What Is Systemic Decashing and Why It's Important for Emerging Markets?

Systemic decashing refers to the process of reducing or minimizing reliance on physical cash within an economy or financial system by promoting and facilitating digital transactions, electronic payments, and cashless alternatives. This shift away from cash-based transactions towards digital and electronic forms of payment is aimed at enhancing efficiency, transparency, financial inclusion, and security within the financial ecosystem.

The sun is setting on cash's reign, with its dominance at the point of sale slipping to a maximum of 44% regionally and a mere 18% globally in 2021 according to the FIS Global Payments Report 2022. By the close of 2025, its presence will dwindle to just 10% worldwide, as North America, Asia-Pacific, and Europe lead the exodus from physical currency.

In 2022, cash utilization saw a global drop of nearly four percentage points from the previous year. Specifically, India experienced a 7% decrease in cash transactions, while Brazil saw a more substantial decline of 10%. It's noteworthy that these declines occurred as a direct and indirect consequence of the presence of robust real-time payment systems like UPI in India and Pix in Brazil.

In the fiscal dance of 2023, the utilization of cash waned, comprising merely 16% of the vast expanse of global point-of-sale expenditures—nearly $6 trillion, witnessing a descent of 8% in transaction worth compared to the preceding year. The prophecy for cash is one of further decline, estimated at -6% compound annual growth rate until the year 2027, where it is anticipated to hold sway over 11% of the global point-of-sale spending, amounting to an excess of $4.6 trillion.

Between 2019 and 2022, Nigeria witnessed a significant shift in transaction trends. Cash's dominance plummeted from 95% to 80%, while instant payments surged fourfold to command an 8% share. The nation now boasts 1.8 million operational PoS terminals, facilitating transactions that soared to ₦1.1 trillion ($1.1 billion), up from ₦718.5 billion ($756 million) in the corresponding month of 2022. Additionally, the Association of Mobile Money and Banking Agents of Nigeria (AMMBAN) boasts a database of over 1.7 million banking agents, further accentuating the digital transformation in Nigeria's financial landscape.

The pandemic's arrival hastened this decline, precipitating a 32.1% plunge in cash usage at POS terminals globally in 2020. While this descent eased to 12.2% last year, Asia-Pacific the Middle East, and Africa saw sharper declines. Meanwhile, digital payment avenues are capitalizing on this shift, with digital and mobile wallets projected to claim the lion's share of global POS transaction value in 2025, at 39%.

But KwikAlat is reimagining this story.

Share of Point-of-Sale Transactions Made with Cash, by Region, 2021 & 2025 (% of total point-of-sale transaction value)

Why It's Important for Emerging Markets?

Fintechs are critical for the advancement of systemic decashing, particularly when it comes to their relationship with legacy financial institutions. The engine for much of this revenue expansion in fintech was emerging markets. In 2022, fintech earnings from Africa, Asia-Pacific (excluding China), Latin America, and the Middle East accounted for 15% of the global fintech revenue. Projections suggest that this figure will surge to 29% collectively by 2028 (McKinsey). Systemic decashing is particularly important for emerging markets for several reasons:

  1. Financial Inclusion: Encouraging digital payments and reducing cash reliance can improve access to financial services for underserved populations, including individuals in rural areas and those without traditional banking accounts. Digital financial solutions enable people to participate in formal financial systems, build credit histories, and access various financial products.
  2. Cost Efficiency: Transitioning to digital payments can reduce the costs associated with cash handling, transportation, storage, and security. For businesses, governments, and financial institutions, digital transactions are often more cost-effective and efficient compared to cash-based operations, leading to potential savings and increased productivity.
  3. Transparency and Accountability: Digital payments leave a traceable and auditable trail, promoting transparency and accountability in financial transactions. This can help combat corruption, money laundering, and illicit activities by providing greater visibility into financial flows and ensuring compliance with regulatory requirements.
  4. Security: Digital payment systems often incorporate robust security measures such as encryption, authentication protocols, and fraud detection mechanisms. This enhances the security and integrity of financial transactions, reducing the risks associated with cash-related crimes such as theft, counterfeiting, and unauthorized access.
  5. Economic Growth: A shift towards digital payments and reduced cash reliance can stimulate economic growth by facilitating faster, more efficient, and scalable transactions. Digital financial ecosystems enable businesses to expand their customer base, access credit and capital, and participate in global markets, fostering entrepreneurship, innovation, and economic development.
  6. Data Analytics and Insights: Digital payment platforms generate valuable data and insights that can be leveraged for financial analysis, customer profiling, risk management, and decision-making. By harnessing data analytics, emerging markets can better understand consumer behavior, market trends, and economic dynamics, enabling targeted interventions and strategic initiatives.

