Will We Become a Cashless Society?

“Cash, in the form of notes and coins, will disappear within a decade”.

Such declarations have been around for the past 60 years since the introduction of cheques and bank cards in the 20^th century, however they have become increasingly numerous from finance experts in recent times due to new innovative alternate technologies. These verdicts form a part of the war currently being waged on cash, by governments and organisations around the world, in the hope of creating a cashless society. But is this push towards a cashless society something we really want? Is cash really dying? Is it even possible to successfully implement a cashless society worldwide and if so, how long will it take? These are just some of the queries I aim to answer in this essay.

With new alternatives for cash constantly making an appearance in news articles and business journals etc, one cannot be blamed for believing cash is on the way out. However, if you were to sit down and look at the statistics you may begin to think otherwise. They show that there has been a strong growth in the demand for cash in the past and currently in the present. According to BBC writer Rose Eveleth (2017): ‘cash in circulation grew 42% between 2007 and 2012, and the amount of American money floating around in bills and coins is expected to grow by about 5% each year’. Furthermore, ‘As of 2013, approximately 85 percent of the world’s transactions involved cash’. (Manor, 2017). Clearly these statistics show that cash has in the past, and still to this day, remains an important part of transactions. In contradiction to some experts views that cash will disappear in the next decade. With all the benefits and advantages of new cash alternatives, why is the demand for cash continuing?

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Firstly, cash offers strong privacy protection. It can be spent anywhere at any time without any third party being involved. There is no digital paper trail left behind for government, businesses or hackers to exploit. According to Lepecq and Holler (2017): ‘Digital payment systems, on the other hand, provide the companies managing them with information on users’ behaviour, which in turn shapes how they will be treated by not only payment providers but by merchants and third parties who are able to access this information without the customer’s knowledge’.

In addition to this, people tend to feel more secure having cash on them in their wallet or purse, rather in a bank or some other type of financial institution which could be prone to hackers. It is estimated that approximately 43% of organisations have had some sort of a security breach, including financial institutions such as Banks (Lepecq and Holler, 2017). In terms of privacy and security, cash is a lot more reliable than the newer alternatives. Until this trend begins to change cash will not be disappearing. Consequently, the demand for cash has remained strong over the last number of years.

Inclusion is another argument in support for keeping cash. With cash, you do not necessarily have to own a bank account. You do not have to have access to a computer, mobile device or have internet to make transactions. Since it is a physical object anyone in the world can use it, regardless of their position in society. You can be living on the streets with nothing to your name and still use cash. This is not the case with most of the contrasting options to cash. By actualizing a plan to remove cash, you’re essentially introducing a policy of exclusion. This can be backed up by statistics. According to The World Bank, there are nearly two billion people in the world who do not have a bank account. Most of the electronic alternatives to cash require you to have one. That’s two billion people who would be unable to make transactions in a cashless society.

An example of a country that would be severely affected by a move towards a cashless society would be India. According to policy analyst Anupam Manur (2017): ‘In India, the number of people without a bank account is about quarter of a billion’. That is almost 20% of the population. Furthermore ‘43 percent of the accounts in India are, in fact, dormant accounts’ and ‘as of April 2015, only 15% of adults in India reported using a bank account to make or receive payments (World Bank estimates)’ (Manur, 2017). These figures show that in contrast to what experts believe, cash is not dying, and it remains an essential method of transaction for people at present. Abolishing cash would alienate entire sections of Indian society. There are people who do not have access to financial services. Furthermore, there are people who would not be able to gain access to a bank account. The illegal immigrant who fled their country due to war or violence, in the hope of having a better life; homeless people who are constantly traveling and do not have a permanent address, contact number or email; people with a history of failed payments or a bad credit rating.

Furthermore, negative interest rates are also preventing a move towards a cashless society. Most people would like to be able to withdraw cash from their bank accounts and store it at home in case interest rates were to fall below zero. In this scenario customers of banks would essentially be paying the bank a tax to save their money instead of spending it. In a cashless society banks would have full control and the customers would be helpless and would have to accept the losses they would be making.

Moreover, at various times throughout the course of history, countries have used cash as a means of reducing national debt. ‘In a cashless society, this important macroeconomic tool would no longer be available to governments. With a digital economy, this would become harder, if not impossible. The only possible tool that the government will have to increase the money supply in the economy would be to issue bonds and bills, which will increase its debt obligations’ (Manur, 2017).

