Banking and Capital Markets

Why a cash-free future might not be as close as you think

An employee of Wirecard AG, an independent provider of outsourcing and white label solutions for electronic payment transactions, presents the contactless payment system "boon" at the company's headquarters in Aschheim near Munich, Germany September 6, 2018. REUTERS/Michael Dalder - RC1140BF6C90

Among the many advantages of the move to a cashless society, security is perhaps one of the most obvious. Image: REUTERS/Michael Dalder

Sean Fleming
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Millions of people in the developed world already live in a de facto cashless society. From the smart watch on your wrist to the contactless card in your wallet, being able to pay for small, everyday items without recourse to cash is fast, easy, and increasingly ubiquitous.

The cashless society is not a particularly new idea. It has generally been held up as an example of the positive march of progress, with some of the most influential names in global economics pointing out its potential benefits. But there may also be downsides, and one UK study has warned that “sleep-walking” into becoming a cashless society could leave millions of people financially disenfranchised.

Among the many advantages of the move to a cashless society, security is perhaps one of the most obvious. Cash is convenient but it’s also vulnerable to loss and theft. From crimes against the person (muggings, robberies and so on) to break-ins and burglaries, cash can attract a lot of unwanted attention. And for the most part, when it’s gone it’s gone.

Sweden is one of the highest profile proponents of the move away from using cash. It’s a trend that is evident elsewhere in the developed world, too. In the UK, 4,735 cash machines were taken out of service between July 2017 and June 2018 – that’s almost 400 per month.

Image: Treasury Today

Many smaller towns, villages, and suburban areas have seen a wave of bank branch closures; around 60 per month since 2015. It’s a similar story in the US, too. For small business owners this means the habit of making regular short trips to pay cash into the bank are a thing of the past. That can lead to larger amounts of cash being kept on-site overnight. One London pub, the Crown & Anchor in Brixton, went completely cashless following a series of burglaries that targeted cash.

For economist Kenneth Rogoff, who advocates a “less-cash society” rather than a cashless society, there are systemic advantages to consider. Paper money is an enabler of tax evasion, organized crime, and other fraudulent activities, he argues.

In much the same way that it is inherently vulnerable when held by individuals, cash is intrinsically hard to trace from the point of view of governments and their agencies. It is all too easily hidden out of sight and circulated without full accountability. This can be a particularly painful problem in parts of the developing world, where corruption and fraud continue to thwart efforts at economic empowerment and financial inclusion.

Clearly, any action that can reduce the extent of such corruption, thereby giving investors greater confidence in those parts of the world where major infrastructure projects will yield the greatest results can only be a good thing. But only 2% of the world’s population live in countries where digital transactions are in the majority. Any wide-scale moves toward a cashless future will need to ensure the rest are not left behind.

In 2016 the Indian government removed the 500 and 1000 rupee notes from circulation in an effort to fight corruption and move towards a cashless economy. Though aimed at helping the poor, the demonetization drive hit the most marginalized segments of society hardest.

While in Sweden cash use may be dwindling to nearly nothing, that’s not necessarily the case elsewhere and there is no clear-cut division between the technologically advanced developed world and the emerging markets. In Europe’s largest and most influential economy, Germany, cash is used in around 80% of all retail, point-of-sale transactions. Plus, the value of notes and coins in circulation is growing in some of the world’s largest economies, including the US and Japan.

From ad hoc charity donations to small payments to friends and family, cash is still hugely important overall despite its decline in parts of the world. Plus, there will be sections of any society for whom the transition to digital-only payments will present enormous challenges.

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That could include people with mental health problems, or physical disabilities, or age-related cognitive impairments, for example. Keeping track of which payment method, device, or card to use could be stressful or even upsetting. People caught in abusive domestic situations may find they have even less financial freedom, which cash may have brought them, if their spending is constantly monitored and scrutinized by a partner.

It also risks opening up another divide, with businesses adopting differential pricing structures that charge more for paying with cash than by digital.

“Britain needs to plan now for a world with fewer cash transactions so we can support those who depend on cash, and include everyone in our future digital economy,” says Natalie Ceeney CBE, chair of Access to Cash, whose report warns of the dangers of rushing into a cashless future.

The organization’s research has concluded that 1.3 million people in the UK do not have access to banking services, and that while only 2.2 million UK citizens use cash for all their everyday payments, “for 47% – or 25 million people – cash is not a choice, but a necessity”.

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