How Is Systemic Decashing Related to Systemic Risk and How Does It Reduce It?

Systemic decashing, reducing reliance on physical cash and promoting digital transactions, is intricately linked to mitigating systemic risk within financial systems. Here's how it tackles systemic risk:

  1. Diversification of Risks: By encouraging digital payments and reducing cash transactions, systemic decashing diversifies the risks associated with cash-based operations. Cash-related risks such as theft, loss, and physical damage are minimized, reducing the potential impact of these risks on the overall financial system. Additionally, digital transactions continue even if physical infrastructure (like ATMs or bank branches) is disrupted, reducing the likelihood of widespread panic or financial instability during crises.
  2. Enhanced Transparency: Digital transactions leave a clear, traceable trail of financial activities. This transparency enhances regulatory oversight, risk monitoring, and compliance enforcement, reducing the likelihood of fraudulent activities, money laundering, and illicit financial flows that can contribute to systemic risk.
  3. Improved Data Analytics: Digital payment platforms generate vast amounts of data that are analyzed to identify potential risk factors, trends, and anomalies. Data analytics tools can help financial institutions and regulators detect early warning signs of systemic risks such as liquidity shortages, credit defaults, and market disruptions, enabling proactive risk management strategies.
  4. Efficient Risk Assessment: With digital payments, financial institutions can conduct more accurate and timely risk assessments of their customers, transactions, and portfolios. Enhanced risk assessment capabilities enable banks to better identify and mitigate credit, operational, and market risks, reducing the systemic impact of individual risk events.
  5. Resilience to External Shocks: A digitized financial ecosystem with decreasing reliance on cash is more resilient to external shocks and disruptions. During crises or emergencies, digital payment infrastructures stay functional, facilitating business continuity, emergency fund transfers, and economic stabilization efforts, thus mitigating systemic risks associated with financial disruptions.
  6. Strengthened Governance and Controls: Systemic decashing promotes the adoption of robust governance frameworks, risk management practices, and internal controls within financial institutions. This strengthens the overall resilience of the financial system by fostering a culture of risk awareness, accountability, and compliance with regulatory standards and best practices. Central banks often implement systemic decashing measures as part of their monetary policy toolkit. For example, they may encourage electronic payments, promote the utility of digital wallets, or implement policies that discourage the hoarding of physical cash. These measures give central banks more flexibility in managing monetary policy, responding to economic shocks, and stabilizing financial systems during periods of stress.
  7. Collaborative Risk Mitigation: Digital payment ecosystems facilitate real-time collaboration and information sharing among financial institutions, regulators, and other stakeholders. This collaborative approach to risk mitigation allows for coordinated responses to systemic risks, effective crisis management, and the implementation of preventive measures to safeguard the stability and integrity of the financial system.

How KwikAlat Addresses Systemic Risk and Enhances Systemic Decashing

KwikAlat plays a pivotal role in lowering systemic risk and bolstering systemic decashing within financial ecosystems through several key mechanisms:

  1. Digital Payment Infrastructure: KwikAlat provides a robust digital payment infrastructure that enables seamless person-to-person (P2P) and business-to-business (B2B) transactions without the need for physical cash or traditional banking instruments like cards. By facilitating direct account-to-account (A2A) transfers, KwikAlat reduces the reliance on cash-based transactions, minimizing the operational and security risks associated with handling physical currency.
  2. Enhanced Security Measures: KwikAlat implements advanced security measures, including encryption protocols, multi-factor authentication, and real-time transaction monitoring, to safeguard digital transactions against fraud, unauthorized access, and data breaches. These security enhancements bolster trust in digital payments and mitigate the risk of financial crimes that can pose systemic threats to the entire financial ecosystem.
  3. Risk Diversification: By promoting the adoption of digital payment channels, KwikAlat contributes to risk diversification within the financial system. Digital transactions spread across multiple channels and platforms reduce concentration risk and minimize the impact of disruptions in any single payment method, enhancing overall system resilience and stability.
  4. Transparency and Traceability: KwikAlat's digital payment infrastructure enhances transparency and traceability in financial transactions. Every A2A transfer leaves a clear audit trail, allowing for better risk assessment, fraud detection, and regulatory compliance. The transparency provided by KwikAlat's platform contributes to a more accountable and risk-aware financial environment.
  5. Data Analytics for Risk Management: KwikAlat leverages data analytics tools and machine learning algorithms to analyze transaction patterns, detect anomalies, and identify potential risk factors in real-time. By harnessing the power of data-driven risk management, KwikAlat helps financial institutions proactively mitigate systemic risks such as credit defaults, liquidity shortages, and operational disruptions.
  6. Collaborative Risk Mitigation: KwikAlat fosters collaboration among financial institutions, regulators, and technology partners to collectively mitigate systemic risks. Through information sharing, best practices dissemination, and joint risk assessment initiatives, KwikAlat contributes to a more coordinated and effective approach to systemic risk management within the financial ecosystem.
  7. Innovative Solutions for Cash Acquisition: KwikAlat offers innovative solutions, such as partnerships with Superagents for liquidity management, that streamline cash acquisition processes for banks, microfinance institutions (MFIs), mobile money providers, and governments. These solutions bring down the reliance on physical infrastructure, minimize costs, and enhance efficiency, supporting systemic decashing efforts.

