With the COVID-19 pandemic increasing digital transformation across the globe, digital currencies are more popular than ever. With contactless and e-wallet payments becoming the nor, and cryptocurrency value, like Bitcoin, skyrocketing, it’s likely that the industry has shifted permanently. However, in spite of these digital payments, it’s also likely that institutions and businesses will raise their fees as people continue to engage with them.
Matt Montes is US general manager at Paysend, a money transfer service. Matt has nearly 30 years of financial services experiences, most recently serving as president of Catalina Card Services.
Here he shares why consumers can expect more banking fees and how they can avoid them
The history of currency can be traced back centuries. During the seventh century, China created the world’s first paper money, and physical currency wasn’t innovated until the paper check was first printed in 1762. Fast forward to today, the form of currency has changed quite a bit. For today’s consumers, buying fruit at the corner market can be as easy as tapping a smartwatch on a credit card reader. Further, money doesn’t just exist in paper, coin or card form. Cryptocurrency, a digital currency maintained by a decentralised system, is also gaining popularity. For instance, the price of one single Bitcoin, the original type of cryptocurrency, has gone from $.08 in July 2010 to $23,000 in December 2020.
While the march away from paper currency was inevitable in the age of digital transformation, the coronavirus pandemic expedited the race faster than anyone ever anticipated.
COVID-19’s impact on traditional financial institutions
When the coronavirus pandemic started to spread rapidly in early 2020, non-essential businesses, including traditional financial institutions closed their doors or limited operating hours until further notice. While these measures may have slowed coronavirus’ spread, they had significant implications on how consumers managed and accessed money.
Because of the restrictions or limitations on brick-and-mortar financial institutions, and once the Center for Disease Control issued guidance last May for the public to use touchless payment methods whenever possible, cash withdrawals and deposits declined significantly. Instead, consumers withdrew large amounts of money from their accounts due to the tumultuous financial market during the coronavirus pandemic. As a result, some bank branches in the US were low on cash. In order to access money, consumers turned to digital currency for personal matters. Instead of going into a local bank to deposit a check, consumers turned to their bank’s mobile apps. Instead of sending cash to loved ones on birthdays, consumers turned to online money transfers, which positively impacted the remittance industry.
For example, at global money transfer provider Paysend, we saw a 15% increase in both users and transfer activity during March and early April. But it didn’t stop there. It continued as the coronavirus pandemic progressed. In September and October 2020, we saw an even bigger jump (25%) in transfer activity in the US.
Now that the coronavirus vaccine is within reach for the general population, the bigger question will be whether new digital consumers will shift back to the old ways of cash and card payments, or if they’ll continue to embrace digital currency. My bet is on a large chunk of consumers sticking to digital currency. Here’s why:
From 2017-2020, the US lost 5% of bank branches, according to the National Community Reinvestment Coalition. But here’s the kicker: the coronavirus pandemic slowed, at least for the time being, the closures of banks. Simply put, bank closures had less to do with lockdown restrictions and more to do with consumers changing the primary mode in which they do businesses with banks.
As consumer money habits change, fees will increase
So, once vaccines are widely available, some consumers may very well revert back to old habits of paying cash and swiping cards. However, many consumers will likely stick to the convenience of digital and mobile payment methods. In fact, a recent McKinsey study illuminated how this newfound culture of convenience has staying power. Specifically, the survey found that more than half of consumers report an intent to continue using digital and contactless services post-COVID-19.
While this is a big win for digital fintech companies, traditional financial institutions will feel the brunt of the shift. And to keep business afloat and maintain expected profit margins, these financial institutions will likely raise fees and will have to rethink their strategy to recoup the more than 70% of profit lost from COVID-19. Additionally, operating ATMs across the country for banks is expensive. Although ATM machines have been in decline over the past decade, there is still a small group of consumers that still enjoy this quick service. That said, instead of writing off the costs associated with operating an ATMs, banks are increasing fees associated with ATM withdrawals.
Thankfully, consumers can rely on non-traditional digital money services to escape those fees. For example, money transfer fees can be as little as $2 per transaction. Additionally, online banks tend to offer lower fees and higher annual percentage yields because they don’t have to spend much money maintaining and staffing physical locations.
While fees may be rising in the traditional sense, the digital form of currency will continue to be a more affordable route for consumers. Who knows, perhaps we will see more partnerships between long-established financial institutions and newer fintech companies, collaborating to provide similar, low-cost and low-friction services to customers.