Being “cashless” is seen as an inevitable milestone for economies around the world. The Digital push has enabled a number of countries to become pioneers of cashless revolution – and there is a large audience adopting a “wait and watch” approach, preferring to learn from the early adopters.
Experts in the field of technology, payments, banking and digital seem to broadly agree on one thing – cashless is more a matter of when than if. In this article, we explore what digital truly means, how cashless ecosystems are built, what are the enabling conditions to achieve a truly cashless economy, what benefits are to be derived from it, lessons learnt and major roadblocks to digital.
It refers to a society where physical cash is not used for monetary transactions of any value. Buyers pay for goods and services through electronic and mobile payment systems such as credit cards, debit cards, mobile wallets, internet banking, etc. In a truly cashless world, currency notes and coins are no longer accepted means of payment. Banks start abolishing their ATM devices as currency notes are neither desired nor required. Given that physical cash has been the foundation on which the concept of money has been built for centuries around the world, this “ideal” scenario is quite a paradigm shift.
Before we dig deeper and analyze how the cashless push has fared around the world, we would like to draw attention to the why of it. Getting people to change their age old habits of transacting with cash is going to take a monumental effort. In this section we attempt to highlight the benefits that are to be derived from a cashless regime. We later list the basic challenges that any cashless economy would present.
Some obvious and immediate benefits of having a cashless economy are – immediate solution to counterfeit currency problem, no risk of theft, no inconvenience of carrying notes and coins and freedom from the problem of tendering/receiving exact change. There are a number of larger benefits to be derived from this – reduced cost of printing currency notes, elimination of ATM machines, easy tracking of money trail leading to higher tax compliance, etc.
When listed together, all these benefits do pose quite a rosy picture, don’t they? Moving to a 100% cashless economy has undeniable benefits and the benefits do present a utopian world. That being said, an economy has to face a number of generic and demographic-specific challenges as it attempts to transition to a cashless regime.
The biggest disadvantage of a cashless push is its limited reach to urban areas. Sections of population that are illiterate and poor do not have the skills or means to transact digitally. Smartphones and computers connected to the internet 24/7, supplemented by digital awareness constitute the backbone of a cashless society.
Not everyone has the means or skills to possess that. As a matter of fact, there are countries around the world where mobile networks are not reliable. Even the well-off who are capable of paying for smartphones, laptops and data plans do not get 100% network coverage all through the day.
Habits also acts as a major hindrance in digital push. A number of people have access to all the digital payment means but they still prefer to transact the old fashioned way. At the other end of the spectrum are old people who have been transacting in cash all their lives and it is not easy for them to digitize their lifestyle.
Data security associated risk is another concern that needs to be addressed to win the confidence general public. Banks around the world are already having a tough time protecting sensitive customer data against hacker and other malicious or organized attacks.
If the digital push comes too soon, a large proportion of population will become vulnerable. Developing countries who tried to gain a head-start in the digital race are having a tough time protecting their citizens against financial frauds.
There is an inherent concern of data privacy and putting up sensitive information (credit card details, bank account number, etc.) online. Data theft is not unheard of, particularly in the financial sector and the stakes are very high.
Another demerit of a digital transaction system is the transaction costs. There is a cost involved in setting up a digital infrastructure. Merchants need to upgrade their software and systems, acquire Point of Sale (POS) terminals, pay Merchant Discount Rates (MDR) charges payable to customer’s bank, etc. These charges are often added to the customer’s bill, as merchants do not want to take a hit on their profits.
Financial inclusion is the starting point for formalizing banking transactions – cashless ecosystem can be a derivative of it much later. Financial inclusion means extending banking services to entire population and getting cash users to change their age-old habit of transacting in cash, especially for smaller amounts. While developed countries are not far from it, developing and under-developed countries need a lot of groundwork to get there. Financial inclusion is often seen as opening bank accounts for those without it but the idea is rooted deeper than that. Once entire population is in the banking net, they need to start using it. Data has emerged from a number of developing countries where less than one third of bank accounts are operational. The proportion is lower for under-developed countries.
Literacy is another pillar without which cashless economy dream would collapse. Both rural and urban populations present this challenge, to differing difficulty levels. Banking transactions require a certain degree of understanding of the domain. Filling out bank checks, executing e-transactions, reaching out to customer support for help – all require basic education. A basic familiarity with numbers is the minimum requirement to make a digital push. It is not a coincidence that countries with high percentage of cashless transactions also have high literacy rates, as we would see later. Illiterate strata of population are not aware of how cashless systems work and they simply refuse to believe that tendering physical cash can be replaced by tapping a device or with keying in a few digits on one’s mobile phone, computer screen or swiping a card.
Economic factors cannot be ignored while making a digital push. If a country is strife torn, where people are unsure where the next meal is coming from, they are unlikely to purchase smartphones and take up expensive data plans. It starts a vicious cycle – as long as the telecom companies do not see high number of users, they cannot reduce their tariffs. Every country faces the problem of parallel economy, where both buyer and seller are happy to transact informally in order to save money. Any cashless push will always face resistance from them under the garb of inconvenience, higher costs, harassment by government officials, etc.
Technological infrastructure is the ultimate piece of the puzzle, which promises to combine all the above factors together and set things rolling towards a cashless economy. “Would you like to see it one more time. You may have blinked and missed it” – said Tim Cook, the Apple CEO while launching Apple Pay. It took decades of breakthrough technological research to get there – online banking, mobile banking, internet money transfers, payment networks such as Visa and MasterCard all played pivotal roles in the build-up.
