Oreva Esalomi was highly commended, in the 14-15 age group of this year’s Young Financial Journalist competition. Her article explores the benefits and downsides of digitalising money.
Since the dawn of credit cards in the late 1950s, economists around the world have been predicting the death of cash. The archaic ritual of sliding notes and coins across a shop counter is quickly being replaced by the swift swipe of a card or phone against a machine. Even in the UK, a nation that is clinging rather stubbornly to physical money, only 11% of transactions involve cash. This is a trend that can be seen to varying degrees across the wider world and begs the question of whether the end of physical money is in sight.
What are the benefits of digital transactions?
At first glance, it is easy to understand why digital transactions are taking over: they are more efficient, more convenient and in many ways safer than their physical counterparts. A report from the banking body UK Finance showed that more than 23m people in the UK used virtually no cash in 2021. This data comes as options to pay in cash are dwindling in shops across the country.
Theft has already been reduced due to the declining usage of cash. As stated by the ONS, theft in the UK has decreased by 20% since 2020 and this can largely be attributed to the lower usage of physical money during the pandemic. Furthermore, there is an added level of security to online banking because whilst debit and credit cards can be cancelled and replaced if lost or stolen, once cash is gone, there is no way to retrieve it. The elimination of cash usage could also help to reduce crime as the invisibility of physical transactions allows a lot of illegal activity to go undetected.
The reality is, across the country, the use of cash is increasingly being seen as a last resort rather than a primary method of payment.
What are the risks of a cashless society?
Despite the ease of many aspects of digital transactions, their drawbacks cannot be ignored. The lack of accountability when shopping with debit cards, and more significantly credit cards, causes many people to make more reckless decisions. A study conducted by Dun & Bradstreet found that people spend 12%-18% more when using credit cards than they would using cash. A similar phenomenon is seen in casinos: gambling with plastic chips encourages people to spend more money as the act becomes less real to them.
The fact that digital money exists merely in the zeros and ones on our phone and computer screens transforms money into an even more abstract concept that many people are not quite comfortable with. These doubts regarding the safety of digital transactions are only reinforced by the prevalence of fraud and scamming in our society.
Through this widespread move to digital transactions, we have seen an unprecedented rise in fraud. Fraud is now the most common crime in this country, and it has increased by 25% since March 2022. A low digital literacy, especially amongst the elderly, causes many to fall victim to these scams when phishing emails plague their inboxes.
Additionally, whilst credit and debit cards have become the default for the middle and upper classes, a transition to a cashless society could pose a threat to many families in the UK, as research by the FCA estimates that 1.3m UK adults remain unbanked. This means that they rely on the presence of cash in society to live their lives. As a result, the systems surrounding physical transactions need to remain in place while we allow disadvantaged members of society to catch up with these rapid digital changes.
Why do we still use cash?
When you consider the rapid technological developments that manifest themselves in other areas of our lives, it is not unreasonable to question why we still bother with cash.
The truth is, we all appear to enjoy the current flexibility of using cash for small purchases and card for everything else. According to the EU, the majority of European consumers consider having cash as a payment option to be important. Furthermore, the feeling of ownership associated with physical money is not something people seem to want to relinquish anytime soon. As described by psychologist Eric Uhlmann, “there’s this sort of irrational feeling that if money is physical, it’s more yours, and you feel like you own it more.” It is this accessibility and feeling of possession that explains our affinity with cash.
However, we cannot count on this always being the case. So, before we enter an age of purely digital finance and banish physical money to museum exhibitions, we need to prepare ourselves for the inevitable threats to financial security that accompany digitalisation through education and awareness.
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