Is a Cashless Society Purely Beneficial?

Q1. The Future of Cash:

A Bloomberg article, “The End of Cash”, December 4 2017 https://www.bloomberg.com/quicktake/the-end-of-cash states the following:

“Economists see great payoffs in a cashless society: lower transaction costs, new tools to manage economic growth and an end to tax evasion and money laundering. Critics see an erosion of privacy, frightening new powers for tyrants and an increase in inequality”.

Critically evaluate the above statement. Use case studies from a range of countries, where appropriate.

Table of Contents:

Introduction.

1: Prospects for Cash.

1.1: The role of physical cash.

1.2: The current use of cash.

1.3: The decline of cash.

1.3.1: Sweden as a case study.

2: Arguments for a cashless society.

2.1: Possible end to tax evasion and money laundering.

2.2: The 500-euro bill (the Bin Laden).

2.3: New tools to manage growth.

3: Arguments against a cashless society.

3.1: Inequality between various groups of society (who will be affected?).

3.2: Increase in online tyrant crime (hacking & scams).

3.3: Privacy concerns.

Conclusion.

Introduction:

 “Cash is not likely to die out any time soon” (Fish and Whymark, 2015). It is evident today, that the future of cash is an ongoing debate, with many arguments both for and against a cashless society. “11 years ago, 22 million payments were made using cash daily, and the percentage of transactions made by card was a portion of this, 10 years from now, that figure is presumed to decrease to below 12 million” (Clarke, 2018). Due to e-payments the future of cash is difficult to determine.

The purpose of this paper is to examine both arguments. Firstly, the paper will provide insight into the history of and prospects for cash. The main body of the paper will discuss in detail the decline of cash and will compare the arguments for a cashless society (tax evasion, money laundering, the 500-euro bill, negative interest rates) with the arguments against a cashless society (inequality, increase in online crime, privacy concerns), before concluding the future of the paper currency in the coming years.

1. Prospects for Cash:

This section explains the role of physical cash, its current uses and the causes for a decline in cash use.

1.1: The Role of Physical Cash.

It was the 1600’s that saw the beginning of bank notes (physical cash). Bank notes are known as ‘fiat money’. “Fiat money is paper currency decreed by governments as legal tender but not convertible into coins or precious metals” (Mishkin, 2010). The functions of fiat money are; a medium of exchange, a unit of account, and a store of value.

Cash is used to enable transactions for goods and services. Cash is originally linked to the experience of the consumer. Therefore, the dominant role of physical cash “remains integral to treasury management, specifically; cash handling costs” (Dubey and Berghout, 2016). However, each person’s preferred method of transfer varies, leading to an increase in methods such as; internet bank transfers and consumer-centric payments through Fintech firms. Nonetheless, economists state that ‘the increase of such digital transactions does not come at the price of the expiry of physical cash, as many sole traders show preferences for using cash, yet; its role may need to be redefined’ (Dubey and Berghout, 2016).

1.2: The Current Use of Cash.

“Cash is not likely to die out anytime soon” (Fish and Whymark, 2015). Despite talks of a cashless society, and the use of cash for transactions deteriorating, demand for physical cash is increasing, especially as opportunity cost diminishes (Linnemann Bech et al., 2018) and the total value of notes and coins in circulation is also increasing. This demand for cash grew after the last global financial crisis. The BOE (Bank of England) estimates that the value of notes and coins circulating in the English economy is approximately £80 billion (Clarke, 2018), similarly to that of the Australian economy, which have an estimated $73 billion in circulation (Davis et al., 2016). Comparing this to G4S statistics that “there is 500 billion banknotes and trillions of coins circulating in the economy today” (Jenkins, 2018), it is evident that the likelihood of cash dying out in the near future is unlikely with the statistic proving that cash is still relevant to consumers, with physical money currently accounting for 9.6% of global GDP (Jenkins, 2018).

Figure 1: Number of Banknotes in Circulation (Davis, 2016).