We now know the pros, cons and pre-requisites of a truly cashless economy. As we would now explore, the above factors are necessary but not sufficient condition for a cashless world. We are witnessing times where technology moves forward at an unprecedented rate.
The most basic of transitions require periods of sustained, incremental steps to complete. Getting people to change their money habits is a mammoth task and there is no one-size-fits-all roadmap. Countries around the world are at different stages of their cashless journey and we study two of them – China and Sweden – to grasp the nuances.
Any discussion on cashless economy would be incomplete without mentioning Sweden – the best placed country to become cashless. Though Denmark and Norway also have very encouraging cashless adoption, Sweden is a clear Scandinavian leader. This article on medium pegs Sweden’s cash transaction percentage (by value) at 1% in 2016, projected to drop down to 0.5% by 2020. Merchants are allowed to refuse cash transactions altogether and 900 out of 1600 bank branches in Sweden did not deal in any cash as of Jan 31, 2018.
These numbers make Sweden a runaway leader of cashless revolution, given 80% of Europe’s transactions still see cash. Yes, Sweden does enjoy some of the best IT infrastructure but the willingness of citizens to adopt technology is undeniable.
Jonas Hedman, associate professor of the department of digitalization at the Copenhagen Business School, provided some interesting insights in his conversation with Knowledge @Wharton. Sweden has seen a steady decline of cash transactions since 2007. It has declined from 100 billion in 2007 to 45 billion in 2017 – more than 50% decrease.
A large part of space vacated by cash has been captured by Swish, the country’s most popular mobile payment app. Sweden already has about 85% cashless transactions and analysts believe 2023 will be the year when they will transform into a 100% cashless society.
40th China Statistical Report on Internet Development lists 724 million Chinese people use mobile phones to go online. This is supported by the mobile phone boom, exponentially growing data consumption and, of course mobile payments!
Most of the world is still trying to chart an all-inclusive path towards a digital economy, incentivizing internet banking, credit/debit/pre-paid card transactions and Point of Sale payments. China, on the other hand, has by-passed the plastic money hype, embracing the QR-code based mobile payment solutions with both hands. iResearch Consulting Group estimates China’s mobile payments in the year 2016 to be of the order of $9 trillion in 2016
Given this context, the 2017 study by Penguin Intelligence report 92% of people in China’s top cities mentioning WeChat Pay or Alipay as their preferred payment method is not surprising at all.
China is witnessing the dawn of a “codeconomy”, said consumer behavior researcher Chen Yiwen in a South China Morning Post article. Here’s what you can pay for through QR code based payments in China – shared bicycles, street food, cab rides, restaurant meals, retail stores, concert tickets, train rides, street musicians, alms to beggars, tips to waiters, the list is endless.
Mobile payments usage has grown from 57.7% in 2016 to 67.5% in 2017. “Cashless Day” and “Cashless City Week” ideas have been gaining popularity among the youth across cities. Tencent’s WeChat Pay and Alibaba’s Alipay have a strong hold on the economy, accounting for 80% mobile payments. Combine this with the surge in app based retailers that can deliver everything (food, grocery, medicines, cigarettes, etc.) at your doorstep and you are likely to forget cash forever. Cashless mobile payments are often described as one of the four great new inventions of China in modern times, the other three being dockless shared bicycles, high-speed trains and e-commerce. The use of cash is down 10% in the past 2 years, according to Wall Street Journal
Given the benefits of efficiency and transparency promised by a cashless economy, few would argue against it. The road to it remains full of challenges. Transition towards a digital economy requires focused, sustained efforts towards building a secure infrastructure to be operated by skilled professionals.
There is a compelling case of the elderly, uneducated and poor left behind in the cashless rush. There are millions of people outside the formal banking system in countries around the world. They are already finding it difficult to transition into a digital payments ecosystem and run the risk of being completely excluded.
Then there is the never ending threat about data protection – imagine the amount of data these billions of transactions across the globe generate on a daily basis and you could never be less worried. However, haven’t we lost the data privacy battle already, thanks to Facebook, Google and Apple?
There are legal implications to it as well. There are countries where individual contracts with shopkeepers do not override the central bank’s law about cash being legal tender. Therefore, no matter how far you are in the cashless race, it is illegal for a merchant to refuse cash.
To summarize, the true benefits of an all-inclusive cashless economy can be reaped only when governments, banks, technologists and people work together. There is no doubt that if it wasn’t for the corruptible benefits of a cash driven business then we would already be cashless. This is happening, its pressing ahead irrespective of nefarious will, as primary technology consultants we would say the biggest problem is what will happen to all the dirty money within the global economy.
Take a minute to consider all the local “Dirty Cash” that exists in your localized area, then expand that thought to your country, further expand it to the world, this is a huge problem. In fact, it’s the giant pink elephant the one bouncing on the florescent yellow ball in the room.
Great money naturally evolves to great power, so giving one up will no doubt give up the other, each of which scores of people have died for throughout history, so no, naturally this won’t be an easy transition for some. At a best guess there will have to be another avenue, or the greatest resistance will be found at this point, transitioning the dirty money and dirty money making businesses into the digital cashless society. This should be the question on everyone mind.
“Millionaires controlled by billionaires” – Rutger Bregman
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