What A Cashless Society Could Mean For The Future
Posted on 10th Jul 2019
Article by: Vishal Marria
With the growth of contactless payment systems, the spread of mobile technology and the establishment of Open Banking catalyzing faster development of digital payment infrastructure, use of cash is slowing. In the UK, only 34 per cent of payments are now made in cash, according to UK Finance, and debit cards overtook cash as the most popular payment method for the first time in 2017. Meanwhile, in Sweden, cash accounts for just two per cent of the value of all transactions and is predicted to account for just half a per cent by 2020.
There will come a point at which the cost of maintaining the infrastructure to support cash transactions is no longer affordable, leading to an acceleration in transition towards digital payment methods. Experts are warning that rising bank charges and disappearing branches will force businesses to ditch cash before customers are ready. A recent report from Access to Cash warns that going cashless too soon could mean millions of people are financially excluded and at risk of exploitation. This emphasizes the need for banks, governments and FinTech companies to work together to ensure that the most vulnerable, the underbanked and the elderly are protected, and that the transition to a cashless society is as smooth as possible.
The benefits of a cashless society
Physical cash can be anonymous and untraceable, allowing it to play a large role in crime, including bribery, tax evasion, money, counterfeiting, corruption and terrorist financing. However, cashless payments leave behind tracable records, making it harder to conceal income, evade taxes and hide black market transactions. With technologies such as voice and face-recognition, as well as retina-scanning, being inbuilt to payment technologies, transactions also have the potential to become more secure than ever before, while payments can also be protected by end-to-end encryption and fraud-preventing technology.
A cashless society also provides scope for more monetary policy. With physical cash, people choose convenience over other safe assets offering higher yields. During economic downturns, governments face challenges stimulating the economy by lowering interest rates, since people are likely to hoard their cash instead. This means governments and central banks have limited power, also known as the zero lower bound theory.
However, with digital payments and no cash, people would be unable to withdraw money from the financial system, meaning governments and banks could leverage greater control of the economy through monetary policy. Specifically, the implementation of a negative interest rate during economic downturns could be brought in, whereby people would pay banks to store their deposits, instead of earning interest on those deposits. This aims to stimulate more lending from banks and increased investment by businesses, as well as encouraging people to invest, lend and spend instead of amassing money.
Another potential benefit of a cashless society is the opportunity this creates for alternate currencies, such as hyper-local currencies that aim to encourage spending in local economies. Such nonofficial payment systems are already developing worldwide, with the likes of TEM (Alternative Monetary Unit) in Greece. No single person is permitted to hold more than 1,200 TEMs, or owe more than 300, meaning it can’t be hoarded like regular cash. TEM is also only accepted in the city of Volos, so that it serves to stimulate the local economy as it has to be spent there.
Digital money could also allow the spender to attach certain caveats to their purchase on how it is spent. For example, cash could be only permitted to be spent on ethical purchases and could devalue if spent elsewhere.
Potential problems with a cashless society
Digital transactions are easily tracked and recorded, raising concerns about surveillance and who has access to these data trails. There are also worries that the rich may be better equipped to buy themselves privacy, while the average person with a traditional bank account receives no anonymity.
Relying on modern technologies built around banks’ old, existing infrastructures also carries risk. Many established banks’ IT systems date back to the 1970s and with no cash as a back-up, people are often depending on systems that are faulty. Technology is vulnerable to glitches, outages and mistakes leaving people without the ability to make transactions at potentially crucial moments.
Furthermore, as payments move online, there would be an increased risk of crimes such as identity theft, account takeover, fraudulent transactions and data breaches, due to the higher volume of cashless transactions and more points of exposure for the average consumer.
A cashless society also poses risks for those without bank accounts finding themselves further marginalized and without support. Those less financially stable may lack the technology for making payments and would thus have no method of getting paid or receiving financial aid. To tackle these issues, several charitable organisations are experimenting with contactless ways to give donations to charities or to those in need.
Looking ahead, it is evident that society could benefit from changes to the way money is spent and businesses would enjoy reduced costs without the need for cash infrastructure, as well as increased efficiency and productivity. However, integration and implementation of new digital payment technologies would need to be carried out gradually. Robust systems would need to be put in place to support and provide for those who may struggle to access the technology, and for situations where technology could fail.