly disqualify crypto-currencies as a form of and a number of limitations impede their use in day-to-day transactions: limited adoption, regulatory hurdles, price volatility, energy consumption, privacy concerns… However, Bitcoin and to a lesser extent other crypto-currencies are attracting an increasing number of organisations seeking to benefit from – or fearing to missing out on – the spectacular increase in its value. In February 2021, Tesla announced it had invested $1.5 billion in Bitcoin. Square acquired $50 million of Bitcoin. In October 2020, PayPal added the capability to pay in Bitcoin to its wallets.
This is perhaps a new interpretation of the Sutton principle: money is where the bank is. Willie Sutton was a bank robber who stole an estimated $2 million in the past century and reputedly replied to a reporter’s inquiry as to why he robbed banks by saying “because that’s where the money is.” Regardless of whether crypto-currencies are a form of money or not, they are attracting investors and users because that is where the money is.
CASH WILL BE PART OF THE ECONOMY FOR DECADES
In spite of this growing interest, crypto-currencies have a long way to go before becoming mainstream. The report identifies several challenges that would need to be overcome.
The first is adoption: in spite of increasing adoption, the report projects that by the end of 2030 there could be 200 million blockchain wallet users or less than 3% of the population. Perhaps more worrying is that between 40 and 70% of respondents to the Deutsche Bank survey state that they will never invest in crypto-currencies.
The second is privacy. “Banknotes and coins greatly reduce digital footprints. A cash transaction does not generate digital data. Therefore, no third party, such as a provider, will automatically receive transaction data, thereby increasing individual privacy.” write the authors. The paper stresses that the adoption of digital payments depends on a trade-off on the user side between the convenience of digital payments and the privacy provided by cash. But there is also a trade-off on the supply side between earning fees on a transaction and monetizing the data. The authors predict that payment fees will approach zero as data is increasingly monetized.
A third challenge is the resilience of the monetary and financial system. Can the system rely exclusively on digital money, when cyberattacks as natural and man-made disasters are increasing outages and shutdowns?
“We start by using the lessons of history to predict that cash will be a part of the economy for decades to come. Over centuries, people have developed a deep-rooted trust in paper and coins during uncertain times. Today is no different. For example, the trade war between the US and China has led notable investors to increase their cash holdings. Our survey shows that people also like cash because it allows them to more easily track their spending.”