Since the emergence of electronic banking in the 1990s, a trend towards a cashless society started. The trend has recently accelerated with catalysts such as advancements in Fintech, increased digitalisation, and customer preference. And of course, the COVID-19 Pandemic.
Have you ever thought about a world where you never see cash? Not seeing any notes, coins, or ATMs. This could be a reality sooner than you may realise.
In this blog, we will explore the reasons behind the trend towards a cashless society as well as its benefits and drawbacks.
A cashless society is one where financial transactions do not entail the use physical cash. Instead, electronic methods of payment are used such as credit cards and contactless payments. In the UK, only one in six payments are made with cash, which heavily fell during the pandemic.
Businesses see electronic and digital transactions to be easier to handle, cheaper to process and more secure than physical cash. The advancements in Fintech have made it possible for businesses of all sizes to adapt and accept electronic payment methods. In 2015, 45% of transactions used cash whereas in 2020 this figure dropped to just 17%.
However, physical cash is not going away any time soon. A significant part of the UK population remains unbanked or relies heavily on cash transactions day-to-day.
This blog will examine the key reasons for the trend towards a cashless society and the benefits and drawbacks of such a world.
There are a few key reasons why physical cash has become less common. These range from advancements in technology as well as changes in business and customer preference.
A key reason behind the trend towards a cashless society is the advancement of Fintech. Payment processing services are one of many Fintech trends and have contributed significantly towards a cashless society.
Advancements in financial technologies have led to numerous high-growth start-ups in the mobile payments industry.
Imagine shopping online with only physical cash. It just doesn’t work. The growth of the eCommerce business industry has coincided with the growth in electronic payment systems.
Digital payment systems have improved the online shopping experience with companies such as PayPal, Klarna and Square all transforming the way we shop online. This has reduced the need for high-street shopping and by extension, the need for physical cash.
Many businesses and customers prefer using digital payment methods. Some want to avoid carrying a wallet around and would rather spend money using a single card. Especially with easy-to-use contactless terminals, even carrying change is cumbersome for some people.
Businesses are also preferring digital payments. Many restaurants changed their payment policy to digital methods only during the pandemic and some even decided to make the changes permanent. It keeps the costs of payment processing lower than large scale bank deposits.
- Security – Electronic money is generally more secure. As there is less physical money to steal, this reduces the likelihood of physical theft.
- Saves time and costs – Cash payments are more time-consuming for both the business and the customer. Paying with a card reduces the time it takes to complete a transaction.
- International Payments – Transferring money internationally is seamless without physical cash. Sending money abroad, with digital banking apps such as Monzo, is much easier than with physical cash.
- Financial Crime – According to the NCA, money laundering costs the UK £100bn a year. Digital payments make it difficult for some criminal to hide money. Cashless economies can potentially reduce organised crime. In addition to this, counterfeit money would also be taken out of circulation in a cashless society. On the other hand, in a cashless economy, there is a greater potential for scams, hacks or fraud.
- Privacy – Electronic payments are not private like cash payments. You will have to trust the organisations that handle your data securely, and not share it with others without consent.
- Economic Inequality – The poorest and the unbanked will be the most affected in a cashless society. In the UK, there are over a million unbanked people. As a result, a cashless economy will impact these people the most. For instance, the homeless rely almost entirely on physical cash and risk being further excluded from society with a cashless society.
- Access to funds – Cash will always be accessible and usable. Glitches and system outages can easily impact your access to your funds. A small outage in 2018 spread panic across the UK as people were unable to spend their money for a short period. In a completely cashless society, there is no cash to fall back on.
- Payment Processing Fees – Payment processing companies often charge a small fee for each card transaction. There are a few companies that dominate the payment services industry. If the firms decided to consolidate and there is an overreliance on their services, they could increase their fees. As a result, businesses and consumers will lose any savings from digital payments.
- Negative Interest Rates – When money is held electronically, negative interest rates could be costly to businesses and consumers. Countries such as Switzerland and Japan have used negative interest rates in their monetary policies. According to a report, negative interest rates can penalise businesses and consumers savings in the bank.
Various countries are already making moves towards cashless economies, with motivation coming from consumers, businesses, and governments. Sweden is a nation at the forefront of digital adoption. By 2023, Sweden is expected to be the first economy that is 100% digital. It has helped improve security, improve transactional efficiency, and reduce money laundering and financial crime.
However, it is important to recognise the success of the digital model in one country does not mean it will also translate in other countries. There are major worries about an all-digital future. From privacy concerns to monopolisation of payment processing services and negative interest rates. As with many aspects of life, there are trade-offs with the cashless world.
The future of payments is digital, the trend towards an intangible future is undeniable and cash may not be king for much longer.