Last week, my mom and I went to a local greenhouse to buy herbs (garden centers were deemed essential businesses in Minnesota). As we approached the checkout, signs instructed us to place a credit card on our cart to pay for our plants. A sales associate took the credit card, swiped it, and placed it back on the cart with our plants.
Even before the COVID-19 pandemic, the world was quickly moving toward a purely digital financial system. In the fourth quarter of 2019, there were 454.7 million credit cards in use in the US, up from 429.9 million in the fourth quarter of 2018. Personally, I feel incredibly awkward every time I pay for coffee with cash (pre-pandemic, of course). Digital transactions via credit cards, apps like Venmo, and other financial technologies are becoming the norm in many places.
COVID-19 and the changing use of financial services
In the current era of social distancing and decreased human contact, COVID-19 has accelerated the shift toward credit and ecommerce. If you’ve shopped in person in the past two months, you probably paid with a credit card. Credit card usage for in-store transactions has increased by 3.4% in the US since January of this year. It’s likely to continue to increase as more people must rely on credit to make purchases amidst an economic downturn. Credit card payments are viewed as more hygienic than cash payments, presumably because they require less contact between consumer and merchant. Additionally, more businesses are accepting services like Apple Pay.
However, not everyone has access to credit, or to any financial services. Globally, 2.5 billion people don’t have access to traditional financial services. In 2017, almost thirty percent of Americans were unbanked or underbanked, meaning that they aren’t served by a bank or that they conduct financial transactions outside of the traditional financial system. Financial transactions such as paying rent or a phone bill are much more costly and time-consuming without access to credit and an insured financial institution. Extra fees and costs can amount to up to $500 for those who can’t afford mainstream financial services.
While the economic impact of state-mandated shutdowns is likely hitting the unbanked, who have an average annual income of $18,203, most hard, the pandemic may also be further excluding these individuals from the economy. Without access to credit, the unbanked cannot purchase essentials through Amazon or have their groceries delivered. If their local grocer or pharmacist no longer accepts cash, these individuals must find another way to pay or shop elsewhere. This makes daily life outside the financial mainstream even more burdensome.
The role of fintech in financial inclusion
For several years, fintech (the crossover between finance and technology) has been revolutionizing the way the world spends money. Fintech companies like PayPal, Venmo and Apple Pay make it easier than ever to transfer and spend money. These services make financial transactions contactless.
Fintech has also been leveraged to increase access to financial services for the unbanked. In their book Financial Inclusion at the Bottom of the Pyramid, Carol Realini and Karl Mehta describe how companies like M-Pesa in Kenya allow users to deposit and transfer money using cell phones and SMS technology.
While digital payment systems and financial technology can reduce the contact required for financial transactions and can increase access to financial services, they can’t replace human interaction. Accion, a nonprofit focused on microfinance and fintech impact investing, stresses the importance of human interaction for digital financial technology to be most impactful. Users may have limited product understanding or less trust in digital financial services, limiting the efficacy of these advancements.
COVID-19 has revealed and exacerbated inequality in many ways. As states and countries attempt to reopen their economies, it may be increasingly difficult to participate in the formal economy without access to traditional financial services, specifically a bank account and credit. Furthermore, an acceleration of the shift toward digital financial services threatens to leave almost a third of the US population outside of the mainstream financial system.
The COVID-19 pandemic has hosted a persistent tension between health and the economy. Perhaps this tension is seen most clearly in the anecdote of physical money: while some are privileged to use other forms of payment, those who depend on using cash may find it more difficult than ever to go about their daily lives.
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