Why do we say digital “disruption” has become the new normal? Isn’t it great people are adapting to the digitised world, meaning it’s not disruption – it’s development. One of the major concepts that has gone through layers of digitisation and is heavily impacting people around the world is MONEY!
In other words, the payment methods that were once based on cash are now becoming cashless. Interestingly, societies are accepting the change by transitioning from traditional physical payments, such as regular cash, to mobile payments, and digital wallets and now, the central stage is – Central Bank Digital Currencies (CBDCs).
In this article, let’s see how the future of digital wallets is creating financial inclusion.
Cashless Societies– How Did They Come into Play?
Did you know ATMs were introduced in the 1960s? But decades ago, people would have frowned upon the idea of contactless payments and cashless societies. But now, it’s the other way around because of the limitations related to traditional money. Carrying a large amount of physical money is risky and challenging. Cash payments are not as traceable as contactless payments and they are highly insecure when compared to digital payments.
The way traditional cash transformed into digital payment isn’t surprising. The world was witnessing globalisation and with that, it’s nearly impossible to let money be in its raw form as the level of security is highly volatile. Along with globalisation, technological advancement also played a huge role in moving from cash to digital payments. Smartphones, digital payment platforms, digital banking, and even blockchain in finance have empowered a cashless society.
People understand that there are countless advantages to digital money, such as speed, convenience, reduced costs for businesses, better security, and importantly financial inclusion.
Financial Inclusion – What is It?
Secure payment solutions or digital payments are not only about offering convenience and ease, there is an underlying issue that’s being addressed – financial inclusion. If you look at a cashless society, you’ll see how previously overlooked individuals in a society can now become a part of the financial system.
It’s, in fact, one of the key policies that central banks developed to include low-income countries in the overall financial system. If implemented correctly, CBDCs (more on this later) have the power to create inclusivity. They can become the chance of entry for people around the world to access risk-free globally accepted digital payment systems.
Below are some of the reasons why financial inclusion is vital:
- It can help reduce poverty. According to the World Bank, it’s one of the main enablers with the potential to reduce poverty through shared prosperity.
- It can lead to economic expansion through increased opportunities for businesses and investments.
- It can reduce income disparity as it offers equal financial access to marginalised populations, including rural communities, women, and many other groups.
- It can foster more solid financial stability when a higher population has access to financial technology (Fintech).
Among these, CBDCs stand as the potential payment innovation that can drive the change for global financial inclusion.
What are Central Bank Digital Currencies (CBDCs)?
CBDCs are state-backed digital currencies that are like regular cash. Even though you can see a pattern of cryptocurrency adoption, CBDCs are not decentralized, rather they aremanaged by the central bank. They offer similar benefits to regular cash but with the convenience of digital payments. Apart from that, CBDS are introduced to:
- Give access to financial services to people who are marginalised in many developing countries.
- To offer financial security, accessibility, convenience, and privacy for businesses and their customers through a government-backed digital payment system.
- To reduce the maintenance costs, cross-border transaction fees, and other similar challenges faced by those who use other digital payment-transfer options.
- To provide an alternative to other digital currencies with higher risk, such as cryptocurrencies.
Several decentralised digital payment options are highly volatile. This could create distress in families and businesses that use such digital payments, ultimately affecting the economy. Through a government-backed payment like CBDCs, the focus is to create centralization through the central bank, making the payment option less volatile. This will help businesses, consumers, and households to use digital currencies without worrying about the risk of volatility.
However, there are several challenges to CBDCs, but many countries, including the US, India, China, and Italy are testing the waters to see how effective this could become.
Conclusion
According to financial expert Darrell Duffie, digital currencies are here to stay. He finds it hard to imagine 100 years from now, people reaching for their pockets to pay in traditional cash. From traditional cash, ATMs, online payments, blockchain payments, and digital currencies, to now Central Bank Digital Currencies (CBDCs), the system of finance is driving a real change.
It’s working toward making real-time payments through digital wallets a possibility for people around the world – financial inclusion. Cashless societies are a possible future that the world can dream of!