October 18, 2016

Digital Cashless Society: Dystopian Nightmares or Utopian Dreams

By Josh Hamilton

Digital Cashless Society

A truly digital cashless society was long the realm of dystopian nightmares (or utopian dreams depending on how you look at it), however, we are suddenly heading down that particular rabbit hole much fast than many could have anticipated. A cashless society has many pros and cons, such as eliminating black markets or allowing easier (and more overbearing) regulation of government monetary policy. But how close are we really to this level of digitalisation of the economy? The Federal Reserve estimated that there will be $616.9 billion in cashless transactions in 2016, up from around $60 billion in 2010. So the question is no longer if, rather when.

Sweden issued Europe’s first banknotes in 1661, and now they are leading the world’s dash to a cashless economy. According to central bank the Riksbank, cash transactions made up just 2% of the sum total of all payments made in Sweden last year (with some predicting that figure will drop to 0.5% by 2020). Swedish buses no longer take cash, you can’t purchase a ticket for the Stockholm Metro with cash and retailers are now legally entitled to refuse cash (which would explain that only 20% of retail transactions were made with cash). Even street vendors and churches increasingly prefer card payments, and perhaps, most incredibly, only 700 out of 1600 bank branches hold or accept cash; circulation of Swedish Krona has fallen over 26 billion since 2009. Regardless of where you are or what you want to purchase, you are likely to find a sign which reads “Vi hanterar ej kontanter” (“We don’t accept cash“).

Sweden may be considered by many to be leading the charge, and perhaps legislatively they are ahead of the game, however, there are other countries taking leaps and bounds towards a cashless society (without even realising). Australia is pushing towards a cashless society at a relentless rate, with each citizen now spending an average of $1824 every month on plastic; that’s $3.08 for every $1 in cash gets withdrawn. However, Australia is only at the tipping point, with 35% of all transactions conducted without cash, there are countries far further down the rabbit hole. Singapore lead the way in the cashless world, with 61% of all transactions; The Netherlands aren’t far behind on 60% and Sweden and France both on 59%. Yet, only Sweden has introduced legislation to increase the spread of the cashless craze, so the consumer is the key catalyst in many countries shift away from physical money.

Governments in many nations have, in fact, pushed for a cashless society. A paper trail for all transactions could a huge aid in reducing crime, money laundering and tax evasion. France’s finance minister has recently stated that he plans to “fight against the use of cash and anonymity in the French economy” in order to help fight terrorism and other threats. Similarly, former Secretary of the Treasury and economist Larry Summers has repeatedly called for scrapping the U.S. $100 bill (which is the most widely used currency note in the world). A cashless society provides the opportunity to pursue fiscal policy that would be foolish whilst cash savings still remain, negative interest rates are much more viable in this situation. From the perspective of the banks, a cash-free society gives them the opportunity to avoid complex cash handling and eliminate bank robberies, theft, and dirty money.

Niklas Arvidsson, professor at the Royal Institute of Technology and author of the popular study “The Cashless Society“, has predicted that “By 2030 we will be completely cash-free“. A fully Digital Economy would allow banks to track the lifestyle and spending habits of customers, arguably more than any other institution in history. Arvidsson warns in his book of the danger of access to such personal data, there is no precedent yet establishing what banks would do with this information, but there is likely to be a price to it. We are much closer to a cashless economy than you think, but is that truly where we want to go?

Pros and Cons

I thought we should turn our attention to the consequences of a truly cashless society. Could it be a force for good? Or could it lead to banks and governments abusing the power that comes along with it?

The phasing out of cash in the economy would make implementation of certain fiscal policies, such as negative interest rates, far easier and more effective. Kenneth Rogoff, author of “The Curse of Cash”, cites negative interest rates as an important tool for central banks to restore macroeconomic stability; the incentive to borrow and spend help stimulate the economy. By holding all currency in regulated accounts the Government can tax savings in the name of monetary policy.

Kenneth RogoffOne of the more widely used arguments in favour of a cashless economy is that of security. France’s finance minister has recently stated that he plans to “fight against the use of cash and anonymity in the French economy” in order to help fight terrorism and other threats. With the ability to track every transaction that takes place, intelligence services could cut down on crime by monitoring purchases and money transfers. However, Rogoff acknowledges the limitations of this policy, in that the removal of paper money will only be effective “provided the government is vigilant about playing whac-a-mole as alternative transaction media come into being“. Although, it is naïve to think that crime could be quashed so easily. If interest rates fall too far below zero, it is quite possible that citizens would find an alternative to cash (drug traffickers certainly would). Money has been reinvented time and again throughout history, as shells, cigarettes and cryptographic code. Going cashless has also been touted as being more secure from theft, with Apple and Google claiming their payment system is more secure than regular banking, as well as being more convenient than cash.

Yet there are a number of concerns that have been raised about the transition to digital money. Advances in tech have allowed credit and debit card purchases to be tracked and evaluated to gauge the validity of a purchase. This has so far been used to prevent fraud and theft, to protect consumers. However, there is a risk of abuse here, for example in 2010 Visa and Mastercard gave in to government pressure, not even physical legislation, and barred all online-betting payments from their systems. They made it virtually impossible for these gambling sites to operate regardless of their jurisdiction or legality. Scott A. Shay, chairman of Signature Bank, suggested in an article on CNBC that “the day might come when the health records of an overweight individual would lead to a situation in which they find that any sugary drink purchase they make through a credit or debit card is declined”. Although this may seem like a stretch, a government with access to this sort of power could quite easily control individual spending.

