The relevance of the topic of environmental protection, social sphere and corporate governance (ESG) requires companies of all spheres to assess the impact of their activities on the world. Incorporating ESG issues into business practices is becoming increasingly important for both companies and consumers. Payments is probably not the industry that first comes to mind when one thinks of environmental or social issues. But the impact on the climate is called by bankers one of the key risks in the next few years (according to the EY survey).
European Association of Settlement Clearing House (EACHA) published comparative analysis of the impact of various payment instruments on the environment. The report uses indicators of each individual stage of the life cycle of both electronic and non-electronic types of payments, obtained as a result of laboratory studies and interviews with experts. According to the research, digital currencies are the most non-environmental payment instrument. They are followed by cash, checks and bank cards. At the same time, batch payments (in particular, configured automatic transfers) and instant payments have the least impact on the environment.
Digital currencies
Mining the most popular cryptocurrency, Bitcoin, is a very energy-intensive process. It relies on specialized data centers and advanced computers and consumes enormous amounts of electricity, equivalent to the energy use of countries like Belgium or Poland. At the same time, the result is significant electronic waste due to the rapid aging of hardware (usually within 1-3 years).
Bitcoin’s environmental impact is huge: significant carbon emissions, electricity use, e-waste generation, and resource extraction, making it the most environmentally damaging of all the payment instruments examined in the study. Another negative aspect of cryptocurrency is the fact that it is mostly used for speculation and rarely as an actual payment instrument.
Cash
The study of the impact of cash on the environment was based on data provided by the central bank of the Netherlands on euro banknotes. At the stage of their production, such materials as cotton, threads, foil, ink, as well as metals for coins are needed (as a result, resource depletion). According to the regulator, this stage represents the largest part of the total impact of cash on the environment. Cotton and metals are supplied from outside Europe, which also requires transoceanic transport.
The operational stage includes transportation (emissions), use of ATMs (electricity costs) and cash settlement processing. This stage is the most expensive part of the cash life cycle.
Compared to the production and operation stages, the end-of-life stage of cash does not have as much impact on the environment due to its long life cycle and simple disposal processes.
Cash is the second most environmentally damaging payment instrument after digital currencies, mainly due to the mining of the metal required to produce the coins and the energy required to operate ATMs and transport cash.
Checks
The use of cheques, although declining in Europe, remains significant in countries such as France, Ireland and Great Britain. The production stage of checks involves obtaining paper from wood pulp and ink from various metallic pigments, binders and solvents, which contributes to deforestation and has a negative impact on the environment. Transportation to banks increases carbon emissions. Check processing is done almost exclusively electronically, which reduces the impact on the environment, but it also consumes energy and contributes to e-waste. After single use, receipts need to be disposed of or recycled (usually shredding or incineration), which results in carbon emissions.
Bank cards
The impact on the environment of bank cards occurs both at the stage of production, including materials, and at the stage of operation, in particular, during the operation of payment terminals and data centers. The consumption of a significant amount of energy by data centers and terminals makes this type of payment one of the least environmentally friendly.
In addition, the disposal of plastic cards after the end of their service life of 3-5 years creates long-term environmental problems. Despite recycling initiatives, most cards are incinerated with regular waste or in landfills, making environmental impact assessment difficult and contributing to overall emissions.
Instant and batch payments
The environmental impact of bank transfers is related to the production of hardware components (servers, routers, PCs) for financial institutions and operators that carry out these transactions. Such production leads to resource depletion and increased greenhouse gas emissions. In the process of operation, electricity is consumed, while 60% of the energy is spent on cooling. Outdated software also contributes to increased consumption.
The issue of end-of-life is also relevant, as hardware typically lasts only 3-5 years before being decommissioned, repurposed or recycled.
Nevertheless, instant payments received a very high rating from experts in terms of environmental friendliness, second only to batch payments (many payments at the same time, used in particular to pay regular bills). The difference between these transactions is energy consumption, as each individual instant payment requires on average three times more electricity than batch payments due to the individual nature of the transactions.
Recommendations
EACHA also identified several key recommendations in its research that payment infrastructure participants should consider and implement.
- Payment system operators must make the services they offer as environmentally friendly as possible. This means switching to hardware stacks that last longer (that is, switching to solid-state drives), ensuring recycling of equipment and using those sources of electricity that are produced ecologically.
- Legislators in each country should support the use of electronic payment methods because they are safer for the environment and socially beneficial (including in particular the fight against money laundering and other types of fraud). At the same time, access to cash must also be maintained to ensure financial affordability.
- Making good decisions requires accurate and up-to-date data, so industry associations need to improve monitoring and standardize reporting on ESG data, including electricity consumption, e-waste and carbon emissions. This information is essential for effective ESG impact assessment.
- Market participants should strengthen coordination around ESG, including sharing knowledge and experience and implementing joint initiatives to ensure that social issues are considered in decision-making.
- Cryptocurrencies have proven to be very harmful in terms of environmental impact. So any legislative initiatives to regulate digital currencies must take this into account.
- Providers of traditional payment methods such as cards, cash and checks must look for ways to make production and transportation less dependent on environmentally harmful substances such as plastics, metals and fossil fuels.
