A cashless society: not if, but when?

Why should cash survive when there are more efficient means of payment evolving?

In the current age where time and convenience are placed at a premium, carrying cash has become too much hassle. Near-field communication (NFC) technology, used in 1 in 4 card payments, has enabled transactions to be reduced to a simple, satisfying ‘beep’, achieved by holding your card or phone to a payment point. This eclipses the practicality of cash for purchases under £30, where the increasingly popular method of contactless payment is taking over. To illustrate this point: in Sweden, just over 2% of transactions are conducted in cash today.

Sweden and Britain are leading the transformation of the global payments infrastructure with standard eateries in Swedish highstreets outright refusing any payments in cash. Swedish high street banks have also ceased to allow customers to withdraw cash at their branches. Coupled with the continued closure of ATMs, cash is becoming both less acceptable and less accessible.

Regarding the production of coins or ‘coin minting’: it cost the US a massive 1.66 cents to produce a 1 cent coin in 2014, a cost that would not be needed in a cashless society. And in terms of efficiency, a Monetary Authority of Singapore study suggests that the country would save 0.5% of GDP a year in social costs by going cashless, equating to a cool £2 billion a year. The cost of cash management is a huge 3% of GDP in India. Many banks, businesses and politicians are ardent advocates for electronic payments in the war on cash, with giants VISA in 2017 offering selected retailers in the US $10,000 to upgrade payment systems and stop accepting cash altogether.

Perhaps the most published proponent of going cash-free is Kenneth Rogoff, a former Economist at the International Monetary Fund (IMF) and author of ‘The Curse of Cash’. He suggests eradicating cash will allow for more effective tax collection, due to the money laundering avenues that cash offers ceasing to exist. The ‘covert’ cash payment dependence of the black economy will undoubtedly suffer, as well as those not inclined to declare cash-in-hand earnings. Rogoff makes scrapping high denomination bills, a key aid to criminal activity, a salient point in his publication. The £50, €500 and $100 bill are said to facilitate criminal operations within the underground economy. The European Central Bank (ECB) will stop issuing the €500 note by 2019 amid concerns that drug dealers and terrorists are the main beneficiaries. It is estimated by the Institute and Faculty of Actuaries that going cashless would result in an extra tax revenue collection of over £6bn in the UK through plugging the hidden economy loophole.

‘The Macroeconomics of De-Cashing’, an IMF report, explains how significant economic growth resulting from constraining the supply of cash can be achieved. The logic assumes that people will deposit their cash with a financial institution, who in turn will have a larger balance sheet to engage in more lending, thus facilitating economic growth. Furthermore, to boost consumption, negative interest rates would be more effective given that cash can’t be held. As such, spending would be incentivised. This is particularly applicable in today’s low interest rate environment.

In the political realm, the issue of eradicating hard cash completely was suggested by a former aide to Cameron in 2015. Since then more calls have emerged to end the role of cash, supported by many banks and politicians. HM Treasury recently noted that 60% of 1p and 2p coins are only used in a transaction once before leaving circulation. In March 2018, Westminster saw attempts to eradicate 1p and 2p coins, a policy endorsed by Philip Hammond, face backlash from the public. Given the provisional life expectancy of hard cash, said to be 2030, it is surprising that money has been spent replacing the £1 coin, along with the £5 and £10 note. The reason new cash was minted was due to ease of replication by criminal organisations. In fact, it is estimated that almost 3% of the old £1 coins were clones. This constitutes another line of reasoning in favour of going cashless.

The biggest proportion of the average person’s expenditure (travel, rent and food) is easily accessible without hard cash. Take London transport for example – all done via card payment. The transport efficiency is greater than systems that accept cash only, such as in Cardiff.

The introduction of the Payment Service Directive (PSD2), has seen a flourish of payment management and budgeting apps come to market to enable consumers to maintain control of their finances, something that isn’t possible when withdrawing cash, unless done manually. FinTech advancements such as the new Revolut card enables travel money to be used via credit card negating the need for travel money dispensed as cash in order to avoid a fee. Apps for paying back a friend such as Paym allow you to transfer money to contacts instantly, again without a fee.

What happens when the internet goes down? How do I know my data is going to be kept secure? These are questions faced by those advocating a cashless society.

Paying by cash triggers more positive emotions - pocket money, birthday money. The sentiment of giving money as a gift is somewhat lost in an electronic transfer.

Another issue comes from the intangible elements of contactless - individuals can be faced with high fees and charges when using cards and accessing overdraft facilities, with bank terms and conditions often misleading. This is not possible with cash – you can’t spend more than what is in your wallet.
Concern points to vulnerable groups such as the elderly who may require digital training to enable them to participate in the cashless society without being anxious or at risk of being scammed. When compared, just under 70% of those 16-74 use online banking in the UK.
Homeless people or those with no fixed address would struggle to open a bank account and would have to adapt. Charities would also suffer; whilst the Church of England and big issue representatives have recently started to take card donations and payments, smaller, more cash strapped organisations may not be able to afford the tech needed.

Contactless technology itself is not without fault – over the last year, there has been an alarming 51% rise in fraud taking place on lost and stolen cards. The rise of ‘digital pickpockets’ is also concerning, with 80% of card users worried about identity theft. It is also difficult to understand who you paid, given trading names often appear on statements differently. Trying to reconcile what you spent, where, and whether the amount was as it should be can be tricky.

The ongoing debate regarding the viability of Cheque payments is an illustration of how difficult it is to change old payment habits and would support the stubborn longevity of cash the payments system. The final factor is trust – payment service providers need the unwavering confidence of their consumer base to operate a cashless society.

The financial world is ever changing, but for the foreseeable future, it looks like cash is here to stay.