For many years, and potentially for years to come, cash is dominating the low-cost retail sector, such as newsagents and pubs, in the RBA bulletin, it states that almost 70% of all transactions under $20 in 2013 where purchased with cash (Davis, 2016).

Cash is used to store wealth, despite being an older method of saving, ‘hoarding’ cash provides many people with a sense of security as it leaves no paper trail and is free from the risks of hackers. Hoarding cash is still popular today,18% of people in England admit to hoarding cash as a store of value in 2014 (Fish and Whymark, 2015).

People on low incomes rely heavily on cash for to budget effectively, and to purchase goods and services. In 2016 alone, “2.7 million people in the UK were reliant on cash, with cash accounting for 44% of all payments made” (Clarke, 2018).

Many people are guilty of what is known as ‘spontaneous’ or ‘impulse’ buying. For these purchases, cash is the most common payment method, accounting for 52% of all spontaneous purchases in 2014 (Fish and Whymark, 2015).

A study conducted by the ECB in 2014, stated that of the 7 countries involved, between 46% and 82% of all payment transactions were conducted by cash (European Central Bank, 2014). Many European countries are still cash intensive, for example, in Germany, 80% of the population use cash the primary payment method, to prevent privacy risks associated with e-payments. The average German wallet contains 103 euros in physical notes and coins (Campbell, 2018).

From the above statistics it is difficult to imagine a world in which cash has been totally wiped out, the ECB remain issuing notes and coins in their trillions (1.2 trillion worth of euros issued in 2018) (Bradley, RTE, 2018). As stated by Mark Twain, “the reports of the death of cash are greatly exaggerated” (Mishkin, 2010).

Figure 2: Value of euros (physical notes and coins) in an average European consumer’s wallet (Campbell, 2018).

1.3: The Decline of Cash.

This section gives us an insight into the recent decline of cash, highlighting the causes for this decline. This section also investigates the Swedish economy.

According to economist Frauke Petry, “we are currently seeing the gradual abolition of cash” (Campbell, 2018). In recent years, cash is facing an undeniable decline. In the last decade, the volume of cash has decreased by roughly one third, and the value of cash payments is decreasing by 10% from year to year (Jenkins, 2018). In 2016, the RBA stated that 47% of transactions were made using cash, despite this being quite a large percentage considering the evident decline in cash, this figure is a decrease of 22%, as in 2007, cash was responsible for 69% of all transactions (Davis, 2016). Comparing current statistics to those of the past emphasises the consistent decline, and highlights the rate at which our economy, and consumer attitudes are changing. In some countries, the decline of cash is occurring at a faster rate than others, in the UK, despite the demand for physical cash increasing yearly since the financial crisis, from 2015 to 2016, the number of all cash payments made declined an astonishing 11% in one year, with the value of such payments decreasing to £240 billion, a 5% decrease from the previous year, by the year 2025, cash transactions could potentially have decreased 26% from its current rate (Clarke, 2018).

Figure 3: (Campbell, 2018).

 Table 1: Most recent estimate of cash use across countries (Davis, 2018).

Between the years 2012 and 2015, there has been a significant increase in non-cash alternatives being used for payments. In the space of the 3 years, non-cash payment methods increased annually by 5.3%, that is by 3.4% in terms of value (Mercadante, 2018). The cause for their popularity is primarily the efficiency, ease of payment, and flexibility that these alternative payments provide.

In a study conducted in China, results found that over 50% of the Chinese population are currently using cashless payments such as Alibaba (Alipay) to purchase over 80% of transactions per year, e-payments currently outshine cash, accounting for 60% of China’s total payments (Jenkins, 2018). It is highly likely that China will soon follow in Sweden’s footsteps on the pathway to a cashless society, especially with the rate in which technology is improving in their region. Currently in China, consumers can make purchases via phone numbers, QR codes, and the most recent progression, facial recognition. This evolvement began firstly in fast food restaurants throughout the region but is quickly becoming a widespread advancement (Linnemann Bech et al., 2018).