A cashless society would also increase the difficulties for homeless people to re-integrate into society. Having no fixed address already makes holding a bank account incredibly difficult, a cash free society simply increases the societal barriers that those on the fringes of society have to navigate. There is also the psychological issue, that electronic payment encourages frivolous spending. A student interviewed at the University of Gothenberg commented that she was much more likely to think twice about spending a 500 krona note compared to with a debit or credit card.

The other side of the coin (pardon the pun), is that this power could be used for good, for example placing restrictions on recovering alcoholics from purchasing alcohol. The route which this technology will take is, as is often the case, determined by the government and societal attitude to the situation. There is room for abuse in the technology, more than most, but the benefits are well documented and used sensibly could help prevent terrorism and crime, reduce tax evasion, and help to curb unhealthy spending habits. Ultimately, a cashless society will be what we make of it.

Digital Wallets and More…

To finish off our cashless society discussion, I want to look at the Fintech giants that are leading the digital money revolution. Whilst services like Apple Pay and Google Wallet have become more widely available, they haven’t quite taken off yet. They seem to be offering the transition to the digital economy that we are told is all but inevitable, but they haven’t managed to take off in the way that say, contactless cards have.

Jordan McKee, an analyst at 451 research commented that, “Mobile wallets haven’t yet proven they are measurably better than incumbent payment mechanisms, which general work quite well”. Avivah Litan, an Analyst at Gartner, put the lack of uptake of digital wallets down to the ease of current systems,

“It’s incredibly easy to swipe or dip a credit or debit card at a payment terminal and U.S. consumers are used to this mature payment application where they know they are well protected from financial loss…..It will take a lot of persuasion and financial incentives to get consumers to change their payment habits.”

Apple Pay

Apple Pay is built around contactless payment technology. It pulls your credit cards, debit cards, and other sensitive-payment data from the Wallet app, enabling you to use an iPhone or Apple Watch like a contactless card at store checkouts.

Apple Pay is growing fast as well, with some experts commenting that it could well be Apple’s saviour. Users of Apple Pay completed more transactions in September 2016 than they did in the entire year of 2015. And on top of that transaction volume was up 500% in the fourth quarter, compared to the same quarter in 2015. Someone in Kensington, England, even used the service to pay for a 1964 Aston Martin DB5 worth over $1 million.

This growth can be partially attributed to the expansion in service from just the US and the UK, to now include Switzerland, Canada, Australia, China, France, Hong Kong, Singapore, Japan and Russia, with Spain soon to follow. Apple has also expanded the payment service to the web, to enable it to be used on mobile phones and desktop computers through Safari, and to be used in apps like Uber or Starbucks. According to CEO Tim Cook, hundreds of thousands of websites are now Apple Pay ready.

Google Wallet/Android Pay

Android Pay has been developed by Google to power NFC (Near Field Communication) payments with phones, tablets, and watches, as a rival to Apple Pay. At the minute, they are only in the US, UK, Singapore, Hong Kong and Australia – lagging behind Apple on the availability of the service – though they are rumoured to be starting up in Canada in the near future! They have also have benefitted from the expansion of MasterPass to cover Google Wallet transactions online, expanding their coverage and viability as an alternative to Apple Pay.

Android pay is available to use, in the countries it operates, nearly everywhere that Apple Pay is (though you might not see branding in quite the same way) and has a major bonus in that you can collect rewards for purchases, unlike Apple Pay.

These digital wallets operate under varied circumstances, but the premise and underlying goals remain similar. Yet, despite their adoption by major providers, there are still alternatives that are being implemented by retailers and businesses.

Retailers Alternatives

Aside from all the fanfare of mega-investments from Apple, Samsung and Google in NFC on smartphones, Starbucks, Dunkin’ Donuts and Walmart Pay allow customers to pay using a QR code displayed on a smartphone, which is a much most cost effective alternative. Starbucks customers spent an estimated $3 billion using the Starbucks app, though the success of apps of this nature can be partially attributed to the customer loyalty that the apps build with vouchers and offers for users.

Nitesh Patel, an analyst at Strategy Analytics, suggested that this could be the main reason for their success over digital wallets, “so far, mobile wallets, particularly NFC, have yet to integrate payments with loyalty in a compelling way…. You need a single tap to redeem or accumulate points and coupons”. Ultimately, the frills of the service are what is going to sell it to the general public, and digital wallets just don’t have those frills yet (especially Apple Pay, though it makes up for it somewhat in its widespread adoption).

Ultimately, we are still very early on in the transition to a cashless society. The technology is all but there, but the infrastructure and cultural acceptance hasn’t quite got there. It isn’t clear quite yet as to whether the digital wallet market will remain as open or competitive, or whether it will become an Android vs Apple battle. We shall simply have to wait and see who establishes themselves as the frontrunner.

By Josh Hamilton

Josh Hamilton

Josh Hamilton ​is an aspiring journalist and writer who has written for a number of publications​ involving Cloud computing, Fintech and Legaltech​. ​Josh has a Bachelor’s Degree in Political Law​ from ​Queen's University in Belfast​​. Studies included, Politics of Sustainable Development, European Law, Modern Political Theory and Law of Ethics​.
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