Is the Future Cashless? Exploring the Implications of Global Money’s Latest Trend
Is it time to say goodbye to the piggy bank? Amid rapid fintech development and the continually evolving landscape of the global financial system, economists, market participants, and governments are beginning to contemplate a future in which physical cash is a thing of the past. In the United States, a Federal Reserve report estimates that the total number of non-cash payments steadily increased by about 5.3% from 2012 to 2015, representing a 3.4% increase in value to $178 trillion. As credit and debit cards, direct-to-bank (or ‘Automated Clearing House’) transfers, and contactless payments continue to gain in popularity, understanding the possible outcomes of a society in which cash is no longer a physical record is more important than ever.
At the forefront of the group of developed countries trending towards cashless-ness, in the middle of which the US is often ranked, is Sweden. There, cash is used in just roughly 2% of all transactions, and many stores (and even banks) have stopped accepting physical currency. As other countries, including Canada and the United States seem set to follow this trend, Sweden’s example has opened up new discussions about the future of money and the economy. The UK is another country rapidly approaching cashlessness, in which debit cards have officially replaced cash in popularity since 2017. With such change already being felt by a major world-economy like the UK, it seems only a matter of time before the very largest economies on the planet face similarly profound developments in the way their money is handled.
Initially, the trend towards cashless payments was embraced by governments and regulators, and widely viewed as a positive development. Electronic payments are exponentially easier to record than cash, which is difficult to trace and is thus the primary instrument of black market trade, terrorism financing, and tax evasion, among other illegal activities. Credit and debit card purchases are more convenient and secure for consumer use than cash, and consumers have reacted favorably to the increased convenience of mobile payments, which represent a further evolution in the streamlining of payments made possible by the growing ubiquity of smartphones. Further, handling cash is expensive for companies, and as a dwindling number of consumers continue to use it, companies have identified the significant cost saving potential to banning cash payments in stores.
Further, and perhaps most interestingly, a cashless society could create the opportunity for radical changes in fundamental interest rate policy at central banks across the globe, in the elimination of the so-called ‘interest rate floor’ generated by the physical-cash denomination of word markets.
A recent post in the International Monetary Fund Blog outlines this phenomenon: cash, in essence, is a zero-interest-bearing alternative to bank deposits, with an unlimited 1:1 conversion ratio when withdrawn from bank accounts. This limits central banks to setting interest rates, at most, to at or only slightly below zero in response to economic slowdowns, as depositors can simply withdraw their money and hold their cash to avoid more severe negative rates. Because of this, when rates are stuck at near-zero levels for extended periods of time, as is the case today in many part of the world, from Europe to Japan following the 2008 crisis and recovery, central banks have no space to further lower rates in response to a future downturn.
A cashless system eliminates this lower bound by removing the ability to save cash without being subject to interest rates: in such a system, the only option for non-zero returns in an economically stimulative, negative-rate environment is investment. If implemented, this reality would radically alter the environment of the global Macroeconomy, and fundamentally change how governments and central banks prepare for and respond to financial crises. The freedom to move rates multiple basis points below zero in response to cyclical changes could provide the means for faster investment recovery following a downturn, and would enable low-positive rate environments to persist, absent the pressure to raise rates faster than may be sustainable, when conditions of moderate growth mandate their continuation.
On the surface, the systematic and individual benefits of the end of physical cash seem compelling, and indeed consumers, financial institutions, and technology companies continue to propel the growth and implementation of non-cash payment alternatives. So why are concerns being raised, by governments and market participants, that we are headed too quickly towards a systemic obsolescence of cash?
Despite developmental pressure and consumer trends, cash remains a popular method of transaction across the globe, with around 20% of payments in the United States alone still made with physical bills and coins. The reasons for this vary, and highlight the differences between various national economies. The majority of cash payments are disproportionately made by the poor and elderly. In smaller, wealthy countries like Sweden, technological and income equalization has spread faster and farther than in many other developed economies, causing its more-rapid evolution away from cash. But in America, a 2017 FDIC report found that 6.5 million households were ‘unbanked,’ or without any banking relationship at all, while “a further 18.7 percent of U.S. households (24.2 million) were underbanked, meaning that the households have a checking or savings account but also obtained financial products and services outside of the banking system.” The sudden end of cash could exclude millions of these Americans from the economy.
Further, a cashless economy would overwhelming depend on global technology networks, exposing a greater proportion of the global monetary system to the threat of identity theft and technological failure. Should a large-scale cybersecurity breach or infrastructural disaster occur, it could catastrophically impact the savings and wealth of millions throughout the world.
Finally, governments stand to lose a great deal of control to commercial banks as the sole guarantor of national currencies should bank accounts become the denominational basis for national and global currencies, and there is concern that privacy could be at risk as data is accumulated from highly-traceable electronic payments.
In the long run these potential downsides to cashless society could, if they were to play out, severely diminish confidence in the global monetary system, risking even the return to primitive barter systems among those without easy access to digital currency transactions. These concerns have led multiple legislative bodies, including the national governments of Sweden and the United Kingdom, the state government of New Jersey, and the City Council of Philadelphia, to consider laws requiring certain businesses to continue accepting cash. Reception among consumers and businesses has been, at best, mixed.
This leaves society at somewhat of a crossroads: on the one hand, the evolutionary forces of consumer and business behavior are inexorably pushing the economies of developed countries towards a cashless future, while the remaining users of cash (as well as the inherent attributes of physical money) continue to underpin crucial, if dwindling, drivers of economic stability and liquidity both in the US and abroad. As Swedish Central Bank Governor Stefan Ingves recently stated in a New York Times interview, ““This is not a war on cash, but no one has argued that this evolutionary motion is going to stop.”
How, then, can we harness the opportunities presented by cashlessness while minimizing its downsides?
The solution may take a combination of patience and ingenuity. As easy access to technology and the scalable minimization of deposit and investment fees continue to spread across the US and the rest of the developed world, issues with banking underrepresentation among retirees and the poor will likely decrease, setting a natural pace for the adoption of cashless finance. This is already beginning to happen in Sweden, although there remain concerns that the balance could tip too soon in favor of the cashless. Until this saturation is widespread enough to make cash truly obsolete, governments may continue to find it beneficial to safeguard access to cash and the availability of cash services for those with no alternatives.
In the meantime, the International Monetary Fund has suggested that a hybrid monetary system, in which governments guarantee digital versions of their existing currencies, could help countries that are stuck in ultra-low interest rate environments capture some of the central-banking and monetary policy benefits of a cashless system, ahead of its full implementation. By enforcing a universal depreciation rate on a nation’s physical currency, to equalize its value with that of bank accounts subject to negative rates held in the same country, policy makers could eliminate the interest rate floor by leveling the relative value of physical and non-physical currency without disenfranchising those who depend solely on cash. For example, should Japan, which currently holds a -0.1% interest rate on digital deposits held in banks, impose a -0.1% depreciation rate on its physical currency, it could theoretically limit zero-interest cash withholdings and increase investment spending, all while retaining physical cash as a unit of exchange. This would free the Japanese central bank to lower rates further below zero if a downturn hit before rates could rise naturally again.
Countries that are today significantly farther along the path to cashless-ness than their peers, including Sweden, have already begun seriously investigating such potential courses of action to address the evolution of digital, non-cash monetary systems. At this stage, however, those in other countries (including the United States) may find that, given the breadth of legal, financial, and regulatory adjustments that will be needed for the successful implementation of a cashless society in the future, IMF chief Christine Legarde is right in suggesting that while “the case for [cashless] digital currency is not universal, we should investigate it further -- seriously, carefully and creatively.”
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