What use is fintech if you can't get online?
A couple of weeks ago I went into an overpriced London salad shop for lunch. Before I could part with my hard-earned money for some wilted spinach and avocado, the connection on the iPad I was ordering on went down.
Just like that, the shop lost its lunch hour revenue. I left thinking that if only they’d accepted the £20 note that was burning a hole in my pocket, it would’ve been a lot easier.
While my inability to purchase an overpriced salad is hardly the most pressing issue, it does raise a bigger question - as cash usage declines globally, what structures are in place to support payments if the power goes out?
When digital won’t cut it
Two-thirds of all adults worldwide currently receive and/or send digital payments. Mobile payments and networks support essential services like everyday payments, remittances, tax collection, benefits and credit. So what happens when something goes wrong? In early 2022, the Kazakhstani government shut down nationwide internet access in response to civil unrest - a terrifying reminder of the growing weaponisation of information technology. Kazakhstanis reliant on digital payments were unable to complete transactions. Long queues at ATMs and withdrawal limits were put in place as citizens raced to secure cash. The situation was much the same in Ukraine when the current conflict broke out. While outages of this scale are rare, they’re far from impossible. If digital payments are to offer a true alternative to cash, they need offline functionality.
If digital payments are to offer a true alternative to cash, they need offline functionality.
Offline digital payments don’t require an internet or mobile network connection to be processed. Existing solutions include PIN authentication, where the PIN entered on a POS terminal is verified by the card chip, stored, and approved by the bank when connectivity has returned. In Sweden, over 9 out of 10 purchases are made digitally. As the country moves closer to cashlessness, tech companies have begun to develop methods to cope with potential disasters, recognising that asynchronous solutions aren’t enough for a large-scale crisis.
Crunchfish’s MO is ‘digital cash’. Their truly offline digital cash architecture allows users to hold digital money in a separate overlay server. In the event that connection is lost, the core banking system can continue to function with payments being verified cryptographically and authenticated offline. For countries where nearly all payments are made digitally, innovation in this area is crucial. But we don’t all live in Sweden.
Although cash usage is declining globally, there’s still variety across different countries and regions: 44% of payments in the Middle East and Africa are currently made with cash. So, hold on a minute - if network connectivity is non-existent or patchy in a few places, and a huge percentage of the world doesn’t use mobile internet at all, why shouldn’t people just continue to use the ‘original’ offline payment system: cash?
Don’t throw the digital out with the bathwater
Cash isn’t going anywhere quite yet, but it’s crucial to dig into how access to digital payments can help bring more people into the financial ecosystem rather than take a backwards step. While the percentage of people with a bank account has risen dramatically in the last decade (from 42% to 76% according to the World Bank), that still leaves 1.7bn people unbanked worldwide.
While no panacea, innovations in digital payments can help unbanked and underbanked individuals access vital financial services. M-Pesa, one of the pioneers of mobile payments, has revolutionised payments across Kenya over the past 15 years. Users can deposit cash at local registered shops in exchange for digital money that can be sent within the country. Serving both the banked and unbanked population, a study from 2016 found that M-Pesa helped to lift 2% of Kenyans out of extreme poverty. The M-Pesa ‘Super App’ now features an offline transfer mode, allowing users to access the money received immediately, rather than waiting days for payments to be settled.
Although 4G coverage in India is near-universal, the growth in mobile phone ownership and internet penetration has happened incredibly quickly, and networks are frequently overloaded. The result is frequent timeouts, often impacting digital payments. As the number of internet users in India grows, investment in network capabilities is growing alongside it. In order for digital payments to be a sustainable and useful option for all, a backup option is needed.
In order for digital payments to be a sustainable and useful option for all, a backup option is needed.
The Reserve Bank of India (RBI) made headlines in January this year when it released a framework for the facilitation of small-value offline payments without Additional Factor of Authentication (AFA). The bank announced that face-to-face offline digital payments of up to ₹200 would be permitted, with the move designed to aid online payments in areas with little or erratic internet coverage. Different methods were tested during a trial, including Near Field Communication (NFC) technology that permits data transfer at close range (the same technology we use when making a contactless payment). Other solutions include sound wave technology, which permits transfer between both smartphones and feature phones. It remains to be seen what the impact of this will be in India, but with the largest unbanked population in the world, innovation in offline payments is an absolute must.
My unfiltered opinion
Access to digital payments systems both online and off will have a substantial impact on financial inclusion. But we have to remember the vulnerabilities: network connection is far from infallible. As many countries begin to explore digital currencies, discussions and innovations around sustainable infrastructure to support offline digital payments will only increase.
While we may not be on the brink of becoming a cashless society quite yet, digital payments must be as reliable as exchanging a physical note, to ensure nobody is left behind.