Does Covid-19 mark the beginning of the end for cash?

The Covid-19 crisis has changed our daily lives in multiple ways and accelerated a number of trends that were already in place. For many of us, one obvious change is that the need to use cash has evaporated as many transactions are done online or via apps and cards.

We think this trend is here to stay as a greater proportion of the population switches to cards and digital payments, offering opportunities for investors.

What are the benefits of card payments?

In the midst of a pandemic, the potential for cash use to be a means of transmitting infection is a clear driver of the move towards other payment methods. Paying cash involves a close interaction with another person, often with change being handed back. Card payments avoid this and so have become the preference for customers.

For the same reason, the pandemic has also increased the willingness of merchants to accept cards. Meanwhile, although merchants are charged for card transactions, the charges have been falling and are now low relative to the cost and inconvenience of handling cash.    

Convenience for the customer is the main driver of the move away from cash and this has been enabled by improvements in technology. Paying by card used to be harder than it is now and involved signing for card payments. The advent of chip-and-pin technology put an end to that, and has been swiftly followed by contactless payments using phones as well as cards.

The roll-out of contactless transport cards was another factor in accelerating the use of cards for payment. These types of cards get people accustomed to not using cash, and then it is a short step to using contactless credit cards.

What does this mean for investors?

Over the last few years, standalone entities in the payment industry have been formed via an accumulation of assets from banks by private equity, and some have now been floated on the stock market. We are starting to see mergers and acquisitions (M&A) among these entities and we expect this to continue.

The likelihood of further M&A makes sense when we consider what the payment providers actually do: they help merchants accept in-store or online payments and route them though card networks. Having the right technology is crucial and costly, whereas processing the extra payments incurs negligible extra expense. It makes sense therefore for businesses to consolidate and invest in improving their technology.

The potential for an extended period of higher growth makes the payment providers an interesting investment opportunity. Much of the rest of the financial sector, particularly the banks, is grappling with the negative consequences of a prolonged low interest rate environment and the Covid-19 crisis. By contrast, card and digital payments were growing anyway and the pandemic has provided a further tailwind.

Of course, while the industry broadly looks attractive, each stock must be assessed on its individual merits.

What is the social impact of non-cash payments?

There is a clear benefit to society from non-cash payments in that they are much easier to track. However, the falling use of cash raises the question of financial inclusion. Those who do not have access to bank accounts could find themselves excluded.

Meanwhile, many people who prefer to withdraw cash may find it increasingly hard to do so. Banks may be unwilling to maintain expensive ATM networks with demand for cash falling. The worry is that this could particularly affect elderly people, who may be less likely to adopt card payments.

That said, cash looks unlikely to vanish entirely. But the pandemic is encouraging the use of non-cash payments for everyday transactions, and we think this is a trend that is only set to accelerate as the benefits to society outweigh some of the temporary challenges.