The Consequences of a Cashless Society

What are the advantages and disadvantages?

The European Central Bank has ended production of the 500 Euro note, in part due to crime and terrorist-financing fears, while in the world’s largest economy, cash payments are on the decline.

According to the Federal Reserve Bank of San Francisco, cash accounted for 40 per cent of payments in 2012 in the United States, while debit and credit cards accounted for 25 and 17 per cent respectively. Since that time, mobile payments have risen dramatically, further reducing the role of cash. eMarketer projects the number of smartphone users utilizing proximity mobile payments (such as Apple Pay, Samsung Pay), will increase from 12.7 per cent in 2015, to 31 per cent by 2019.

The more mobile payments take place, the more cash will be pushed aside. While the growing move towards digital transactions is about speed and convenience, it is not without consequences, including the loss of privacy.

“Governments and their agencies love electronic transactions,” writes Charlie Sorrel in FastCompany. “Without cash, it’s much harder to hide money from the tax man. The police and government agencies like the NSA love the trackable records that cashless payments leave behind.” While this loss of privacy can be mitigated if more and more people shift transactions to digital currencies (such as bitcoin), government controlled currencies are likely to remain dominant.

Could the end of cash reduce crime?

Harvard professor Cass R. Sunstein thinks so, based on a study he conducted on a shift in welfare payment distribution. Sunstein writes, “In the 1990s, the national government started requiring states to deliver welfare benefits through the new Electronic Benefit Transfer system instead of paper checks. EBT allowed beneficiaries to get their money via debit cards — meaning a big reduction of cash on the street and, as a result, significantly lower crime rates.”

Sweden – which is rapidly moving towards being the worlds first cashless society – cites reducing crime as one of the reasons to do so. Niklas Arvidsson, associate professor of industrial dynamics at Sweden’s Royal Institute of Technology, has studied this shift. “Bus drivers were getting attacked for their fares and so Stockholm banned cash on public transport. There was also a spate of bank robberies, so four years ago, the banks began to move away from cash. Now, five of Sweden’s six big banks – all except Handelsbanken – operate cash free wherever possible.” Arvidson also points out, “At the offices which do handle banknotes and coins, the customer must explain where the cash comes from, according to the regulations aimed at money laundering and terrorist financing.”

Of course, crime is not limited to the physical realm, and a cashless society would incentivize digital crime.

Another consequence of a cashless society is probably the least popular one: Paying the bank to hold your money.

Negative interest rates

A society without cash is a society where people can’t escape the effects of negative interest rates. Right now, if you have money in the bank you are earning interest on it. Basically, the bank is paying you to hold on to your money. Negative interest rates would reverse this – you would be paying the bank to hold your money, reducing the value of your savings.

If that happened in a society where cash is available, you could pull your money out of the bank, and this would discourage the imposition of negative interest rates in the first place. In a cashless society however, your only alternative to paying the bank would be to spend your money before it drops in value. This would boost the economy (at least in the short run), which is why many governments find negative rates so interesting.

While negative interest rates in a cashless society would give governments a greater level of control over consumer spending, and could help stabilize the banking system through the prevention of bank runs, this would come at the cost of reduced financial freedom for individuals.

The potential consequences of a cashless society are serious, representing a fundamental shift in our relationship with the financial and governmental systems that serve us. Due to the growing ubiquity and convenience of cashless payments, we are embarking on this shift without spending much time thinking it through. Before the shift is irreversible, we must fully consider what it will mean for our future.

Follow Spencer Fernando on Twitter: @SpencerFernando

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