The threat of censorship is also slowing the movement towards a cashless society. If all payments were to be made electronically, governments in countries around the world would have an overwhelming amount of power. Banks would be able to see what your spending your money on, then if they wished, they could ban a certain good or product via a totalitarian regime. Undesirably, this has already happened in Uganda in 2016. Banks shut down the usage of mobile money during elections. According to Anupam Manur (2017): ‘The fear was that the opposition could use the mobile money networks to pay voters. However, certain analysts insist that the real reason was to block donations to the opposition party.’ A similar event happened when ‘Bank of America, VISA, MasterCard, PayPal and Western Union made an arbitrary and seemingly unlawful blockade on donations to the Wikileaks page, which has seen its revenue dip by over 95%’ (Manur, 2017). With very little regulation on cash alternatives currently, banks could run riot with their new-found power.

The demand for cash has grown up to now, however, this may not continue. It relies upon many factors. Firstly, there are various nations across the world that have effectively implemented an alternative to cash in the form of mobile payments. An example of such a country would be Sweden. ‘Sweden is the most cashless society on the planet, with barely 1% of the value of all payments made using coins or notes last year’ (Savage, 2017). Furthermore, cash only accounts for less than 20% of the transactions carried out in stores in Sweden, which was previously at 40% five years ago. If there is any country worldwide that is likely to become a cashless society of the next decade, it is Sweden. So why has Sweden been so successful in eliminating cash? This is largely due to mobile apps such as ‘Swish’. This mobile payment app allows you to spend and transfer money using your phone number. It is used by over 5 million people in Sweden which is close to half of the population and is backed by major banks. Bus companies, some bars and shops in Sweden no longer accept cash, due to the fear that they might be robbed. Sweden is not the only country to adopt new payment technologies.

Cash is also on the way out in China. According to CNBC writer Evelyn Cheng, the lack of regulation in China regarding electronic payments has allowed mobile payment technology to become widespread across the country. Last year, mobile payment technology volume doubled to 5 trillion US dollars.  There are two mobile payment companies that together, hold over 90% of the market share in China. These are ‘Wechat pay’ and ‘Alipay’. Furthermore, in the article Cheng states: ‘WeChat messaging app from Chinese technology giant Tencent reached 963 million monthly active users in the second quarter’ and ‘Alipay, which is owned by Alibaba affiliate Ant Financial Services, has 520 million users’. That is an enormous amount of China’s population that are using alternatives to cash when making transactions. Taxi company Didi and various bike rental companies are also taking advantage of the rise in mobile payments in China. Didi took over Ubers operations in China last year after acquiring it for 35 million US dollars. They are operating in conjunction with Wechat pay and it is impossible to pay for one of their taxis with cash. QR codes are also being placed on rental bikes in China, which allow customers to pay for them using mobile payment technology.

Another country that has successfully implemented alternative payment technologies is Kenya. In 2007 the country adopted the first mobile payment system to be used in Africa, called M-PESA. Since its introduction it has been making saving and spending money easier for households across the country. ‘When it was launched the average distance to the nearest bank was 9.2 kilometres. Eight years later in 2015 the average distance to the nearest M-PESA agent was a mere 1.4 kilometres’ (Logan, 2017). The introduction of M-PESA has also reduced transaction costs, poverty, crime and corruption. Since all financial transactions are online, and a password can be placed on mobile devices and accounts, people are less likely to be victims of crime such as robbing as stealing. Similarly, corruption can be easily spotted in electronic payments as banks have access to people’s transaction history. According to a recently published study by sicencemag.org, Almost 2% of households in Kenya (approximately 194,000) have escaped extreme poverty due to the introduction of electronic payment technology. There are other factors affecting the future rate of growth in demand for cash as well.

For instance, Cryptocurrencies are basically cash in a digital format. If cryptocurrencies such as Bitcoin, ethereum and ripple, start to be adopted and accepted as legitimate methods of payment. It is possible we will see a reduction in the demand for cash, and potentially a completely cashless society later down the line. While there are benefits to replacing cash with cryptocurrencies such as removing intermediaries and thus reducing costs, there are also some worries preventing a fast transition during the next decade. For example, governments across the world could lose control of their economies, not being able to print money or regulate currencies. Furthermore, if cryptocurrencies were to replace cash entirely, the value of cash would decrease dramatically and the transition from a cash-based society to a crypto-based society would be difficult. It would also result in many people losing money previously invested in cash-related assets.

