How prepared are Albanians for the problems of replacing one payment system with another more advanced one?

Physical currencies have been the mode of economic transaction for thousands of years. Today, payment systems are becoming increasingly cashless. In the European Union (EU), one in five of all daily purchases in 2022 were made online and one third were made using a card.

The preference to use cash or digital methods varies. Based on the total EU population of all individuals aged 16 to 74, around 68% of respondents bought or ordered products or services online in the 12 months prior to the survey, an increase of 1% compared to 2021 [1]. In Albania, 38.5% of the population aged 16-74 have made online purchases in the last 12 months, with an increase from previous periods.

However, the trend towards digital payments is set to accelerate as the digital revolution becomes increasingly global. For example, in Sweden already only half of bank branches accept cash deposits, and in 2022, Europe’s six largest online-only banks had more than 34 million customers.

In parallel, emerging markets are digitizing their economies, moving from cash to digital payments bypassing the intermediate “card age”.

In developing countries, more people use mobile money transfer apps than own a bank account, and mobile money accounts are more common than bank accounts.

If the government is forced to intervene in the financial sector, it will have to consider the use of public services over cash and draft appropriate legislation to allow this, as a parallel transitional approach. Currently, digitalization for 95% of public services exists to provide access to essential services, but the problems that have arisen and are not being solved are increasing. Meanwhile, the private sector may not be willing to provide them as it is driven by the profit motive.

On the one hand, a legal obligation could force banks to offer accounts to vulnerable people who do not meet the typical criteria, allowing them to access a debit card.

The government has included in the Draft Mid-Term Revenue Strategy, 2022 – 2026 [2] a reduction of cash in circulation from 22% which has been found to 10% after 5 years. This has to do as a policy with the increase of transactions through the bank account of individuals at the points of sale and purchase.

But to advance further than that [3] and aiming to digitize an economy where 1/3 is informal and an economy where 90% of businesses are in services and retail trade would really create a very impossible situation to realize.

Imagine a scenario where supermarkets stop accepting cash. This would be devastating for vulnerable groups and the government must ensure that it has the ability to decide and guarantee the freedom to decide with free will and voluntarily accept changes such as: the payment system.

The shift from cash to card payments presents challenges for certain groups, including the unbanked, the elderly, and the working poor for minimum wages. These groups face barriers to accessing the financial system and can be economically isolated and vulnerable to fraud. Meanwhile, the banking digitalization that leads to the digitalization of money is an impossible mission for many, many years to come.

Policymakers should address these issues by protecting access to money or access to the financial system. This includes considering the use of public service obligations and promoting financial inclusion to ensure equal opportunities for all members of society.

Meanwhile, if the long-term goal is a cashless economy (an economy in which digital transactions exist, such as mobile payments, debit cards, credit cards and online banking), then an economy where cash transactions are replaced , then for individuals and businesses that will rely on digital payments for transactions, a long and gradual process of removing physical money from circulation must occur.

Systemic benefits…

Reducing cash in the economy can bring many benefits, such as an increase in accountability and transparency in the monetary system. It also helps track the flow of money and reduces financial fraud and crime.

With the elimination of notes and coins, a larger portion of the money supply would be in the form of virtual bank deposits. If banks have access to a larger supply of digital money, they can increase the volume of loans they make and improve lending costs. Moreover, not having excess physical money in circulation would make the economy more responsive to changes in central bank monetary policy, since physical money in the country is less sensitive to changes in interest rates than bank deposits. They can also improve tax revenues as tax evasion becomes more difficult.

So it seems that the reduction of cash in circulation has benefits that cannot be denied.

But, on the flip side, a cashless economy means vulnerable groups can become more isolated and increasingly vulnerable to scams by family, strangers or friends as they hand over their personal account details.

Possible short-term impacts from the reduction of physical money in circulation include:

– Claims related to the malfunction of software and hardware systems at the point of purchase/transaction, which are likely to increase.

– Liability claims may occur related to power outages, cyber-attacks and natural disasters resulting in shutdowns or malfunctions of the digital payment system.

– Even a seemingly functional digital/cashless economy involves the risk of discrimination claims. These may come from consumer protection/interest groups seeking compensation for individuals/population segments excluded from the market because they still use cash.

– The ability of customers to rapidly transfer money digitally increases the risk of bank runs and can have ripple effects on financial markets.

– A shift from physical theft to money transfer crime.

– A cashless economy creates a new product segment for cyber insurance.

However, digital payments require infrastructure: for example a network, electricity and functional devices (phone, smartphone, card etc.). Failure in any of these elements can paralyze an entire economy. At the consumer level, payment system disruptions include transactions at a point of service, at a point of sale. Furthermore, it may happen that wages are not/cannot be paid, or that an entire payment system does not work for whole days. Major disruptions caused by cyber-attacks, blackouts and natural disasters are a major threat to the cashless economy. But they also bring new opportunities for risk groups such as cyber security breaches and digital fraud.

Another risk is that many digital payment systems are privately run. This leaves households dependent on private businesses for access to cash and for day-to-day transactions. In the event of the bankruptcy of a private payments company, the guarantee of access to one’s electronic wallets may be at risk.

Individuals who lose the ability to save in physical currency may find their virtual savings more vulnerable to financial crises or the collapse of private banks. And some sectors that rely heavily on cash transactions (eg housing construction) may struggle.

This could see a rise in new business for re/insurers: cover for deposit guarantees created for non-bank payment providers, and digital wallet insurance.

All of the above are the problems of daily life and from what we have experienced to date, with that level of digitization of public services, we are drawn to accept hasty initiatives that do not take into account the physical reality of the country.

Big banks in many countries are pushing for a cashless society, mainly because they would benefit from complete control over consumers’ financial lives. But a cashless society won’t happen overnight, if ever.

[1] https://ec.europa.eu/eurostat/statistics-explained/index.php/E-commerce_statistics_for_individuals

[2] https://www.financa.gov.al/wp-content/uploads/2022/02/Strategjia-Afatmesme-e-të-Ardhurave-2022-2026.pdf

[3] when there is no certainty that the above target will be reached in only 10% cash turnover