PayPal and Apple Pay are other examples of cash alternatives which are becoming increasingly popular. These apps are dominant for online shopping websites, with your purchase being completed by the touch of a button. Using less resources and being a faster means of payment is the main cause of such payments nudging cash into further extinction (Bradley, RTE, 2018).

Contactless payments are taking cash’s place in the payment for lower costing transactions. In 2016, in the UK, contactless payments accounted for £26 billion (Clarke, 2018). In the Financial Times magazine, The Watch House café in London was investigated by Jenkins (2018), and the findings stated that becoming a cashless café has saved the business both time and money. Most payments are received through contactless. Also, over 80% of customers were paying through card so the change to a non-cash business was inevitable (Jenkins, 2018).

Firms are constantly creating new advertising techniques to influence consumer attitudes. One obvious example is the “Cash is Awkward” campaign by Visa, this campaign is enticing consumers to make the change to contactless, offering business $10k to abandon cash and use entirely card-based payment methods. In recent years, the number of people globally furthering their education has increased, a study by the RBA proved that with educational and income increases, the use of cash declines (Davis, 2018). Across the UK, benefits such as Universal credit benefits now have a new policy in which they are no longer given in cash and must be transferred into an account, this is forcing many people who may not have access to debit/credit cards and bank accounts to make the modern-day switch.

One main target for banks across the world is an attempt to phase out coins. We have seen this already in Ireland, with the demise of the one and two cent coin no longer accepted as medium of exchange. South Korea is currently following suit of Sweden, hoping to extinguish all coins by 2020. Cash is unsurprisingly expensive for banks to count, distribute and print. In the US, processing cash transactions and ATM repairs take up 10% of the countries cost base (Jenkins, 2018). The past few years have seen the closure of thousands of banks across the world, in Ireland alone, 60 branches have closed monthly since 2015. Economist Andy Haldane states that “the decline of cash will give the banks new flexibility in the event of another downturn” (Giles, 2015).

1.3.1: Sweden as a case study.

“Sweden heads the vanguard” according to Financial Times reporter Patrick Jenkins (2018). Sweden is progressing towards potentially becoming a cashless society. There have been major advancements in the Swedish economy in recent years in relation to mobile and e-payments, with over 90% of households in the nation having access to online banking apps such as Swish (payments are made using either mobile numbers or QR codes) and the average person making over 270 card transactions yearly (Segendorf and Wretman, 2015). The demand for cash in Sweden has declined across all sectors, demand for cash as a store of value has decreased, as has demand for transactional purposes of cash. Bank notes and coins currently represent just 1.5% of the nation’s GDP (Sivabalan, 2017), a decrease from 4% at the beginning of the 2000’s.

Figure 4: The End of Cash (Sivabalan, 2017). 

Figure 5: The decline in ATM use in Sweden from 2012-2016. (Campbell, 2018).

 The people of Sweden evidently have great trust in their community, with church donations being made through contactless. A survey undertaken by the Riksbank in 2016 showed that in the month before the survey took place, over 50% of interviewees had used SWIFT in the past month, and that cash was used for one fifth of transactions (Davis, 2016). The Swedish government has now created a method in which homeless people can now receive card payments through specially created devices.

Sweden has invested heavily in IT systems and was 3^rd out of 148 countries in 2015 in utilising its telecommunication systems (Segendorf and Wretman, 2015). This has helped the nation to reduce VAT evasions, using specified, certified cash registers. This has led to the closure of bank branches and ATM’s and aided the country in introducing negative interest rates. According to the Riksbank, “a cashless society is imaginable, if you extrapolate current trends, the last note will have been handed back to the Riksbank by 2030” (Jenkins, 2018).

2: Arguments for a Cashless Society.

Many economists see great payoffs in a cashless society. There are various evident benefits towards the increase in e-payments, this section of the paper outlines the potential benefits of a cashless society on the global economy.

Firstly, e-payments are frictionless, and the experience of paying is faster than paying in cash. In the past 5 years in China, the app Alipay has issued $96 billion in loans. Amazon has also loaned over $1 billion to small businesses across the globe between 2017 and 2018 (Bradley, 2018). Smartphones are potentially the wallet of choice, currently accounting for 60% of all payments.  Digital wallets are germ free, quick, and convenient.