Another factor determining the future of cash would be government intervention in relation to cash alternatives such as cryptocurrencies and mobile payments. At present, governments have done little or nothing in terms of regulating these new technologies, however it is possible that they will begin to intervene more once there is a serious possibility of cash being replaced.  For example, they may decide to ban or impose taxes on certain cryptocurrencies and there is a chance that they could replace cash. This is because cryptocurrencies like bitcoin are bought and sold via the blockchain. The blockchain is the infrastructure that stores information across a network of computers, making the blockchain de-centralised. This means that nobody owns it, not even the government, however everyone can still use it. Due to this loss of control, it is highly unlikely that the government will ever support cryptocurrencies and allow them to replace fiat cash. In fact, countries such as Bangladesh, Bolivia, Ecuador, Kyrgyzstan, and Nepal have banned cryptocurrencies.

Then if cash is replaced by mobile payment applications, governments might start cracking down on corruption and the black-market. As all transactions will be online and thus it will be easier for governments to collect information on your spending habits. Unlike cryptocurrencies, governments might be in favour of mobile payments replacing cash. This leads us onto the next factor that will determine the future of cash – retailer and financial institution preferences.

The retailers have arguments for and against the implementation of a cashless society. They would benefit from no longer accepting cash as it would greatly reduce the possibility of stores being robbed. Burglars can’t take cash out of a till if there is no cash in the till in the first place. Furthermore, employees would not be able to steal from their employers by taking money out of the till.  Both scenarios are real-life problems that retailers around the world face on a daily basis. However, retailers will not invest in the technology required to accept mobile payments and other cash alternatives unless there is enough customers willing to make transactions without cash. It’s like a chicken and an egg- One of them must come first before the other can happen. Be it customers becoming more open to a world without cash, or retailers taking a risk and investing in alternative payment technologies. At the moment, we are in a deadlock, with neither willing to budge. However, if in the future one of them decides to make the first move, it could lead towards a chain effect with others following suit. Ultimately, resulting in society taking one more step towards the abolition of cash. 

But what about the preferences of financial institutions? It turns out they are in a similar situation to retailers. They also have arguments in favour, and against a cashless society. Take for example, the cost of cash. According to a study carried out by Prof Bhaskar Chakravorti and Dr.Benjamin D. Mazzotta, Cash costs the US government around 200 billion every year. This is illustrated in the diagram, taken from their study, shown below:

For the government, most of their losses in cash are related to tax evasion. For businesses, most losses come from retail theft, and for individuals most losses come from the time spent getting cash. In the study, Prof Bhaskar Chakravorti and Dr.Benjamin D. Mazzotta also discovered that the average American spends around 28 minutes a month traveling to banks and ATM’s to get cash, which adds up to around 5.6 hours per year. Furthermore, it is very expensive to print cash, store it, and to then distribute it safely and securely. In addition to those costs you also must factor in the costs of setting up an ATM and running it. In a cashless economy, none of these expenses would exist. The main problem financial institutions have with alternatives to cash is regulation. If regulation that allows financial institutions, such as central banks, to remain in control of these new alternatives to cash, is introduced, then financial institutions shall certainly support and try to implement a cashless society.

Furthermore, socio-Economic developments have in the past, and will in the future have an influence on demand for cash. The Västberga heist is a perfect example. In this heist 7 men planned and executed a robbery of cash, the equivalent of 6.5 million US dollars. All seven men were later found and arrested however the 6.5 million in cash was never found. This planted doubt in the minds of people around the world, in relation to the security of cash. Events like this encourage a movement towards a cashless society. If cash never existed bank robberies like the Västberga heist would never be able to occur. Another event would have been the great recession in 2007-2009. After this event people began to lose faith in banks and no longer felt like their money was secure. As a result, banking regulation became stricter. It has left a scar with people around the world and a distrust with banks that has slowed a possible transition away from cash. People don’t like the thought of a society where all money was electronic, and where you would be unable to withdraw your money from a bank account and save it in cash ‘under the mattress’ at home.

