How slowing down the cashless frenzy could ensure a more inclusive society in East Asia

This article is brought to you thanks to the collaboration of The European Sting with the World Economic Forum.

Author: Yunzhong Cheng, Strategic Partnership Lead, Asia , World Economic Forum

• In Asia, South Korea is the cashless champion, while Japan remains loyal to cash.

• Elderly, rural and low-income groups lack the digital communications equipment, network access, and digital-finance knowledge to enjoy a cashless society.

• Cashlessness has multiple advantages but cash still lends people a sense of security.

Cash-free payment methods have become life-changing for many in the era of the Fourth Industrial Revolution. However, people around the world disagree on what the superior method of payment is, and it seems to be a subjective thing. In East Asia, there are also distinct national trends.

South Korea has typically been seen as the cashless champion of Asia. According to research, only 14% of payments in South Korea involve cash. Some might say that it is already a cashless society, and the main reason it has happened is that South Koreans want it.

The country has an almost 100% smartphone adoption rate, and there is a growing demand from the younger generation, looking for fast and convenient payment methods. And during the pandemic, South Koreans have become more familiar than ever with digital payments due to the boom in the e-commerce industry, with mobile shopping accounting for over 70% of online sales, The Korea Herald reports.

Even before the pandemic, cash was in decline. Businesses in South Korea are looking into virtual cards and prepaid cards, and the country has passed one of the world’s first comprehensive cryptocurrency laws.

Meanwhile in China, around 60% of payments are cashless, so 40% of payments still involve cash. The only reason the country is not higher in the ranking is its immense population. However, China is rapidly becoming one of the most cashless societies in the world, with the rise of dominant fintech platforms.

China is the undisputed leader of e-commerce in the region, and around 52.1% of the country’s retail sales will come from e-commerce in 2021. It is a mobile-first country, and mobile payments using QR code scanning have been successfully adopted by mainstream society, from big cities to more rural areas.

According to J.P.Morgan, sales via mobile devices take a 60% share of the overall e-commerce market.

Japan’s loyalty to cash

Japan has long been known for its heavy use of cash. Around 82% of payments involve its use, and whilst the pandemic has encouraged the cash-loving Japanese to move away from physical money, the country’s fast-ageing population are resisting change.

According to Reuters, Japan’s currency in circulation and bank deposits even rose at a record pace during the pandemic, which prompted businesses and households to continue hoarding cash. That proportion rises with the elderly, some of whom stick to cash as a way to prevent wasteful spending.

Excessive “cashlessness” will lead to a new type of financial exclusion which deviates from the original intention of inclusive finance.—Yunzhong Cheng

On the whole, Japanese society is still more dependent on cash, also largely due to the frequent occurrence of natural disasters. However, the government has set a goal of increasing cashless payments to about 40% of all transactions by 2025, from about 20% currently.

Is a cashless society an inclusive one?

People’s demand for cash is still widespread across Asia, especially from the perspective of inclusive finance and consumer protection. For instance, in many cities across China, it has become increasingly difficult to hail and pay for a taxi, buy groceries, or even settle a bill without mobile payments. If you walk into small stores, it is very possible some will not even accept cash. In South Korea, more than half of 1,600 bank branches no longer accept cash deposits or withdrawals.

The original intention of developing inclusive finance is to ensure that all individuals and businesses have equal access to useful and affordable financial products and services that meet their needs.

Digital technology improves the coverage of financial services, but it also brings “digital divide”. Some of the elderly, rural population, and low-income groups lack digital communications equipment and network access, not to mention digital finance knowledge and skills.

Cash is also the necessary guarantee to meet the basic payment needs of specific groups, including overseas tourists, juveniles and the visually impaired. Excessive “cashlessness” will lead to a new type of financial exclusion which deviates from the original intention of inclusive finance.

Cash as a secure solution

On the other hand, in the process of rapidly developing mobile payments, there is a tendency to over collect consumers’ personal information, which may lead to the over mining of consumers’ contact information, consumption behaviours, biometrics and other data.

Cyber security issues are also causing wide concern. For example, 7-Eleven Japan’s team opened up a “7pay” mobile app for making in-store payments in 2019. But unfortunately, $500K was stolen from the app due to insufficient mobile payment security, and the service was shut down in its entirety in less than three months.

When consumers are not sure about the security of mobile payments, choosing to use cash helps to reduce the risk of personal information and property security being violated.

Theoretically, cash can be regarded as a risk-free payment instrument and safe asset, while any cash-free payment instrument that depends on market institutions has more or less operational risk, market risk, credit risk, and even moral risk. As such, the option of keeping cash can enhance people’s sense of security.

Although there is some competition between cash-free paying and the use of cash, they are ultimately complementary in nature, not substitute. Becoming a cashless society should be a gradual process. It is important to make sure that no one is left behind.