What is a cashless society and how does it work – pros and cons of such a state
Tips / 27.05.2021
Numbers play an important role in how we interpret information and make decisions. So, let’s take a look at some key figures. The European Central Bank indicates that “the total number of non-cash payments in the euro area increased by 8.1% to 98.0 billion in 2019 compared to the previous year, with a total value of €162.1 trillion.” However, does this mean that the role of “cash as king” is declining and that we’re moving towards a cashless and what exactly is a cashless society? How does it all work?
Cash is still the predominant method of payment in most European countries”, but its proportion among retail payments is on the decline. Since the euro was introduced as a currency, the Eurozone has seen a dramatic increase in the use of cash. Given this contradictory picture as it relates to the use of cash and digital payments, where is the world headed in terms of achieving cashless societies? Let’s take a closer look.
Table of Contents
What is a cashless society?
Described as an “economic phenomenon in which financial transactions are carried out electronically” as opposed to using banknotes and coins, some consider cashless society our new future. We may see each group in a cashless society with its own electronic card or device that will be used to process and complete transactions. Some real-world examples of cashless transaction methods include those made by credit and debit cards, mobile wallets, Point of Sale (POS), Internet banking, and mobile banking.
8 types of cashless payments
Cashless payments can come in many forms and varieties, with different types of hard- and software. Here are a few examples:
Prepaid debit and credit cards are just one example of how a consumer can make cashless payments. These cards typically have a magnetic stripe, a chip, and other physical characteristics that set them apart. They offer users convenience, flexibility in terms of payments, speed, and security. Some of the major global card issuers are Visa and Mastercard and you can use their debit and credit cards to make purchases in-store through a card machine or online in various online shops.
Through a contactless payment, a consumer taps or hovers their card or smart devices such as a smartphone or a smartwatch against a POS terminal, eliminating any physical contact between the buyer and the seller. They can also be tapped against mobile phones which have mobile applications designed to accept payments. Such contactless payments work with Near Field Communication (NFC) and RFID technology.
Through mobile wallets, a user can send, receive and store money directly on their phone. They can go shopping and use their mobile device to make payments instead of using a banking card. This is first done by linking the user’s bank account to their mobile app. Sending money to friends and family is easy as the user will only need to enter a name, phone number, email address, or another form of identification in order to complete the transaction.
A Quick Response (QR) code is a black and white, two-dimensional sort of barcode which is scanned using a mobile device. Once the merchant scans the QR code, the device can process payment through the consumer’s linked bank account.
Traditionally, POS devices were only considered as hardware, which is used by merchants to mark the chosen goods and accept customers’ cards. However, with constant developments in the fintech space, besides physical POS devices, there are other solutions such as mobile POS and virtual POS.
Gift cards and vouchers
Gift cards are physical or virtual cards that are pre-loaded with funds and enable the user to shop at selected merchants, which accept cashless payment methods. Gift cards a brilliant way to increase brand awareness and serve as an effective marketing tool for many businesses.
Electronic Clearance Service (ECS)
ECS is a type of cashless payment method, which is widely used for making bulk payments. These include payments such as monthly instalments, paying for utility services, and disbursement of payments such as pensions, salaries, and dividend interest.
You can use ECS for both credit and debit services and in order to start this service, a person’s bank needs to authorise these “periodic credits and debits”. It is considered a safe cashless payment method, as users can provide specific instructions to their bank or financial institution, such as the maximum sum of the debit, the validity period, and the purpose of the transaction.
Unstructured Supplementary Service Data (USSD)
USSD is another cashless payment method through which a consumer can make payments without the use of an Internet connection or a smart mobile phone. To use this payment method, a customer needs to dial a specific number to reach a call centre. Payments are then made, as long as the mobile number and the bank account of the user are in agreement and linked to each other.