Security will probably be the deciding factor in the war for cash. Presently, people are unsure about how secure their money would be in a cashless society, where everything is electronic. Most organisations have been hacked at some stage throughout their lifetime and people fear that a society that is based around electronic money, could end up having disastrous implications if hackers were successful. To further this uncertainty, since most alternatives to cash are electronic, such as mobile payments and cryptocurrencies, there would be catastrophic implications in power outage situations. Since there are multiple natural disasters, wars and sometimes solar flares, around the world every year. Power outages are inevitable. In an economy or society that relied only on electronic money, a power outage would be calamitous. People would not be able to pay for goods and services. If back up files were lost you would have no way of proving you had 20000 euro in your bank account. The affected areas would come to a standstill with potential riots and break-ins to stores by people to get what they need to survive. In a situation where a power outage lasts a couple of weeks or months, with no payments coming through, who’s to say police would continue to work and enforce order? The affected areas could turn into a war zone where its survival of the fittest.

The final factor that will determine the future of cash is the people’s opinion. At the end of the day, if the public doesn’t believe that implementing a cashless will be beneficial, then it won’t happen. Governments cannot demonetise fiat money without the public’s support. Alternatives to cash cannot be successful without customers. It is up to these institutions and organisations to find solutions to societies worries, about living in a society where cash is worthless.

To conclude, there are many problems to be addressed before any sort of a transition is made away from cash. While it is quite possible that one day electronic money will become the dominant form of payment in the world, it is highly unlikely that society will be completely cashless. Certainly, the cashless revolution has been overhyped. Cash will still be around in a decade from now, perhaps with even stronger demand than there is currently, considering the continuous growth there has been in the demand for cash over the last number of years. And when the day comes that technology such as mobile payments or cryptocurrencies overlaps cash as the dominate form of payment, cash will still have a role to play in in our economies in some shape or form.

References:

• Cheng, E. (2017). Cash is already pretty much dead in China as the country lives the future with mobile pay. [online]
• CNBC. Available at: https://www.cnbc.com/2017/10/08/china-is-living-the-future-of-mobile-pay-right-now.html [Accessed 8 Nov. 2017].
• Chakravorti, B. and D. Mazzotta, B. (2017). Cost of Cash. [online] Fletcher.tufts.edu. Available at: http://fletcher.tufts.edu/CostofCash/~/media/Fletcher/Microsites/Cost%20of%20Cash/CostofCashStudyFinal.pdf [Accessed 8 Nov. 2017].
• Data.worldbank.org. (2017). Losses due to theft, robbery, vandalism, and arson (% sales) | Data. [online] Available at: https://data.worldbank.org/indicator/IC.FRM.CRIM.ZS [Accessed 8 Nov. 2017].
• Eveleth, R. (2017). The truth about the death of cash. [online] Bbc.com. Available at: http://www.bbc.com/future/story/20150724-the-truth-about-the-death-of-cash [Accessed 8 Nov. 2017].
• Lant, K. (2017). Mobile Payments Are Completely Replacing Cash in One of the World’s Largest Nations. [online] futurism.com. Available at: https://futurism.com/mobile-payments-are-completely-replacing-cash-in-one-of-the-worlds-largest-nations/ [Accessed 8 Nov. 2017].
• Lepecq, G. and Holler, J. (2017). Cash Payments: Freedom, Privacy and Security. [online] Atmia.com. Available at: https://www.atmia.com/files/Position%20Papers/eu-cash-limits-16-may-2017.pdf [Accessed 8 Nov. 2017].
• Manur, A. (2017). We are trying to become a cashless society — but is that a great idea?. [online] CashEssential. Available at: http://cashessentials.org/news/news-details/2016/09/29/we-are-trying-to-become-a-cashless-society-but-is-that-a-great-idea?gclid=EAIaIQobChMIsYCtuIWw1wIVS7XtCh0AfwC_EAAYASAAEgIfnfD_BwE [Accessed 8 Nov. 2017].
• Suri, T. and Jack, W. (2017). The long-run poverty and gender impacts of mobile money. [online] sciencemag.org. Available at: http://science.sciencemag.org/content/354/6317/1288.full [Accessed 8 Nov. 2017].