For retailers, avoiding cash would reduce the risk of robbery, e-payments are a much safer means of sending money. Many retailers also provide online loyalty schemes in which you can only avail of offers via email or the online website, this is a tactical means to reduce the number of customers paying in cash.

Cash has no paper trail and when it’s gone it’s gone. However, credit and debit cards can be traced or cancelled. Consumers using e-payments or debit/credit cards are protected under the Fair Credit Billing Act, with cash there is no protection scheme, an issue which many would consider another downfall of cash.

2.1 End to Tax Evasion and Money Laundering.

“The shift away from cash has been great for tax receipts” states Per Bolund, the Swedish Deputy Minister of Finance (Jenkins, 2018). As economists globally question why cash is increasing relative to GDP, it is evident that this is due to crime and tax evasion. Peter Sands states that “drug trafficking is the biggest driver of illegal financial flows, cash is a major source of funding for terrorism” (Jenkins, 2018). Getting rid of cash will make clamping down on tax evasion easier for governments. Tax evasion is a major problem globally, particularly in the US and Europe, according to the International Monetary Fund, each year the total about of laundered money exceeds $1 trillion dollars (Summers, 2016). In 2011 alone, 19% of the total reportable income in the US was not reported (Zorpette, 2012). It is estimated in Ireland that for every 100 euro paid in tax, another 200 is owed.

Tax evasion is highly associated with the drug trade and human trafficking, however; one problem which arises from the availability of cash is the employment of illegal immigrants. The estimate of illegal immigrant workers worldwide is 230 million (Rogoff, 2016), working mainly in construction and agriculture (‘cash-in-hand jobs’). The existence of cash in this instance makes it difficult to control boarders and calculate such incomes. If cash were to be phased out, the number of illegal immigrants working in countries such as the US would be greatly reduced, as would the drug trade, human trafficking, and many other underground economy activities, and the overall amount of money being laundered would decrease.

Figure 6: Process of money laundering (Sands, 2016).

2.2: The 500-euro Bill.

“Europe is right to kill off the criminals favourite banknote” (Summers, 2016). Europe has taken a step closer towards a cashless society by eliminating the 500-euro bill. High denomination notes are primarily used by workers of the underground economy, mainly workers in the drug trade, and most recently, terrorists. November 13^th, 2015 marked the horrific terrorist attack in Paris in the Bataclan theatre. This encouraged the ECB to make it harder for the criminals of Europe and those entering Europe by eliminating the 500-euro bill. Many economists such as Sands (2016), Summers (2016), and Haldane (2015), all state that there is truly no use for larger denominated notes in everyday living. The economists believe that by eliminating such notes, current crime flows will decrease. Before the availability of the 500-euro bill was curtailed in 2010, over 90% of demand for 500-euro bills in the UK came from criminals. What’s more, in a survey conducted by the ECB, results show that over 56% of the general EU public have never laid eyes on the banknote (Summers, 2016). The ECB can only hope that the elimination of this banknote will reduce the percentage of money being laundered in the future.

2.3: New Tools to Manage Growth.

Getting rid of cash would provide governments and central banks with new methods to measure growth, and results will be more accurate as tax evasions and money laundering will be reduced. According to Giles (2015), the banks would have increased flexibility in the case of another global downturn. Without cash, regressions could be easily fought by central banks by introducing negative interest rates, primarily a tax on savings (Campbell, 2018). Abolishing cash removes the option of people converting their deposits into cash in the case of a reduction in interest rates (Giles, 2015).

3. Arguments Against a Cashless Society.

“Cash is vital in supporting financial inclusion” Victoria Cleland, (Jenkins, 2018). This section explores the arguments for cash, and why it should remain in our economy in the future. Despite there being countless reasons for the public to disapprove of an economy of e-payments only, the section below highlights the 3 main reasons.

3.1: Inequality between various groups of society (who will be affected?).

