A cashless society might sound like something out of science fiction, but it's already on its way. Several powerful forces are behind the move to a cash-free world, including some governments and large financial services companies.
However, no society has gone totally cash-free just yet. In addition to logistical challenges, several social issues need to be addressed before society can give up on cash entirely. The benefits and disadvantages below can give you an idea of the myriad of effects going cashless can have on money and banking as you know it.
Lower crime rates, because there's no tangible money to steal
Less money laundering, because there's always a digital paper trail
Less time and cost associated with handling, storing, and depositing paper money
Easier currency exchange while traveling internationally
Exposes your personal information to a possible data breach
If hackers drain your bank account, or you experience technical issues, you'll have no alternative source of money.
Those with no knowledge, bank accounts, or mobile phones will struggle to keep up with evolving cashless technology.
Some may find it harder to control spending when they don't see physical cash leaving their hands
Benefits of a Cashless Society
Those with the technological ability to take advantage of a cashless society will likely find that it's more convenient. As long as you have your card or phone, you have instantaneous access to all your cash holdings. Convenience isn't the only benefit. Here are some other benefits.
Lower Crime Rates
Carrying cash makes you an easy target for criminals. Once the money is taken from your wallet and put into a criminal's wallet, it'll be difficult to track that cash or prove that it's yours. One study by American and German researchers found that crime in Missouri dropped by 9.8% as the state replaced cash welfare benefits with Electronic Benefit Transfer (EBT) cards.
Automatic Paper Trails
Similarly, financial crime should also dry up in a cashless society. Illegal transactions, such as illegal gambling or drug operations, typically use cash so that there isn't a record of the transaction and the money is easier to launder. Money laundering becomes much harder if the source of funds is always clearly identifiable. It is harder to hide income and evade taxes when there’s a record of every payment you receive.
Cash Management Costs Money
Going cashless isn't just convenient. It costs money to print bills and mint coins. Businesses need to store the money, get more when they run out, deposit cash when they have too much on hand, and in some cases, hire companies to transport cash safely. Banks hire large security teams to protect branches against physical banks' robberies. Spending time and resources moving money around and protecting large sums of cash could become a thing of the past in a cashless future.
International Payments Become Much Easier
When you travel, you may need to exchange your dollars for local currency. However, if you're traveling in a country that accepts cashless transactions, you don't need to worry about how much of the local currency you'll need to withdraw. Instead, your mobile device handles everything for you.
Disadvantages of a Cash-Free World
Depending on your perspective, going cashless might actually be more problematic than beneficial. Here are some of the major downsides associated with a cashless financial system.
Digital Transactions Sacrifice Privacy
Electronic payments aren't as private as cash payments. You might trust the organizations that handle your data, and you might have nothing to hide. However, the more information you have floating around online, the more likely it is to wind up in malicious hands. Cash allows you to spend money and receive funds anonymously.
Cashless Transactions Are Exposed to Hacking Risks
Hackers are the bank robbers and muggers of the electronic world. In a cashless society, you're more exposed to hackers. If you are targeted, and somebody drains your account, you may not have any alternative ways to spend money. Even if you’re protected under federal law, it will still be inconvenient to restore your financial standing after a breach.
Technology Problems Could Impact Your Access to Funds
Glitches, outages, and innocent mistakes can also cause problems, leaving you without the ability to buy things when you need to. Likewise, merchants have no way to accept payments when systems malfunction. Even something as simple as a dead phone battery could leave you “penniless,” in a sense.
Economic Inequality Could Become Exacerbated
Unless special outreach efforts are made, the poor and unbanked will likely have an even harder time in a cashless society. If smartphone purchases become the standard way to transact, for example, those who can't afford smartphones will be left behind. The UK is experimenting with contactless ways to donate to charities and homeless individuals, but these efforts may not be developed enough yet to substitute cash donations.
Payment Providers Could Charge Fees
If society is forced to choose from just a few payment methods, or if one app becomes the standard payment app, the companies who develop these services might not offer them for free. Payment processors may cash in on the high volumes by imposing fees, which would eliminate the savings that should come from less cash handling.
The Temptation to Overspend May Increase
When you spend with cash, you recognize the financial impact by physically taking the cash out of your pocket and giving it to someone else. With electronic payments, on the other hand, it’s easy to swipe, tap, or click without noticing how much you spend. Consumers may have to rethink the ways they manage their spending.
Negative Interest Rates Could Be Passed Onto Customers
When all money is electronic, negative interest rates could have a more direct effect on consumers. Countries like Denmark, Japan, and Switzerland have already experimented with negative interest rates.
Dropping the interest rate is typically a move to stimulate an economy, but the result is that money loses purchasing power.
According to the International Monetary Fund, negative interest rates reduce bank profitability, and banks could be tempted to hike fees on customers to make up that deficit. In 2021, banks are limited in their ability to pass on those costs, because customers can simply withdraw their cash from the bank if they don't like the fees. In the future, if customers can't withdraw cash from the bank, they may have to accept any additional fees.
What Does a Cashless Society Look Like?
Without cash, payments happen electronically. Instead of using paper and coins to exchange value, you authorize a transfer of funds from a bank account to another person or business. The logistics are still developing, but there are some hints as to how a cashless society might evolve.
Credit and debit cards are among the most popular cash alternatives in use today, but cards alone might not be enough to support a 100% cashless society. Mobile devices could become a primary tool for payments instead.
Electronic payment apps, like Zelle, PayPal, and Venmo, are helpful for person-to-person payments (P2P payments). In addition, bill-splitting apps allow friends to split their bills easily and in a fair manner. Fintech companies like Stripe, Adyen, and Fiserv support business-to-consumer (B2C), business-to-business (B2B), or what they now merge into account-to-account (A2A) online payments in a reliable and speedy fashion.
Mobile payment services and mobile wallets like Apple Pay provide secure, cash-free payments. Many nations that use cash sparingly have already seen mobile devices become common tools for payments.
Cryptocurrencies are also part of the discussion. They’re already used for money transfers, and they introduce competition and innovation that may help keep costs low. However, there are risks and regulatory hurdles that make them impractical for most consumers, so they might not yet be ready for widespread use.
Examples of Cashless Societies
Several nations are already making moves to eliminate cash, with the push coming from both consumers and government bodies. Sweden and India are two notable examples, with two different outcomes.
It’s not uncommon to see signs that say, “No Cash Accepted” in Swedish shops. According to the European Payments Council, cash transactions accounted for just 1% of Sweden's GDP in 2019, and cash withdrawals have been steadily declining by about 10% per year. Consumers are mostly happy with this situation, but those who struggle to keep up with technological developments continue to rely on cash. Sweden is gearing up to become the first cashless nation in the world, with an economy 100 percent digital by 2023.
The Indian government banned 500 and 1,000 rupee notes in November 2016, in an effort to catch criminals and those working in the informal economy. The implementation was controversial, in part because roughly 99% of those banknotes were eventually deposited. However, criminals weren't punished for hoarding untraceable cash, which had been the intent of the move. The Economic Times cited the Reserve Bank of India as it reported that electronic transactions has increased temporarily, but cash returned to pre-demonetization levels by the end of 2017.
While these two examples had varying levels of success, both countries struggled to address how the marginalized would fare in a 100% cashless society.