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The cashless society


Christopher Craig

By

October 10th, 2018


Cash is fast becoming a thing of the past, and as such the cashless society is upon us. Chris Craig dissects the ramifications of this shift in the way we pay.


Think about the last time you left the house. Bring any cash with you? If you did, I bet it wasn’t much. The numbers confirm that cash is dying. Rapidly. The latest RBA figures show the majority of transactions by both number and value are done using non-cash methods (63% and 82% respectively).[1] The share of payments by cash is expected to fall to just 2% by 2022.[2] This trend is mirrored abroad. In Sweden, cash is expected to be used in just 0.5% of transactions by 2020.[3] Developing nations such as Nigeria, Kenya and India are also heading in this direction thanks to strong government support.

The cashless economy truly is coming. What will this mean for us though?

 

The money side

Firstly, let’s look at the economic and financial impacts. Cash costs us through lost time, storage, manufacture and transport. According to McKinsey, these costs all add up to roughly 0.38% of GDP, or $6.6 billion.[4],[5] In addition, although it isn’t sexy, less cash means more tax. The disappearance of the cash economy will give the government $15 billion more revenue each year.[6] This will then theoretically allow the government to lower the burden on us law abiding citizens – if they are feeling generous.

There are financial downsides however. You’ve likely realised this yourself – people spend more when they don’t use cash. The research backs this, suggesting people spend up to 50% more on non-essential transactions when not using cash.[7] Good for retailers, bad for us.

Rejecting cash also means foregoing a free, public good in favour of a paid alternative, as digital payment systems charge the user per transaction. Indeed, these relatively high costs are one of the reasons why cash is still around.[8] Transaction costs are expected to fall however due to the Fintech boom. Traditionally, competition has been slow in the digital payment system industry due to its oligopoly structure, with banks and other giant firms (Paypal, Mastercard, Visa etc.) dominating.[9] Nowadays, however, small Fintech companies are ramping up competition; reducing costs, driving efficiencies and increasing accessibility. Whilst this shift will no doubt be positive for consumers and drive down costs, the disappearance of the free competitor (cash) will mean firms have little incentive to drop their fees to zero.

Central banks are also eagerly awaiting the death of cash. Currently, the average interest rate of OECD nations is 0.92%.[10] If another economic downturn were to arise, policymakers would have little choice but to implement negative interest rates. However, people don’t like having their savings taxed, and in such scenarios are tempted to just hide it under the mattress – making monetary policy less effective. In contrast, this is not an option for people in the cashless society. Money must always be in the bank. Some people may choose to store their wealth through other instruments, but the majority will be forced to accept the negative interest rate.

 

The other side

The implications of the cashless society are far from just financial and economic however. Going cashless will reduce the number of bank robberies, but it doesn’t mean the overall crime rate will fall. Last year there were just ten bank robberies in Sweden, down from 110 in 2007.[11] However, instances of electronic fraud have doubled.[12] Going cashless also means that hackers can steal ridiculous sums of money from the other side of the world, as occurred in 2016 when $63 million was stolen electronically from the New York Federal Reserve Bank.[13]

Worrying possibilities also arise from every transaction being recorded. As cash dies so do anonymous purchases. Not only will banks have access to this information, but so too the ever-growing big tech firms through products such as Apple/Amazon/Google Pay. As events of the last year have shown, this presents numerous problems. The Cambridge Analytica scandal displayed how much data technology corporations have on us, how this data may be abused, and how uncomfortable people are with these facts. Corporations are not the only worry however. An even more alarming possibility is if the government were to slip into totalitarianism. Without cash, the government would gain one more way of keeping tabs on its citizens. It could even decide to simply delete the finances of any person or group it sees as a threat. An unlikely scenario, but a possible one nonetheless.

 

Cash lives on

There are innumerable consequences stemming from the death of cash. Some are good, some are bad, and some are potentially terrifying. Personally, I believe keeping limited cash in society whilst using other methods for most transactions gives us the best of both worlds. It seems the market agrees. Whilst cash as a share of transactions is shrinking, demand for cash is still growing.[14] People like to use cash, whether it be for storing wealth, for its lower costs, or because they want to keep some things to themselves. And there’s nothing wrong with that.

 

[1] Doyle, M.A., Fisher, C., Tellez, E., Yadav, A. (2017) How Australians Pay: Evidence from the 2016 Consumer Payments Survey. Retrieved from https://www.rba.gov.au/publications/rdp/2017/pdf/rdp2017-04.pdf

[2] East & Partners. (2017). Is a cashless society fact or fiction? Retrieved from http://www.eastandpartners.com/index.php/publications/banking-news/is-a-cashless-society-fact-or-fiction

[3]Henley, J. (2016). Sweden leads the race to become cashless society. Retrieved from https://www.theguardian.com/business/2016/jun/04/sweden-cashless-society-cards-phone-apps-leading-europe

[4] Denecker, O., Istace, F., Niederkorn, M. (2013) McKinsey on Payments (No. 16). Retrieved from https://www.mckinsey.com/~/media/mckinsey/dotcom/client_service/financial%20services/latest%20thinking/payments/mop16_forging_a_path_to_payments_digitization.ashx

[5] Australian Bureau of Statistics. (2018). 1345.0 – Key Economic Indicators, 2018. Retrieved from http://www.abs.gov.au/ausstats/abs@.nsf/mf/1345.0

[6] Khadem, N. (2017). Federal budget to tackle illegal cash economy costing up to $15b in lost revenue. Retrieved from https://www.smh.com.au/business/the-economy/federal-budget-to-tackle-illegal-cash-economy-costing-up-to-15b-in-lost-revenue-20170404-gvdfkr.html

[7] Kohler, C. (2017). Tap, spend, forget: Why using cash could be the key to saving money. Retrieved from https://www.domain.com.au/money-markets/tap-spend-forget-why-using-cash-could-be-the-key-to-saving-money-20170726-gxha2l/

[8] Achord, S., Chan, J., Collier, I., Nardani, S., Rochemont, S. (2017) A Cashless Society: Benefits, Risks and Issues (Interim Paper). Retrieved from https://www.actuaries.org.uk/documents/cashless-society-benefits-risks-and-issues

[9] Achord, S., Chan, J., Collier, I., Nardani, S., Rochemont, S. (2017) A Cashless Society: Benefits, Risks and Issues (Interim Paper). Retrieved from https://www.actuaries.org.uk/documents/cashless-society-benefits-risks-and-issues

[10] Organisation for Economic Co-operation and Development. (2018). Monthly Monetary and Financial Statistics (MEI). Retrieved from https://stats.oecd.org/index.aspx?queryid=86

[11] Business Insider Nordic. (2018). Bank robberies decline as Sweden ditches cash – but more people are turning to black market crime instead. Retrieved from https://nordic.businessinsider.com/sweden-is-ditching-cash–and-it-has-unexpected-consequences-for-owls-and-orchids–/

[12] Henley, J. (2016). Sweden leads the race to become cashless society. Retrieved from https://www.theguardian.com/business/2016/jun/04/sweden-cashless-society-cards-phone-apps-leading-europe

[13] Hammer, J. (2018). The Billion-Dollar Bank Job. Retrieved from https://www.nytimes.com/interactive/2018/05/03/magazine/money-issue-bangladesh-billion-dollar-bank-heist.html

[14] Davis, C., Doyle, M. A., Fisher, C., Nightingale, S. (2016). The Future of Cash. Retrieved from https://www.rba.gov.au/publications/bulletin/2016/dec/pdf/rba-bulletin-2016-12-the-future-of-cash.pdf

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.

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