2023 Capgemini World Payments Report: Finding the value in cash management

The 2023 Capgemini World Payments Report indicates that the prevalence of non-cash transactions and the continued expansion of instant payment and open banking frameworks are expected to rise meteorically. However, in a world reeling from rising inflation rates and stock market turbulence, an intriguing trend has emerged – a resurgence in the use of physical cash.

Turbulence and market disruption

Global commerce and the financial industry have experienced a whirlwind of change and challenge since the start of 2022. The volatile market conditions, including supply chain disruptions and ongoing escalation of geopolitical crises, have presented significant challenges. While a drop in the use of digital services and non-traditional forms of banking and payments was not observed, an interesting trend arose - the temporary rebound in the use of physical cash.

The reliance on cash, especially during uncertain times, is noteworthy globally. The resurgence during the past year underscores the enduring relevance of paper notes in a world where CBDCs and other emerging forms of digital currency have begun to materialise on the horizon.

"We see a focus on cash, in terms of where is my cash now? Where's my cash today? Where's my cash tomorrow?" says Jeroen Hölscher , Global Head of Payment Services at Capgemini . "When you see a slowdown in economic growth or uncertainty, cash use is often the first thing monitored – how do people respond?"

Ongoing transformation

However, is this cash resurgence short-lived? Like previous years, digital transformation drives innovation, keeping pace with customer expectations and demands. The report suggests that global non-cash transaction volumes will soar to nearly 1.3 trillion by 2023, marking an impressive year-over-year growth rate of approximately 16.6%. By 2027, these volumes are expected to double from last year’s levels, reaching approximately 2.3 trillion.

These shifts are driven by a combination of factors, including further expansion of instant payment infrastructure and ongoing adoption of open banking frameworks, as well as regulatory changes, industry initiatives and evolving customer expectations. "We are past the hype cycle now, and are beginning to really see the applications of where digital currencies and payment infrastructure are useful. Whether it's tokenising bonds, securities, or cross-border payments, we're beginning to see the real benefit from a cost perspective," says Jeroen.

This rapid transformation is coming at a cost, particularly for banks and payments firms. With nearly 80% of traditional payment revenue sources, such as fees, funds, and float income, under pressure, these financial institutions face significant challenges. Regulatory compliance, scheme implementation and payment modernisation costs leave limited resources for much-needed innovation. "It's certainly a challenge," suggests Jeroen. "They need to keep investing in their core capabilities to provide better services to the end customer in a more flexible and harmonised way. As market demand and digital trends evolve, costs and complexity continue to rise for banks and payment firms."

Striking the balance

To navigate this landscape successfully, the report indicates that banks and payment firms must balance retail and commercial payments to maximise value. Surprisingly, the overall value of commercial payment transactions surpasses retail payments, comprising 56% of total transaction value, compared to retail's 44%. Commercial payment instruments like virtual cards, account-to-account payments, and digital wallets are gaining traction among corporate treasurers, indicating a digital shift. As per the report's findings, it is suggested that banks and payment firms must act swiftly to expand their commercial payment capabilities to capitalise on this trend.

At the same time, efficient cash management remains an ongoing challenge for corporations amidst macroeconomic uncertainty and prolonged cash conversion cycles. According to the report's findings, corporate treasurers struggle to gain a comprehensive overview of their cash, with 79% expressing dissatisfaction with cash conversion times. Indeed, even with multiple banking relationships, 70% of corporate treasurers find banking services underwhelming.

From the report, it's clear that banks and payment firms must embark on an end-to-end digital transformation journey to address these issues. This transformation should prioritise efficient, streamlined, and experiential cash management services for corporate clients, eliminating the hurdles posed by outdated systems and disconnected transformation initiatives.

Cash management strategies through strategic relationships

Clearly, complexity lies ahead for many banks and payment firms. The path forward involves a substantial transformation in the digital space and forging strategic relationships underpinned by efficient cash management. A three-pronged strategy to achieve this is outlined by Capgemini: simplifying back-end infrastructure to enable innovation, leveraging platforms to boost cash management efficiency, and engaging with corporate clients as strategic partners.

"Many banks now have to get more flexibility within their architecture and back office to cope efficiently," indicates Jeroen. "Bringing aboard a third party for certain services flexibly with minimal impact - this is where the focus currently lies.”

This can unlock sustainable value, reduce disintermediation by FinTechs and PayTechs, and increase cross- and up-selling opportunities. According to the report, 67% of bank executives acknowledged that strategically partnering with corporate clients reduces the threat of disintermediation. In comparison, 57% of payments executives said strategic banking partners enjoy increased cross- and up-selling opportunities because of these relationships.

Banks should consider partnerships to bolster their value chain and lessen the pressure from investment costs and the burden of regulatory compliance and resource management. Key to banks strategy should be how to best answer the question of where the cash is now, where it will be tomorrow, and how it can be accessed.

To conclude, the current landscape of global payments continues to evolve rapidly, driven by a confluence of factors. Banks and payment firms must adapt, innovate, and prioritise efficient cash management while nurturing strategic relationships with their corporate clients to succeed. Despite the ongoing complexity brought on by transformation and the uncertainty of the modern world, the time to act is now.