Financial Services Bulletin
One of the impacts of the COVID-19 pandemic has been a significant decrease in the use of cash for day-to-day transactions. To a large degree, this has been involuntary, as many retailers have stopped accepting cash for health and safety reasons.
It is possible that this is a temporary effect, and that the use of cash will return to pre-pandemic levels once there is no longer the need for social distancing and other measures to mitigate the spread of COVID-19. However, this is an acceleration of a pre-existing trend, and we think it is more likely that it will have lasting effects. In other words, Canadians were already using cash less frequently, and now that consumers and retailers have gotten more accustomed to alternative payment methods such as contactless debit or credit card transactions, they may never go back. This bulletin situates the rise in non-cash payments as a result of COVID-19 in the broader context of payments trends, and considers some of the potential implications for payments in Canada.
Recent Trends in Payment Methods
According to the 2019 Canadian Payments Methods and Trends Report published by Payments Canada (the "Payments Canada Report"), the move away from cash and toward alternative payment methods at the point-of-sale, specifically electronic payment methods, was already a growing trend before the COVID-19 pandemic began. According to the Payments Canada Report, in 2016, debit card transactions surpassed cash transactions in terms of volume.1 In 2018, the volume of both debit card transactions and credit card transactions surpassed the volume of cash transactions.2 The volume of debit card transactions and credit card transactions in 2018 increased by 4% and 5%, respectively, while the volume of cash transactions declined by 9%. 3 2018 also saw a significant increase in the use of contactless payment transactions at the point-of-sale, increasing by nearly 30% in terms of both volume and value.4
In light of the COVID-19 pandemic, card brands including Visa and MasterCard have increased their limits for contactless transactions (up to $250 from the previous limit of $100), allowing consumers to more frequently use this method of payment. Interac has also said that it has been working with its partners to enable contactless payments where this method may not currently be accepted.
According to a Payments Canada publication, 62% of Canadians reported using cash less as compared to pre-COVID-19. The same publication reported that 31% of Canadians who used to be weekly users of Interac e-Transfer, 29% of Canadians who used to be weekly users of PayPal and 28% of Canadians who used to be weekly users of credit cards have all reported an increased or more frequent use of these payment methods. In addition, 53% of Canadians reported using card or mobile tap payment for in-store purchases more often than they did pre-pandemic.5
The Payments Canada Report points to convenience and rewards as important drivers of the growth of electronic payments.6 In the current circumstances, and for the foreseeable future, additional considerations driving consumers to opt for electronic payment methods over cash are the potential contamination associated with bank notes and coins as well as an effort to limit unnecessary contact with others and to limit trips to banks or ATMs7 as much as possible. Concerns regarding potential contamination associated with point of sale terminals are also leading to an increase in contactless payments.
A further factor driving the move away from cash is an increase in online shopping. Online retail transactions (vs. in person retail transactions) have dramatically increased as a result of COVID-19. A recent Payments Canada study has shown that 38% of Canadians are using e-commence platforms to get different products more often.8 Like the move away from cash, we think this likely represents a permanent acceleration of a pre-existing trend.
Regulatory Changes to Support Electronic Payments
There have been a number of regulatory initiatives that support the adoption of electronic payment methods. In January of this year, Payments Canada's Rule E5 (Exchange of Point-of-Service Delayed Authorization Debit Payment Items for the Purpose of Clearing and Settlement) came into effect. This rule enables broader point-of-sale debit card acceptance by removing the requirement for merchants to have consistent online connectivity to accept debit payments, and is designed to accommodate debit card payments for high volume, lower dollar value transactions such as public transit services. For additional information on Rule E5, please see our prior bulletin "New Payments Canada Rule Enables Wider Use of Debit Cards".
Another regulatory initiative with implications for electronic payments is the ongoing consultation regarding open banking, which can involve consumers and businesses being able to authorize third-party service providers to initiate payments on their behalf. Stakeholder consultations regarding the merits of open banking were scheduled to take place this spring, but have been delayed due to the COVID-19 pandemic. For additional information on the developments regarding open banking, please see our prior bulletins "Government Launches Review Into Open Banking", "Open Banking: A Call to Action from the Senate Committee on Banking Trade and Commerce" and "Open Banking Update: Advisory Committee Releases Report of Consumer-Directed Finance".
Potential Concerns with the Reduced Use of Cash
Although there are a number of benefits associated with the accelerated move away from cash, reducing the use and acceptance of cash also raises a number of concerns, including the consequences that this will have on unbanked or underbanked Canadians. Even during the current COVID-19 pandemic, the Bank of Canada has strongly urged retailers to continue to accept cash in order to ensure Canadians have access to the goods and services they need, and has emphasized that refusing to accept cash altogether would put an undue burden on those people who depend on it as a payment method and who may have limited alternative payment options.9
In addition to access to cash for people who rely on it, as noted above, other potential concerns with the move away from cash and toward more electronic payments include the functioning of electronic payments systems in emergency situations, such as a power outage or major cyber incident, as well as privacy impacts such as the lack of anonymity associated with electronic transactions.10
The shift away from cash in favour of electronic payment methods has likely been permanently accelerated by the COVID-19 pandemic, which has driven many consumers to increasingly consider contactless electronic payment options for transactions where they previously would have used cash.
This will likely continue to provide opportunities for emerging fintech and paytech companies that offer new ways for merchants to accept electronic payment methods. This may also result in further calls for the adoption of a framework for open banking to give consumers more control over and options for payments. While the consultations on this topic are currently on hold, they could come back with a vengeance.
Ultimately, the increase in electronic payment methods could also contribute to the shift toward a more fully digital society, including, for example, the potential issuance of a central bank digital currency.
1 Payments Canada, "2019 Canadian Payments Methods and Trends" (pdf), pg 10 [2019 Canadian Payments Methods and Trends].
2 2019 Canadian Payments Methods and Trends, pg 13.
3 2019 Canadian Payments Methods and Trends, pp 13, 15 and 16.
4 2019 Canadian Payments Methods and Trends, pg 19.
5 Payments Canada, "COVID-19 Pandemic Dramatically Shifts Canadians' Spending Habits" (13 May 2020), [COVID-19 Pandemic Dramatically Shifts Canadians' Spending Habits].
6 2019 Canadian Payments Methods and Trends, pg 12.
7 COVID-19 Pandemic Dramatically Shifts Canadians' Spending Habits.
8 COVID-19 Pandemic Dramatically Shifts Canadians' Spending Habits.
9 Bank of Canada, "Bank of Canada Asks Retailers to Continue Accepting Cash" (13 April 2020).
10 Bank of Canada, "How Canadians Pay for Things".
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.