Around the Fed

Digital Payments and the Path to Financial Inclusion

Payments innovations can offer unprecedented convenience and provide a glimpse into the rapidly unfolding future of technology. But these innovations also have the potential to further exclude people who may be less likely to have access to digital payment methods, including low- and moderate-income families. In a recent paper, Shifting the Focus: Digital Payments and the Path to Financial Inclusion (Off-site), the Federal Reserve Bank of Atlanta looks at opportunities to enhance economic mobility and resilience for those without access to digital payments, especially those relying on cash as a primary payment method and without access to a traditional bank account.

Overall, 4.8% of consumers have neither credit nor debit cards, and that number jumps to 14.4% among the three lowest-income categories.1 According to the paper, 88% of those with no card also do not have bank account access. In other words, those with the lowest incomes and lowest levels of economic resilience are much more likely to have limited access to the digital financial system. To address this discrepancy, the Federal Reserve highlights three approaches that could help safeguard cash-based consumers from getting left behind during this period of rapid digitalization. The opportunities and challenges of each are summarized below.

1. Preserving cash

Maintaining the infrastructure needed for a cash economy is one way to ensure the payment system remains accessible to everyone. Cash payments are immediate and provide final settlement; they can be used anonymously and are available regardless of social status, creditworthiness or demographic group. However, facilitating the continued use of cash may hurt consumers who are otherwise unmotivated to adopt digital solutions. In some cases, it also could perpetuate the use of a less efficient payment method for both businesses and consumers.

2. Bridging the gap

A second potential approach to promote inclusive payments is preserving the use of cash temporarily while promoting the access and use of innovative payments options for cash-based users. These payment tools could be used to support a transition to digital payments while still meeting the needs of cash-based users. To achieve this, it is important to consider which benefits offered by digital payments offer enough incentive for a shift in behavior. Strategies to address these barriers may include cash-in/cash-out (CICO) networks, which enable consumers to convert their physical cash into digital money, and/or public banking, a single institution offering everyone access to a basic transactional account.

3. A cashless future

The Federal Reserve Bank of Atlanta’s paper outlines risks and challenges associated with moving toward a completely cashless economy, which would require implementation of policies and strategies to ensure the payment system is accessible to everyone. For example, mobile and broadband access is not always available to low-income Americans, and going cashless would require bridging a digital divide for the 19% of Americans who do not own a smartphone and the 25% of adults who do not have access to broadband internet at home.2

Instant payments could encourage some cash users to transition to digital payments sooner given some of the features offered could be similar to cash payment characteristics, including the ability to better manage their finances. For example, instant payments can facilitate time-sensitive payments, such as bill payments or person-to-person payment methods that do not require both the payer and recipient to set up an account with a particular provider to send or receive payments. In 2017, the Clearing House launched a real-time payments platform known as the RTP® Network in the United States. In 2019, the Federal Reserve announced it would develop a 24x7x365 instant payment service, the FedNowSM Service (Off-site). For instant payments to successfully meet the needs of the financially underserved, they should be widely accepted, affordable and easy to use.

A second cashless option that many central banks around the world are exploring is Central Bank Digital Currency (CBDC), which has the potential to increase safety, reliability, efficiency and universal access of payments. The Federal Reserve is also assessing opportunities, challenges and use cases for a digital currency to complement cash and other payments options (Off-site). However, there are a number of policy and operational questions to consider related to resiliency, fraud, privacy, security, disintermediation and financial stability.

Finding a solution 

While the rapid digitization of payments is full of opportunity, it is increasingly important to create a payment system accessible for all – especially the most vulnerable populations. While three options were proposed for those with limited access to the digital payments who rely on cash and oftentimes are without access to a bank account, it is unlikely there will be only one solution. Moving forward, further collaboration between the public and private sector will remain critical to ensure all individuals have fair access to the U.S. payment system.

View the full paper, Shifting the Focus: Digital Payments and the Path to Financial Inclusion (Off-site), to further explore the findings.

1 Shy (2020) and SCPC/DCPC (2017-2018-2019)
2 Pew Research Center, “Mobile Fact Sheet,” June 12, 2019