New payment technology is putting the squeeze on paper money. Debates are raging about a new proposal from the Federal Reserve about a central bank digital currency (CBDC). It’s an important concept to discuss as fewer and fewer transactions each month involve paper money and more people are turning to payment innovations like cryptocurrencies and mobile payments.
In the US alone, $30 billion was invested in crypto currency in 2021. Millions of people opened digital bank accounts and downloaded payment apps on their phones during the pandemic, and these behaviors show no signs of slowing down.
At the same time, paper money plays a crucial role in our society. No matter what happens to a bank, or to an internet server, paper money offers a tangible alternative that many people still favor, and many businesses still embrace. But the question remains, is paper money important enough to survive the surge in digital innovation and interest in 2022 and beyond?
Consumers, businesses, banks and even the Federal Reserve are all pushing for more digital payment capabilities to enable faster, more efficient and cheaper transactions. Much of the momentum around digital payments comes from innovations within smartphones and apps. Apple Pay, Venmo, Stripe, all of these technologies are made possible by tech companies and their customers -— not banks.
For their part, banks have had to quickly innovate in order to stay relevant. They’ve had to keep up with customer demand to connect their accounts to these new, convenient payment technologies. For example, Early Warning, a technology entity that is owned by Bank of America, Truist, Capital One, JPMorgan Chase, PNC Bank, U.S. Bank and Wells Fargo runs Zelle, a quick digital payment system that processed 436 million payments in Q2 2021 after a surge of use in 2020 at the height of the pandemic.
The Fed has a history of innovating in order to support advances in payment needs, creating systems like the automated clearing house (ACH) to enable electronic replacements for paper checks. And they are working on a new interbank settlement service for instant payments. The FedNow Service is scheduled to debut in 2023, enabling commercial banks to provide payment services to households and businesses “around the clock, every day of the year, with recipients gaining immediate access to transferred funds.”
With so many headlines about smartphones and apps, it can be easy to overlook the millions of people who aren’t part of the digital economy, either by choice or because they aren’t able to afford it. Many people, from recent immigrants to those without smartphones/Internet access to small businesses and more, rely heavily on cash.
What’s more, paper money can give people true privacy in how they spend their money. And those who are particularly concerned about security and data privacy may be very resistant to digital payments for years to come, as digital payments come with detailed, online records that leave the door open for hacking and cybercrime.
For these reasons alone, eliminating paper money would be extremely difficult — and unfair. Until electronic payments are easily accessible to all, and equally beneficial to all, paper money will have a part in our economy.
The beauty of the US economy is its ability to evolve and grow. And that’s how it will be for payments for the foreseeable future. The benefits of having both paper money and digital currency available is that consumers, businesses and banks have flexibility to use the legal tender that makes the most sense for them.
Paper money clearly has an important place in the economy and is not going anywhere any time soon. That said, the benefits of digital payments — efficiency, speed, security, convenience — are simply too great to ignore, and it’s likely that digital payments will only grow in the future as technology improves and adoption increases.