ESSA

ESSA

#ESSAdebate – The Cashless Economy


Charan Naidoo and Ben Toohey

By

May 14th, 2018


With the rise of new technologies such as, ‘tap and pay phone apps,’ it is becoming easier and simpler for consumers to switch to cashless payments. Charan Naidoo and Ben Toohey discuss whether we should view the rising cashless economy positively or negatively.


Charan Naidoo

You’ve been warned- the cashless economy is coming and there is little you can do to stop it.

The merits of a cashless economy have been a feature in public debate for over two decades. However only recently have nations, such as Sweden, finally made the transition, while many others are on the way. Transactions that were once completed by cold crisp bills are increasingly being replaced by plastic, creating many benefits for both central banks and everyday shoppers.

The switch from coinage to the card is picking up its pace. In 2016, India plucked 86% of their currency from circulation. Vietnam also recently announced an initiative to be 90% cashless by 2020.1 Similarly, Korea plans to stop minting new currency by 2020.2 Within a European context, Sweden is a shining example, with less than one percent of transactions taking place in the form of physical currency last year.3

There are a number of key reasons why this shift is taking place and why it should be embraced, rather than viewed with fearful apprehension. First, as the Reserve Bank of India avowed, going cashless will aid in an effort to curb money laundering. Cash has long been seen by terrorists, mobsters and financial criminals as anonymous cover to engage in unscrupulous activity, due to its almost untraceable nature. To quote Harvard Economist Kenneth Rogoff, “Cash plays a big role in crime. There’s a reason cash is king”.4 The European Central Bank has long been wary of the ability of the fabled 500 Euro note to be used for illicit activity, going as far as to announce that the note would be phased out by the end of this year.5 Forcing more currency into the control of banks and other financial institutions also makes tax evasion is made more arduous. Therefore, a cashless economy will create greater financial transparency, increase tax revenue and assist governmental authorities in their crackdown on crime.

The cashless economy will present several benefits for everyday consumers. Obviously, payments by card or by phone are far more efficient, due to considerably faster transaction speeds. Consumers no longer need to fumble for coins when they can quickly ‘Tap and Go’.1 Overall, cashless transactions create a more seamless and user-friendly experience. The popularity of this method is in part demonstrated by the explosive success of Uber, which makes hailing a taxi from your phone far less exhausting than doing the same from the curb. Whilst an immediate transition is unlikely, consumers can expect new payment methods will be essential to innovative and refined 21st-century business models.1

The new global cashless paradigm will not be here for some time, due to regulatory, ideological and otherwise practical considerations. However, it is coming. What governments, financial institutions and everyday consumers need to do, is keep their eye out for the bandwagon so they can hop on when it gets here.

References

  1. https://www.forbes.com/sites/forbesfinancecouncil/2017/10/24/the-cashless-economy-why-and-where-its-evolving-and-what-businesses-can-do-now-to-prepare/#3fa082f23e11
  2. http://www.imf.org/external/pubs/ft/fandd/2017/06/wheatley.htm
  3. http://www.bbc.com/news/business-41095004
  4. https://www.cnbc.com/2017/04/20/going-cashless-to-battle-financial-crimes-.html

 

Ben Toohey

There’s something about tangibility. We all grew up with the concept of ‘pocket money,’ the idea that if we completed our chores such as cleaning our room or washing the dishes, we would be rewarded with a gold coin – or a precious note if we were lucky – that we’d drop into our piggy bank, and one day crack open to have all that cash spill out and reward ourselves by purchasing what we’d been dreaming of owning for months. It was a simple ploy from our parents to teach us work ethic and encourage us to contribute to the household, but most importantly it taught us the value of money in a way that the changing of numbers on a screen never could.

Nostalgia aside, our understanding of the value of money is intrinsically linked to the tangibility of cash, and the inability of a solely electronic currency to carry an inherent value prevents cashless society from becoming a reality. The fundamental value of cash in modern society is a result of its history. Gold is the basis of currency; in its infancy, coins were made of the precious metal, and as time progressed this relationship become more distant, until the Gold Standard and ‘paper money’ was introduced before even that was deemed unnecessary, and thus cash gained its inherent value.

The value of cash is not solely this distant link to gold though, but rather what it represents: it is something physical, and that allows us to assign a value to it.  After all, the value of gold is the product of its scarcity and physicality. Therefore, the fundamental purpose of currency – to carry value – cannot be present in an electronic, intangible form. Human behaviour portrays the importance of physical currency, and this has been demonstrated through experiments examining how the spending behaviour of individuals changes according to their spending medium: cash or electronic. These studies found that there was a greater propensity to spend money when it was electronic, and suggest that this arises because of their being less ‘friction’ or ‘resistance’ to the spending – we do not bear as great a sense of loss when we give up something intangible.

Beyond the detriment caused to consumer’s spending habits, the movement towards the discontinuation of cash poses issues relating to our security and privacy. Fundamentally, a cashless society must place a greater reliance upon its banks. All transactions will be required to be facilitated through the finance sector; the possibility to operate independent of these institutions will be foregone. With the current widespread mistrust of banks – perpetuated by the current banking royal commission – and the already worrying level of dependence we have upon them, can even further empowerment be warranted or acceptable? Their importance to the operation of modern society and the growth of the economy provides the banks with a sense of security and creates moral hazard, an issue that creates inefficiencies and sub optimal outcomes. Indeed, we all saw the consequences that can arise from placing copious amounts of faith in the financial sector during the GFC. Let’s not make the same mistake again.

In the age of digitalisation, the privacy of data is becoming increasingly important. Electronic transactions all create a paper trail of information that is forever present; the anonymity benefits of cash will dissipate. Indeed, this increases the vulnerability of both our wealth and data; examples such as Facebook’s ‘Cambridge Analytica scandal’ show that even the largest of institutions are perceptible to ethical misconduct, irresponsibility and mistakes regarding the sanctity of what is personal.

Indeed, it is not just the banks that are empowered by a cashless society; the government also stands to benefit. The information that is generated from transactions, and the ability to control entirely an individual’s assets trend the government towards a worrying degree of power and influence over the population.

While the benefits provided by electronic transactions will continue to strengthen its prominence and dilute the necessity of cash, tangible currency will never be replaced in its functionality and purpose. For all the progression that stands to be capitalised upon as we progress further into the age of technology, wariness regarding issues of privacy and security must be maintained, and the continued use of cash in society will ensure this.

The views expressed within this article are those of the author and do not represent the views of the ESSA Committee or the Society's sponsors. Use of any content from this article should clearly attribute the work to the author and not to ESSA or its sponsors.

Founding sponsors

 

 

Partner

Gold sponsors

 

 

 

Silver sponsors

 

 

 

 


Affiliates