How KwikAlat Enables Legacy Financial Institutions to Power Systemic Decashing

KwikAlat capacitates systemically critical legacy financial institutions, particularly banks, to direct systemic decashing initiatives through several strategic capabilities and collaborative efforts:

  1. A2A Network Integration: KwikAlat seamlessly integrates with existing banking infrastructure, allowing legacy financial institutions to leverage its A2A network for efficient and secure account-to-account transfers. By incorporating KwikAlat's digital payment solutions into their systems, banks offer customers and businesses convenient alternatives to cash & card-based transactions, cutting back reliance on physical currency and cards.
  2. Reduced Cash Handling Costs: Banks incur significant costs related to cash handling, including transportation, storage, and security. KwikAlat's A2A network diminishes these costs by promoting digital transactions, eliminating the need for physical cash movement. This cost reduction incentivizes banks to transition towards cashless operations and invest resources in digital payment innovations.
  3. Enhanced Customer Experience: KwikAlat augments the general customer experience for banks by providing faster, more convenient, and secure payment options. Customers benefit from coherent fund transfers, instant notifications, and real-time transaction tracking for higher satisfaction levels and magnified loyalty toward banks offering KwikAlat-enabled services.
  4. Risk Mitigation and Compliance: KwikAlat incorporates advanced security measures and regulatory compliance frameworks into its A2A network, mitigating risks associated with cash-based transactions and financial crimes. Banks partnering with KwikAlat gain access to robust risk management tools, fraud detection capabilities, and compliance support, ensuring adherence to industry standards and regulatory requirements.
  5. Data Analytics for Strategic Insights: KwikAlat leverages data analytics and artificial intelligence to provide banks with actionable insights into customer behavior, market trends, and transaction patterns. This data-driven approach enables banks to optimize their product offerings, tailor services to customer needs, and identify opportunities for systemic decashing initiatives based on market demand and regulatory dynamics.
  6. Partnerships for Ecosystem Development: KwikAlat collaborates with banks, regulators, fintechs, and industry stakeholders to co-create innovative solutions that promote systemic decashing. Through strategic partnerships, banks leverage KwikAlat's expertise, network reach, and technological capabilities to pioneer cashless initiatives, drive financial inclusion, and contribute to economic development in their respective markets.
  7. Educational and Awareness Campaigns: KwikAlat conducts educational programs and awareness campaigns to educate banks and their customers about the benefits of digital payments, systemic decashing strategies, and best practices for transitioning to cashless economies. Thus, fostering a culture of digital finance literacy and promoting responsible financial behavior, KwikAlat empowers forward-thinking institutions to lead in systemic decashing efforts effectively.

KwikAlat empowers legacy financial institutions, including banks, to power systemic decashing by providing seamless integration, cost savings, enhanced customer experiences, risk mitigation, data-driven insights, strategic partnerships, and educational initiatives. Therefore, by harnessing the transformative potential of digital payments and collaborative ecosystem development, banks can play a pivotal role in advancing systemic decashing agendas and building resilient, inclusive, and sustainable financial ecosystems.

KwikAlat's comprehensive suite of digital payment solutions, coupled with its focus on security, transparency, data analytics, and collaborative risk mitigation, positions it as a catalyst for diminishing systemic risk and accelerating systemic decashing in financial markets. Accelerating the transition towards cashless economies and promoting responsible digital finance practices, KwikAlat contributes to building more resilient, inclusive, and sustainable financial systems.

Systemic decashing contributes to shrinking systemic risk by empowering diversification, transparency, data-driven risk management, resilience, governance, and collaborative risk mitigation within financial ecosystems. Embracing digital innovations and reducing cash-related vulnerabilities, financial systems become more robust, adaptive, and capable of navigating complex risk landscapes with greater stability and confidence.

Systemic decashing drives financial inclusion, economic modernization, and sustainable development in emerging markets, unlocking opportunities for individuals, businesses, governments, and financial institutions to thrive in a digitized and interconnected financial landscape.