Pandemics, Payments, and (Digital) Property

Pandemics, Payments, and (Digital) Property

INSIGHTi
Pandemics, Payments, and (Digital) Property
March 10, 2021
Many people have heard the phrase “cash is king,” but is that stil true? Even in today’s digital world,
cash is stil an important tool for retail transactions among many consumers, and some stil rely on it. But
today, electronic payments are the primary mechanism for consumers to use money.
Electronic payments are an old concept. For 60 years, Americans have been using cards that, when
swiped, send a signal electronical y to financial institutions to make a transfer of funds from the purchaser
to the sel er. Congress first passed the Electronic Fund Transfer Act (P.L. 95-630) in 1978 to regulate
debit card transactions. Today, debit cards are the most common tool for consumer retail payments. But
new forms of electronic payment have emerged for consumers ranging from prepaid cards to digital
wal ets to cryptocurrencies and other forms of digital assets.
One of the byproducts of the Coronavirus Disease 2019 pandemic is an economic environment that
encourages electronic payments. Perhaps not coincidental y, the universe of electronic payment options
has increased substantial y, with a few new types of tools gaining prominence in the past year.
This Insight looks at how the pandemic has impacted consumer payments and how some of these trends
are altering the way consumers pay for goods and services. Additional y, it considers how a prolonged
pandemic economy may contribute to a new level of comfort among consumers seeking to use innovative
payment options and how this may impact the future payments landscape.
Mobile Payments, Contactless Payments, and the
Potential Decline of Cash
Before the pandemic, 82% of consumers used cash, and almost 92% used electronic payment cards.
Federal Reserve survey data shows that in 2019, nearly 35% of payments were made with debit cards and
24% were made with credit cards, while cash comprised less than 22% of transactions.
Electronic payments occur in two ways: card present and card-not-present (CNP). Card present
transactions are purchases where the consumer presents a card in person and pays at a register.
Alternatively, with CNP transactions, the consumer provides payment account information remotely over
the phone or through the internet. CNP transactions accounted for 27% percent of debit transactions and
40% of debit transaction value in 2019.
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Mobile payments, which are conducted with a mobile phone through a webpage or an app, have become
more popular as smartphones have gained popularity. According to Pew Research Center, over 80% of
Americans own smartphones. Further research by the Pew Charitable Trusts suggests that in 2018, over
half of Americans used smartphones to make a payments. Mobile payments are not real y a new payment
type; instead, mobile phones simply facilitate other types of payments, such as debit and cards, by storing
the account data in an app or al owing the consumer to input that information in an internet-based
payment window. In other words, mobile payments facilitate CNP transactions.
Has the Pandemic Facilitated More Fundamental Innovation?
The response to the pandemic has led to a significant increase in remote work and online commerce. With
fewer people going to storefronts to shop or dine, the role of in-person, cash transactions in the retail
economy has become increasingly marginalized, at least temporarily. The pandemic has created a unique
environment that fosters the use of mobile payments and other electronic payment innovations. For
example, demand for “contactless payments”—remote payments made without having to physical y hand
a payment to a merchant or press buttons—has increased. This rise in demand has, at least temporarily,
reduced demand for cash transactions. Mobile payments are wel -suited to remote forms of contactless
payments. Another innovation that predates the pandemic is card readers that al ow many card holders to
tap or wave their cards near payment terminals to complete transactions. (This technology has existed for
some time and is also used in, for example, the Washington, D.C. Metro’s SmarTrip card.)
These mobile and contactless payment methods rely on underlying payments technology that was built
decades ago. They are essential y new ways to do old things: send money between bank accounts using
debit and credit card infrastructures. The recent advent of blockchain-based payment innovations such as
cryptocurrencies and other digital assets may present an opportunity to change the landscape of consumer
payments more fundamental y. Until recently, these new products—such as Bitcoin, Ethereum, and
Facebook Libra—appeared to be niche products, but there is the possibility that the pandemic has laid the
groundwork for consumers to adopt these new payment methods.
One new adaptation of these digital assets that poses interesting prospects for property ownership in the
post-pandemic digital age is the use of smart contracts in non-fungible tokens (NFTs), which al ow people
to purchase the rights to digital assets such as photographs, videos, highlights, and music without the need
for a third party to validate the contractual transfer of property. (NFTs were made popular by the
blockchain-based game CryptoKitties, where players can buy and trade virtual cats using NFT
technology.) The proliferation of blockchain-based transaction tools has given consumers no shortage of
alternative payment options; the question is whether these products wil become mainstream enough to be
widely used in serious, everyday transactions. Some anecdotal examples suggest they may: Real estate
offerings are accepting Bitcoin, and recently Tesla announced that it would accept Bitcoin to purchase
vehicles. However, these technologies are a long way from widespread adoption and face numerous
obstacles to achieving ubiquity.

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Author Information

Andrew P. Scott

Analyst in Financial Economics

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