Bundestag: Experts warn of “world without cash”

In a new study, the Office for Technology Assessment at the German Bundestag (TAB) has analyzed changes in the classic banking and payment systems and the associated power structure. In summary, it warns of a “world without cash” and the increasing influence of big tech companies from the USA and China on the financial system. This means that in the future “the question of maintaining the ability of the European banking system to act will arise more strongly”.

“Compared to cashless means of payment, cash is an important corrective in payment transactions,” emphasize the researchers from the Karlsruhe Institute of Technology (KIT), who operate the TAB, together with their cooperation partners. No debit or credit card, and certainly not Bitcoin and other virtual coins, achieved “a similarly high level of inclusion.” The protection of privacy is by no means comparable.

“Nevertheless, the use of cashless means of payment is also increasing in Germany,” the scientists have noticed. The decline in cash use by 14 percentage points between 2017 and 2020 to 60 percent is significant. However, this could “essentially have been caused by pandemic-induced catch-up effects”. Then the minus should settle down to the usual one percent per year in the next few years.

According to the study, card-based payment methods are currently of particular importance. This is done either directly with the debit or credit card at the physical point of sale or with a virtual solution for mobile payments and Internet solutions “through which cashless payment methods are processed in the background”. In addition to the corona pandemic, the drivers are price, availability and distribution of basic technologies, consumer wishes and innovative payment approaches.

The authors see the advantages of cashless payment solutions in their applicability in e-commerce and in cross-border payment transactions and in protective mechanisms. The security and data protection level of the respective approaches is very different. Paying with debit cards can be rated as relatively safe compared to many other non-cash payment methods. Privacy is not eroded that much either. Credit cards fared worse on both counts.

With newer online variants such as PayPal & Co. and mobile payment, data protection is even lower than with card payments, the authors point out: Information is also collected and processed here “that is not directly related to the payment process”. With mobile payment, however, at least tokens are used in addition to general authentication mechanisms, which somewhat limits misuse. An additional security factor is given when biometric features are required to unlock the smartphone.

“With some cashless payment methods such as immediate transfer, the principle of systematic IT security is violated,” criticizes the TAB. According to this, “new access data should be used for every registration process and service provider” that is not known for any other service or third party. According to the second EU Payment Services Directive (PSD2), however, this is permissible.

According to the study, large companies with established tech platforms such as Alibaba, Amazon and Facebook are “established players in payment transactions”. Their motives for entering the market and the business models they pursue are diverse. They ranged from collecting data for advertising purposes, to keeping customers in your own ecosystem for as long as possible, to collecting fees by offering relevant products. As payment “becomes more and more of an integrated function, banks run the risk of becoming behind-the-scenes processors and thus losing their visibility with customers”.

The researchers have identified initiatives for products for different payment situations under a European umbrella brand that are based on instant payments as the central ideas of the central banks in the EU in order to stand up to Big Tech. The aim would be real-time transfers, in which the transfer of funds takes only a few seconds. A European card system is also planned. It remains to be seen whether these plans can be realized in the near future.

The scientists also shed light on the effects of crypto assets with a payment function. These could be used, for example, to process fast and inexpensive cross-border transactions, but so far they have led a niche existence in payment transactions. Meanwhile, cryptocurrencies that are not linked to the US dollar & Co., such as Bitcoin, “did not fulfill the money function due to their price volatility caused by speculation”. Above all, they were not suitable as a store of value. Furthermore, because of many of their important properties, they are “often used for criminal purposes”.

According to the study, the prospect of a globally available private digital currency, driven primarily by Facebook, has led many central banks to consider introducing their own digital central bank currencies or to accelerate existing projects to this end. Depending on the design of such a Central Bank Digital Currency (CBDC) around anonymity, data protection and security, such approaches could “similar to cash have a corrective function with regard to the product design of private payment service providers”.

With CBDC, payment flows can be better controlled, the authors state. This would make it easier to combat money laundering and terrorism. In the hands of authoritarian regimes like China, however, the activities of system critics and ordinary citizens could also be more easily monitored. The Middle Kingdom generally seems to have made the most progress in the CBDC area. In mid-2021, however, the European Central Bank also decided to explore the potential of an e-euro more closely. In general, the introduction of digital central bank money would be “a significant break in the current monetary and banking system”.

The researchers can also imagine that the experiences from the pandemic “grow curiosity about the variety of cashless payment solutions and the products and services that can be combined with them”. In connection with a uniform payment solution for all channels supported by German banks, a European card system according to European data protection standards and a digital euro that is available in the future as an alternative legal means of payment, this could significantly exacerbate the decline in cash use.

From the 2030s onwards, “the need for legal standards for a basic supply of cash like in Sweden” might have to be considered, the conclusion reads. Coins and bills hardly played a role there. In response, the government in Stockholm has not only pushed ahead with its e-crown project, but also enacted a law aimed at restoring and guaranteeing the level of cash supply in 2017. According to the TAB, such countermeasures raise the question of the costs of providing the cash infrastructure including ATMs and taking them over.


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