In the winning essay of the 16-17 age group in our Young Financial Journalist competition, Leo Smith looks at the impact and consequences of a cashless society.
All around us, a fundamental aspect of day-to-day life is changing. The sound of coins jangling in pockets and falling into parking meters, the sight of crumpled notes bearing the Queen’s face being handed across counters, and the metallic smell of change, are all slowly going extinct – rapidly replaced by the chime of a phone and a silent message on a card reader confirming a payment.
The rates at which cash is being counted out vary around the world, but the general trend is clear and the pandemic has accelerated the decline. In the developing world cash is still king, but in most developed countries it has been usurped.
In the UK, five in six payments now involve no notes or coins, compared with half of all transactions ten years ago. While cash is unlikely to die out completely for a while, we are well on our way to a virtually cashless society.
What are the benefits of a cashless society?
Cashless transactions are not only faster and more convenient but more efficient as well. The processes of minting, sorting and distributing cash is estimated to cost about 0.5% of GDP in rich countries and cash operations account for between 5-10% of total bank operating costs.
A cashless society should also help reduce petty crime. In a society where nobody carries or stores large sums of cash the alternative would be to steal contactless cards which can be easily cancelled and offer protection against fraudulent purchases.
The most significant potential benefit, however, is the reduction in financial crime. It is estimated that the UK shadow economy accounts for more than £200bn and is worth a staggering 11% of UK GDP, with a very large proportion of this being untaxed.
A cashless society would go a long way to eliminating this with all transactions being visible and undeclared earnings being almost impossible to hide.
What issues might be caused by a cashless society?
It is also hoped that a cashless society will reduce money laundering due to the far greater audit trail for digital transactions. However, this hope is optimistic. Money laundering will persist.
While many current money laundering tactics involve cash, criminals will adapt quickly and find new ways of disguising illegal incomes from digital transactions.
There is already a myriad of examples of so-called ‘cyber laundering’. Books of gibberish are listed on Amazon for thousands of dollars and are suspected to be used to wash money. Players use online gambling to purposefully lose large sums of money to other individuals.
In Russia, a money-laundering scheme was discovered in which criminals set up ‘ghost rides’ on taxi services such as uber – complicit drivers are paid for rides which never occur using stolen credit cards.
Criminals will innovate and money laundering does not require cash. In fact, as we move toward a cashless society the speed and complexity of monetary movement may make money laundering harder to track rather than easier.
Who is negatively impacted by a cashless society?
The anonymity of cash also brings advantages will which evaporate in a cashless society. With all transactions being made digitally our spending habits and personal data can be tracked and exploited by governments or private titans.
Without adequate regulations or safeguards, this will lead to ever more intrusive advertising and could have far more serious consequences in the hands of oppressive regimes or malicious individuals.
However, the most immediate issue is that people are not left behind. While the majority of people like digital payments and are already making the seamless transition, there is a small but important segment of society that still relies on cash.
According to the UK’s ‘Access to cash review,’ 7% of people said they wouldn’t be able to cope at all with a cashless society. The groups most reliant on cash include the elderly, people in rural areas and poor people with limited access to formal financial services.
Research by the FCA estimates that 1.3 million UK adults remain unbanked. Many charities and the homeless also still rely heavily on cash donations. Therefore, it is important that cash remains accessible and useable for all while we complete the transition to a cashless society.
Cash and the infrastructure around it needs to remain available for at least a decade to allow the disadvantaged to open bank accounts, ensure the elderly are educated and nobody is left behind.
The convenience and efficiency of digital transactions means that notes and coins are slowly dying out. However, before a fully cashless society is ushered in, we must ensure we are well equipped to deal with the potential pitfalls in order to fully reap the rewards.