When cash ceases to be king: the rise of innovative payment methods

When Covid-19 lockdowns first hit North America two years ago, life changed overnight — with retailers playing canary in the coal mine.

Digital payment systems of all sorts have seen explosive growth

Even in a climate of uncertainty, merchants with a culture of innovation were able to pivot quickly, adopting new electronic payment technologies to survive the downturn. Some companies even created ways to thrive through the pandemic, setting themselves up for long-term success by envisioning the new normal.

Lockdown restrictions kept customers out of countless brick-and-mortar retailers as only essential merchants such as grocers could operate. Shops that stayed open did so at reduced capacity. It was a disaster for the retail sector: according to a report from the National League of Cities, major retailers shuttered over 12,000 stores in 2020, and hundreds of thousands of independent businesses also closed.

Millions of retailers and restaurants shifted exclusively to debit and credit cards. Large retail chains already had service agreements and digital terminals to accept multiple payment methods, while smaller businesses needed a quick pivot to embrace digital payments.

Covid-19 created opportunities for the fintech industry to offer versatile, secure, and affordable new experiences while accelerating the shift to digital. Everyone from start-ups to massive fiscal institutions are exploring this seismic shift in the market. According to research by the National Retail Federation and Forrester, no-touch payments increased for 69% of retailers during the first eight months of the pandemic.

Much of this progress in payment methods comes from financial tech industry innovators who rushed to fill the newfound need. These companies (and the retailers leveraging their products) are able to turn on a dime in reaction to unprecedented economic upheaval. Multi-year contingency plans may have helped some companies survive the pandemic, but leaders imagined better systems were able to “stop, drop, and roll,” and move beyond survival to success.

The impact on small and medium-sized businesses (SMBs)

Covid-19 disproportionately impacted SMBs, which are often more reliant on cash transactions and paper records than their larger counterparts. Research we conducted last year found SMBs have been underserved by the fintech community, generating opportunities for innovation. Many non-chain restaurants without online ordering interfaces scrambled to implement digital integrations with services like Uber Eats, GrubHub, or DoorDash.

Hardware or clothing stores allowed customers to order and pay for items online and get their products the same day with curbside pickup. This approach, ubiquitous in 2022, was an outlier in retail in 2020. Consumers could pay electronically instead of with cash, both for convenience and Covid prevention.

Before the pandemic, these SMBs avoided the cost of these services. New and disruptive companies now allow businesses to save on payment processing, get paid quicker, and pay their suppliers and vendors — all while gaining insights into cash flow and inventory management.

Xero joined forces with payment start-up Wise (formerly TransferWise) to manage accounts and process transactions, while Shopify introduced Shop Pay Installments, allowing customers to “buy now, pay later”. Even social media giant Meta introduced Shops, letting business profiles on its Facebook and Instagram platforms create virtual storefronts.

Consumers are using less cash

Cash and cheque use was declining before the pandemic. According to an EY study, Americans paid with cash about one-third of the time and used cheques as often as digital payments. Lockdown made digital payments mandatory. Before the pandemic, e-commerce accounted for 16% of all US retail sales. Eight weeks after quarantines began, that number jumped to 27%. Morgan Stanley reports the value of e-commerce sales at 25% in 2019, and Payments Canada says 62% of shoppers use less cash, while 42% avoid shopping at places that don’t accept contactless payments.

This great migration to cashless systems will continue as infrastructure increases the speed of transactions. Currently, it can take cheques two to five business days to clear, or up to ten days for large amounts. Meanwhile, debit or credit card transactions are virtually instantaneous. If the payor account has enough money or credit to fulfill the transaction, the payee receives the amount immediately. This is how e-commerce operates, though not without risks. A stolen or spoofed card could cost a retailer or consumer thousands of dollars. The need to authenticate payer identity online is critical.

Many innovative companies are taking up the security challenge. The use of digital wallets will likely grow. Big players like Apple and Google require biometric verification using fingerprints, face, or voice recognition to complete a transaction. Smartphones have become ubiquitous, even in emerging markets and the developing world. Small farmers can quickly and securely sell crops using their mobile device while safeguarding their digital cash. Seeing the benefits of such systems, companies like BanQu are developing blockchain technologies to provide safer transactions with lower fees.

Innovators fill the void

Digital payments represent a major opportunity for companies willing to innovate in the space and find problems that need solving.

Construction software manufacturer Harbr, for example, created a system to automate billing for contractors. Their product has relieved an industry-wide bottleneck so severe that federal and regional governments demanded builders pay their tradespeople faster.

While many payment apps focus on the retailer-customer interaction, SparcPay helps retailers pay their suppliers, securing transactions with encrypted connections and a protected database while insisting all members use strong passwords and recording transactions in a digital audit trail.

By stepping into these unexplored spaces, companies such as Harbr and SparcPay are making sure retailers willing to pivot to digital can thrive.

The future is digital

Digital payment systems of all sorts have seen explosive growth, rewarding ideas that help businesses adjust to the new normal. Companies like Drop, which supercharges consumers’ debit and credit cards and gets them rewards with brands like Uber, Grubhub, Sephora, and Starbucks on one app, are streamlining the payment experience on the consumer end.

Cryptocurrencies and associated technologies like NFTs and blockchain have risen in popularity, while central banks in at least 87 nations have considered a central bank digital currency (CBDC), which would have the same value as the local fiat currency.

The shift from cash to innovative digital payment systems has been growing for years, but the Covid-19 pandemic has undoubtedly accelerated this transition. Everyone in the field of business strategy is excited to see what revolutionary new ideas innovators bring to this emerging space, making people more comfortable with digital payments until cash is longer king.

About the author

Marcus Daniels is a founding partner and CEO of hybrid corporate venture studio and VC firm Highline Beta.