Digital Systems Will Drive Globalization & Redefine Competitive Advantage for Nations

Cash continues to be used in ~85% of global consumer transactions

Despite strongly rooted belief in the digital future of businesses, cash is still the king in the vast majority of countries. Even with highly fragmented digital payments market, in 2013, around 85% of all retail payment transactions were still done with cash, equating to 60% of retail transaction value. Furthermore, the most recent estimates suggest that cash continues to be used in around 85% of global consumer transactions. Transactions in cash may be declining around the world, but cash still remains the most commonly used payment mechanism for the vast majority of individuals and businesses.

Even countries with highest rates of cashless transactions still have room to grow: cashless transactions account for 61% of consumer payment transactions in Singapore, 60% in Netherlands, 59% in France and Sweden. Meanwhile, only 1% of consumer payment transactions in such countries as Egypt, Peru, Saudi Arabia, and Malaysia, are cashless. In the Eurozone, 75% of point-of-sale payments are in cash.

WEF emphasizes that even India’s demonetization experiment has not broken the country’s heavy cash dependence. Five months after the country demonetized 86% of its currency, cash withdrawals were actually 0.6% higher than a year earlier.

However, with the fast pace of technology development and improving digital experience, electronic payments globally are being adopted at an outstanding pace. Even with increasing concerns over data privacy and security, the trend is expected to continue. Over the course of development and adoption, electronic payments are expected to have a tremendous effect on economies. Moreover, digital systems overall are seen as an undeniably positive force in driving globalization, connectivity, and borderless innovation in addition to boosting inclusive economic growth within national borders.

A report from Moody’s published last year quantified the impact of electronic payments on economic growth – electronic payments added $296 billion to GDP in the 70 countries studied between 2011 and 2015, which is equivalent to the creation of ~2.6 million jobs on average per year over the five-year period, or about 0.4% of total employment in the 70 countries.

Digitization as a competitive advantage

The Digital Planet 2017 report states that digitalization is now driving globalization. As such, achieving a competitive advantage in the global digital arena has become a key priority for governments, businesses, and citizens who strive for inclusion and relevance in this global marketplace.

Two important themes emerge as distinctive features of this report:

• The role of the digital system in redefining competitive advantage, especially in smaller countries. Unique examples (e-residency in Estonia, Malaysia + Alibaba partnership) suggest that even small countries can harness the power of digital systems to punch above their weight in having an impact, often leapfrogging more established countries in finding creative solutions around constraints."
• The role of user trust in the digital system. As digital platforms increasingly become a part of people’s lives, and as businesses & governments embrace digitalization, there is a need to understand the nature and state of trust in the digital economy. As technology improves and more complexity is being embedded into algorithms, questions about the trustworthiness of what happens behind the scenes emerge. The increasing security layers, sometimes involving multiple stages of authentication and passwords, add to the dimensions of trust in ways that are novel and unique to the digital world.

Four drivers of digital evolution

The report by Tufts that was mentioned earlier distinguishes four key drivers of digital evolution: supply conditions, demand conditions, institutional environment, and innovation & change.

Source: Digital Planet 2017

• Supply Conditions: This driver measures the quality and readiness of digital and physical infrastructure such as bandwidth availability and quality of roads.
• Demand Conditions: Are consumers willing and able to engage in the digital ecosystem? While high demand is always a welcome sign, low demand scores can be interpreted as an indication of untapped market potential that investors and businesses can take advantage of in an enabling institutional environment; stagnant demand over time, particularly in advanced markets, can be a sign of market saturation pointing to a need for innovation that can help restart the engines of demand.
• Institutional Environment: By providing a stable environment that encourages investment and protects consumers, governments create enabling conditions or even the technologies themselves that foster digitalization. The indicators underpinning the Institutional Environment driver also help address questions, such as: Are governments taking deliberate steps towards advancing and adopting digitalization? Do they have policies and regulations in place to foster digital ecosystems?
• Innovation & Change: Innovation and the resulting change push the boundaries of the digital ecosystem and what it can do; it is in equal parts the most impactful and challenging driver to jump start. The system of innovation can be broken down into inputs such as availability of talent and capital; processes, such as university and industry collaboration in R&D; and outputs, such as new digital products and services created.