The Benefits of Applying a ‘Preventative Policy Approach’ to Payments
There is a new money saving trend taking social media by storm. It does not involve crypto, AI (Artificial Intelligence) or the latest wearable technology. It’s ‘cash stuffing’: the new trend of placing physical money into a selection of envelopes, each labelled with a specific expense, such as rent, car, food and utilities. There are even online lessons and saving challenges, teaching viewers how to budget for a period of 52 weeks.
The craze is likely to be partly due to the rise in popularity of retro behaviour, largely influenced by Netflix shows such as Stranger Things, which singlehandedly returned Kate Bush’s 1985 hit ‘Running Up That Hill’ to top the charts in eight countries, and the fact that these days, everything gets their share of 15 minutes of fame.
It is, however, possibly more than a fad. According to new research, in the US 69% of Gen Z adults (born between 1997-2005) are using cash more compared to 12 months ago. This is higher than the 47% of Gen X (born between 1965 and 1980) and 37% of Boomers (born between 1946 and 1964). Of those in Gen Z who use cash to pay for purchases, 59% say they do so to budget, and 64% say they spend less money when they pay with cash.
This behaviour is being driven by the desire to have more control of their spending at a time when consumers are battling the rising cost of groceries, fuel, mortgage and rent payments. It makes sense that in challenging times, people are turning to a tried and tested method of saving and budgeting. After all, when the cash is gone, it isn’t coming back. Placing money in jars or shoe boxes is the original saving technique; what’s new is the younger generation leading the change. 30% of Gen Z are using ‘cash stuffing’ to save and budget and are seeing results: 89% have been able to save more and 70% have been able to reduce their overall spending.
This is a reminder that the future of payments may not be as straight forward as it seems. In hard times there is a demand for payments that offer friction, limitations and tangibility. This contrasts with the overall direction of travel towards quick, convenient and frictionless payments, which work well for many in a variety of circumstances but, as the new research shows, not for all.
It is important that governments, central banks and regulators have a long-term plan for the evolution of their country’s payments landscape. Without it, there is a risk that the drive to introduce the latest technology overrides the need to cater for, and ultimately protect, consumers that may wish to take things a little slower and revert to a more well-known behaviour. With interest rates forecast to remain higher than 2020 levels across most countries, the pressure on household budgets may remain for the foreseeable.
In all aspects of policymaking, a long-term approach is best. Difficult decisions can pay dividends if made early enough. In the area of public health, preventative measures have been put in place by governments across the world to prevent negative outcomes that reduce life expectancy and cause a strain on scarce public resources. Age restrictions on tobacco sales and, in some cases, public smoking bans, are obvious examples, as are taxes on alcohol and sugar. Another example is automatic enrolment retirement plans, which have seen a huge increase in the number of citizens enrolled in an employment pension, ensuring a certain standard of living in retirement and easing the burden from the public purse.
A country’s payments infrastructure should not be excluded from implementing preventative measures to ensure that it manages to provide safe, convenient and trusted payment solutions to all citizens that can adapt to changing circumstances. Employing such a strategy will, therefore, go a long way to prevent financial and digital exclusion. Retaining cash payments and face-to-face, or in-person, banking services is a fundamental aspect of this. According to the World Economic Forum, 2.9 billion people lack the opportunities to go online and engage with the digital economy, and it is highly likely that billions more have yet to become ‘fully digital’.
To prevent financial and digital exclusion, we have highlighted five measures that should be central to your country’s payments landscape.
The first measure is simple but essential: arrange an independent review of your country’s payment landscape that will produce recommendations to ensure it can safely cater for all payment needs and withstand the volatility of world events. Chaired by an independent, with a review panel consisting of experts that include industry, retailers, third sector and consumer groups, the review should be funded to allow for the commissioning of research. Delivered with a roadmap, the outcome should be seriously considered, if not agreed to in advance, by the government and enacted at speed. There is no ‘one-size-fits-all’ solution, so do not depend on what other countries have done.
The vast operation of government means that, in many countries, responsibility for delivering a preventative payments policy may sit with different government departments and different regulators. For example, digital strategy and financial inclusion could be separate, as could regulation of the banks and regulation of payment systems. Efforts must be made to ensure a joined-up approach to implementation. If this is not possible, the creation of a specific Payments Department could be a solution.
Improve digital capability
The increase in the adoption of digital payments over the past decade does not mean that there has been a relative increase in digital capability: the skills needed to fully benefit from the digital economy. This is a key element of payments preventative policy, as, without the capability, the benefits and opportunities presented by the digital economy will not be enjoyed by all and could lead to exclusion further down the line, a particular issue for vulnerable citizens. To address this, improving digital capability should be a top government priority.
Explore utility models
Utility models have already become a feature in some payment landscapes and offer a solution to the challenge of providing a necessary service that is declining in popularity. Nowhere is this more appropriate than wholesale cash, where lower volumes are leading to higher costs, which makes the business case for continuation difficult to square. Market exit is not an option as the product remains essential to some, resulting in the next natural step, which is to increase costs and reduce services. This, however, potentially excludes people from making payments and places them in an awful position of feeling that society has moved on without them. This can be avoided by clever planning and implementing a utility model that maintains a flexible service, thus removing a challenge that grows in difficulty the longer it is left unaddressed.
A similar approach can also be applied to services, such as ATMs and bank branches, that will also rise in cost as digital payments and online banking grow in popularity. Implementing a process for this as early as possible provides the time needed for consumers to get acquainted with new services and for the roll-out to precede political pressure to act. A successful example of this can be found in the Netherlands where the major banks have consolidated their ATM network. In the UK, a new joint venture between the banks is opening shared ‘banking hubs’ that offer cash access, deposit and basic banking services to address the continued demand despite individual branch closures.
Author: David Hensley and David Fagleman, Associates, London, Payments Consulting Network
David and David have worked together for nearly 10 years and in 2020 co-founded Enryo, an independent consultancy designed to support the financial services industry as it navigates times of change.
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