The world is steadily moving towards a cashless society and the change seems unstoppable. Sweden is certainly at the forefront of promoting a cash-free society.
In Sweden, it is difficult to find a cafe or shop that accepts cash. According to the European Payments Council, only 1% of Sweden´s 2019 GDP were cash transactions. Also, cash withdrawals are declining around 10% a year. (1)
In today’s post, we talk about the positive as well as negative aspects of the cashless-world. In addition, at the end of the article, we mention another country that has experimented with going cashless. And yes, this country might come as a surprise.
Benefits of a Cashless Society
- It is much more convenient than carrying around paper and metal coins.
- Probably lower crime rates. Carrying cash makes one an easy target for criminals. Once the money is taken from your wallet and put into a criminal’s wallet, it’ll be difficult to track that cash or prove that it’s yours. One study by American and German researchers found that crime in Missouri dropped by 9.8% as the state replaced cash welfare benefits with Electronic Benefit Transfer (EBT) cards (2)
- Automatic Paper Trails (this should also be listed under negative effect). Similar to the previous point, financial crimes could dry up in a cashless society. For example, gambling and drug operations typically use cash, which means they can hide and launder it easily. With a cashless society, it becomes harder. If of course criminals won´t find a loophole or a clever way to hide/move it. Time will tell.
- International payments become easier. When you travel, you may need to exchange your cash for local currency. However, if you’re traveling in a country that accepts cashless transactions, you don’t need to worry about exchange rates or how much of the local currency you’ll need to withdraw. Instead, your mobile device handles everything for you. (2)
Negative effects it could bring
Depending on perspective, going paper-free might actually cause more problems. The first one on the list is by far the biggest problem and the biggest argument against a cashless society today.
- Digital transactions sacrifice privacy. Almost everyone today trusts banks or service providers with their data, but when someone (good or bad) wants to find a certain transaction they can do so easily. There have been reports that data regarding customers’ transactions offline (in stores) has been sold to online search engines, to track offline purchases and correlate them with online ad interactions. You can read more about it in The Verges article “Google reportedly bought Mastercard data to link online ads with offline purchases”. This is potentially only one of the cases where our transaction data has been sold/accessed without our explicit permission.
- Hacking risks. This is the second biggest argument against a cashless society. Every day The World becomes more digitalized and crucial “parts of life” move to the Internet. As money has moved online, so have criminals and hackers.
- Access to Funds. Every financial company is working hard to ensure continuous access but there are some risks, e.g. human error, technical glitches, electricity outages, banks going bankrupt, etc. If personal finances are only in a digital form and there is no access to it, it could end up badly. Not to say, it is super annoying when something like this happens.
Interesting side note: If a bank goes bankrupt or a major financial attack happens and you have less than 6-figures in your account, don´t worry, you should be safe. Trustworthy banks have insurance for these kinds of things. (In Sweden there is a state guarantee for deposits up to 950 000 SEK per person and institution.) Businessinsider has written a good article about what happens if your bank fails.
- Negative interest rates could be passed onto customers. When all money is electronic, negative interest rates could have a more direct effect on consumers. Countries like Denmark, Japan, and Switzerland have already experimented with negative interest rates. (3)
According to the International Monetary Fund, negative interest rates reduce bank profitability, and banks could be tempted to hike fees on customers to make up that deficit. In 2020, banks are limited in their ability to pass on those costs because customers can simply withdraw their cash from the bank if they don’t like the fees. In the future, if customers can’t withdraw cash from the bank, they may have to accept any additional fees. (2) Now Danske Bank will start charging its customers a rate of -0,6% to hold their own money in the bank account for deposits exceeding 250 000 DKK (approximately 340 000 SEK) from 1st January 2021. You can read more about it on Reuters.
- More spending. It is so easy to pay with a card, just touch, swipe, or enter a PIN. Psychologically when paying with cash, more often than not, you think twice before handing over your money as you have to count it.
- ‘Being cash-free puts us at risk of attack’: Stefan Ingves, Governor of Riksbank: If digital networks fail or if there is a widescale cyber-attack or failure in electrical grids, then the Governor of the Riksbank recommends (as a country) to have sufficient physical cash to revert to cash usage if necessary. In fact, the crisis information brochure even recommends all individuals to store cash in small denominations to use them if needed. Read more about it in The Guardian
At the beginning of this article, we mentioned another country that has experimented with its policy on cash. This country is India.
The Indian government demonetized 500- and 1,000-rupee notes overnight in November 2016 (these notes formed about 86% of cash in circulation) in an effort to penalize criminals and those working in the informal economy. The implementation was controversial, in part because roughly 99% of those banknotes were eventually deposited. The fact that the banknotes were deposited means criminals weren’t punished for hoarding untraceable cash, which had been the intent of the move. The Economic Times cited the Reserve Bank of India as it reported that electronic transactions increased temporarily, but cash returned to pre-demonetization levels by the end of 2017. (2) For India, a cashless economy is still a distant dream.
Now that you know the pros and cons of cash and a cashless society, you can plan accordingly!
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