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Electronic payments look more appealing as people fear cash could spread coronavirus


The coronavirus outbreak is prompting second thoughts about reaching for cash. 

As the number of cases tick up in the U.S., some are going cashless to avoid potential hygiene issues around handling banknotes. Regardless of  whether there’s a proven risk, the “psychological factor” of people thinking of cash as “unclean” could change how they choose to pay, according to Bain & Co. partner, Thomas Olsen. 

“Merchants are encouraging people not to use cash, citing Coronavirus,” Olsen told CNBC. “We would expect some trigger to accelerate behavior from cash to digital payments.” 

The U.S. Federal Reserve is also changing how it handles greenbacks. As a “precautionary measure,” the Fed increased the minimum holding period for bills coming from Asia and Europe to the U.S. to a 10-day minimum. The previous minimum was five days.

“The Fed’s staying in contact with the CDC to make sure we’re aware of the latest thinking, and right now it’s mainly person to person contact,” a Fed spokesperson said in a phone interview. “We’re prepared to modify that depending on the circumstances.”

Banks in China, where the outbreak started, were ordered to disinfect cash before issuing it to the public in an attempt to slow the virus spread. More than 169,000 people have tested positive for coronavirus as of Monday, according to Johns Hopkins University. Chinese government officials said during a February press conference that banks would only be allowed to release new bills that had been sterilized. 

Meanwhile, the World Health Organization denied reports that the agency warned against using cash. 

“WHO did not say banknotes would transmit COVID-19, nor have we issued any warnings or statements about this,” a WHOspokesperson said in an email. “We do recommend that people wash their hands regularly.”

Moving to mobile

The new virus fears could be enough introduce mobile payments to those who to otherwise didn’t see the appeal.

“People default to what’s familiar, unless there’s something to jolt you out of it,” Jodie Kelley, CEO of the Electronic Transactions Association, said in a phone interview. “Contactless payments have come up as a new option for consumers who are much more conscious of what they touch.”

Before the outbreak, mobile payments in the U.S. had not come close to the global adoption rates. It seems odd considering the ubiquity of smartphones. But experts cite a deeply embedded legacy system and rewards cards as reasons Americans don’t tap their phones to pay. In China, by contrast, more than 80% of consumers used mobile payments last year, according to management consultancy Bain. In the U.S., major mobile payments apps had adoption rates of less than 10%.

The major players in U.S. mobile payments are mostly tech companies. PayPal is the leader among several competitors, including Apple Pay, Google Pay, Samsung Pay, Venmo, Square Cash and Zelle, according to Bain. There are also a handful of newcomers looking to disrupt them. While they might get a boost as consumers adopt their mobile payment options, it likely hurts other, more profitable parts of their business.

“Coronavirus impact on fintech is a double-edged sword,” said Max Friedrich, analyst at ARK Invest. “Most payment providers also have exposure to payments in physical store.”

Major payment companies have already warned of the virus hitting U.S. spending. Visa, Mastercard and PayPal have all cut guidance due to the coronavirus. Banks have also taken a hit as the virus spreads. Shares of major U.S. banks have plunged in recent weeks as oil prices collapsed and falling bond yields sparked fear that the outbreak could lead to a recession.

On the consumer banking side, online options from traditional banks could see more adoption. As people self-quarantine they may avoid bank branches, too. 

“I think this is an opportunity for a move to digital,” said Peter Gordon, executive vice president and head of emerging payments at U.S. Bank. Gordon added that Zelle, PayPal, and online banking could see a boost. “I believe this crisis will accelerate and move people to utilize all forms of digital financial services.”

‘Shock’ to the system

While the coronavirus impact is still unclear, India may offer a glimpse of what an unexpected, macro-economic event can do to people’s payment behavior.

E-payments in India soared after a surprise cash crunch in 2016. Nicolas Crouzet, an associate professor of finance at Northwestern University’s Kellogg School of Management, and Filippo Mezzanotti, Kellogg assistant professor of finance, said it shows how quickly and drastically consumers might change their behavior.

“Although the cash crunch was temporary, it had a very persistent effect on use of electronic payments,” Crouzet told CNBC in a phone interview. “There are network effects to these electronic payments. The shock forced people to start using that technology.”

Crouzet and Mezzanotti looked at a free, e-payment system in India similar to PayPal’s Venmo. They saw a “huge increase in usage” after the cash crunch. The number of transactions nationwide jumped 150%, then roughly doubled each week over the next three weeks. Meanwhile, the number of credit cards and credit-card transactions stayed “fairly steady.”

Still, the Kellogg professors said it’s too soon to tell if the virus will be enough of a jolt to change the payment system in the long-run. The effect could go beyond payments. They said Zoom and other software companies that people are newly relying upon for at-home-work could also see similar trend to what happened with payments in India.

“It’s most likely going to be a temporary shock, but forces people to use the software for a while,” Mezzanotti said. “You could imagine that for a bunch of industries, it could have permanent positive effects.”


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