“Retailers should not discriminate against a cash buyer by requiring the use of credit by a buyer in order to purchase goods and services” states the Massachusetts retail policy. One negative impact of a cashless society is the issue of inequality. Over 2.5 billion people living in the global South don’t have access to modern financial services (Lin, 2014). In the UK in 2016, over half of households in which their income was less than £16k relied heavily on cash, and up to 40% of social housing tenants do not have internet access (Clarke, 2018). The main groups of society which would be affected by this change are elderly people, people on lower incomes, people in the global south, people living in geographically isolated areas, and homeless. A shift away from cash would make these people second class citizens who are prone to attack from criminals who also rely on cash. In 2015, the FDIC carried out a study which proved that 11% of the American population don’t use the internet, eliminating cash would segregate this percentage from participating in the economy (Mercadante, 2018). Cash should remain in the economy as “easy accessibility to cash, for the elderly, socially vulnerable, and minors, allows people to participate in society” (Mersch, 2018).

Figure 7: Consumers reliant on cash by age and income levels. (Clarke, 2018).

3.2: Increase in online tyrant crime.

“Cyber warfare is currently the biggest risk to business” (Jenkins, 2018). Then why are people edging towards a cashless society? Many people forget the risks associated with online shopping, banking, and credit card payments. In 2017, every 1 in 16 people were victims of identity theft, a problem largely associated with e-payments. This is 6.64% of the global population (Mercante, 2018). If demand for e-payments continues to increase, online crime will be a compliment to this and cases of identity theft and online tyrants hacking financial systems will also increase. With new means of technology, credit card and cyber fraud is consistently rising. The current cost of cyber fraud is valued at $22 billion a year to the global economy. If cash was to be removed from the economy, the current cost of cyber fraud could potentially double, with people new to online methods leaving themselves more susceptible to risk (Dubey and Berghout, 2016).

3.3: Privacy Concerns.

“Privacy protects people from the risk of surveillance state and thought police” (Mersch, 2018).

Lastly, the importance of privacy is a major concern for many consumers in relation to e-payments. Public trust in banks has decreased immensely since the financial crisis of 2008, many people love the idea of cash as it “gives the consumer greater control over their money” (Clarke 2018). As cash provides no paper trail and purchases can’t be traced, it provides many people with a sense of security. One country which is evidently more sensitive to privacy concerns than others is Germany. One worry surrounding Germany’s population is that they’re “being asked to open their data, without knowing that the end guardian is going to keep it safe” (Jenkins, 2018), the German population also no longer allow Google Maps to take street view images, this highlights the severity of such privacy concerns. In a digital economy, banks, building societies, and governments can take control of your payments with the flick of a switch, they also have the right to refuse transactions, which is a serious issue for a large percentage of the global population. Everyone at some stage has occurred the stress and anxiety of losing a credit card or mobile phone, if the economy was to become cashless, and such an event was to happen, this experience would only be exacerbated. “Cash is printed freedom” (Campbell, 2018) and therefore should remain in the economy for both the near and far future.

Conclusion:

“The reports of the death of cash are greatly exaggerated” (Williams and Wang, 2017). To conclude this essay, having considered both arguments. It is evident that our global economy will remain with cash as a legal tender for the foreseeable future. Despite there being countless pros and cons to both sides of the argument, an entirely cashless society will be difficult to implement due to the number of underground businesses, elderly people, and people in the global South highly depending on it. A cashless society would lead to social and economic segregation. Another reason for the likelihood of cash remaining in society is due to potential power outages, hackers, or cyber warfare. “Digital systems have central points of failure, but cash doesn’t crash” (Bradley, 2018). However, if the global central banks proceed to eliminate cash in the coming years, it is crucial that the process is slow, an operation such as this would take a minimum of 10-15 years to be implemented successfully, to avoid excess disruption to the global economy.

As cash remains a primary tender for transactions in our economy, the conclusion of this essay is that;

“Cash is an important public good by which governments and central banks measure the transparency and legal order of society” (Campbell, 2018).

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