Why a cashless society is good
There is a long list of benefits of a cashless society, many of which will not only offer us increased convenience but also improve digital footprints so that there’s less scope for corruption and illicit activities. Here are a few of them:
Reducing disease transmission
Although the German central bank, the Deutsche Bundesbank, in a study indicated that “cash poses no particular risk of infection for the public,” there are some health-associated risks related to handling cash. This is because of various bacteria that are transmitted through its proliferation. In fact, in 2020, the World Health Organisation suggested that consumers rather use their contactless cards instead of cash to reduce the transmission of diseases, such as COVID-19.
Improved budgeting for consumers
The mobile apps which accompany many bank accounts and online banking solutions offer their users an easy-to-view list of all their expenses made and income received. This helps them keep track of their expenses and ultimately can improve their budgeting.
Reduced business risks and costs
Moving cash around costs money. It requires strong security measures to protect such a valuable resource. However, in a cashless world, the risks associated with handling cash can become a thing of the past.
Improved transaction speeds
Using debit and credit cards, smartwatches and key fobs and even mobile apps to make payments offer increased transaction speeds as they are processed much faster than cash-only transactions.
Less time and costs related to handling, storing, and depositing cash
In a cashless world, consumers will spend less time handling, storing, and depositing cash at physical bank branches as the need for cash will be eliminated.
Smoother international payments
Traveling abroad used to mean having to purchase foreign currency in order to enable you to enjoy your trip to another country. However, if the foreign country accepts cashless payments, you could simply swipe your card or use your mobile app to process the transaction, while the exchange rates and commissions are calculated automatically and debited from your account. In addition, making payments as remittances abroad or any other type of international payment will become easier because of the online nature of the transaction.
Compiling more comprehensive economic data
Governments across the world spend significant resources on compiling economic data, which is then used to make policy decisions. In a cashless world, digital transactions leave a trail and this data can be collected much faster, for a wider scope of the population, enabling governments and organisations to make better-informed decisions.
A tool for addressing corruption
An estimated $1.26 trillion is stolen from developing countries through corruption, tax evasion, and bribery. With a digital paper trail, there will be less opportunity for money laundering and other illicit activities. We have also seen that the elimination of high-denomination notes can contribute to reducing criminal activity.
Why a cashless society is bad
With all the benefits mentioned above, you might wonder if there are any dangers of a cashless society? There are certainly some concerns worth considering:
Cash enables you to spend and receive money anonymously. However, with a digital transaction, there’s always a footprint you leave behind, which can be used against you, and even worse, it could have negative ramifications if it falls into the wrong hands.
Safety and security
Digital payments are not completely safe yet. The world of hackers is rather dangerous and if you find yourself with a drained bank account with no money left, it could take a long time before the institution restores your funds. Therefore, basic cyber safety is an essential skill that we all have to learn.
As much as we rely on it, technology is never perfect. Trusting your finances to a machine could come with some technological glitches. This could cause loss of funds, frustrations, lost time and efforts.
Going cashless could disenfranchise the unbanked. This could be damaging to those in poor areas and the digitally incompetent groups such as the elderly, resulting in decreased social equality, which could become more disrupted.
Reduced cash handling should ideally come with reduced costs. But, if one provider of digital services or a small group of them band together, they may charge fees for using their services, which could negate such savings from reduced cash handling. Merchants already pay a transaction fee for every payment that they process, and such fees could be prohibitive for some merchants who trade in low-value and low-volume transactions.
Managing spending needs to be revised. Because of the convenience of swiping, tapping, or clicking, it’s easy to lose track of how much you’re spending. Impulse purchases that are put on one’s credit card could see a jump leading to overspending and going over the budget.
Negative interest rates
When banks hike interest rates, consumers can currently withdraw their funds and go elsewhere. With all payments being digital, the shift of fees on consumers might end up being costly.
It is difficult to imagine exactly how cashless societies will be regulated. Will there be a central bank that oversees all income and expenses? What will the role of financial institutions and governments be? This could lead to imposing additional taxes, while more totalitarian governments could use the system for mass surveillance.
Additional questions related to the idea of a cashless society
Is a cashless society possible?
A cashless society is not only possible, it’s already in the pipeline with some of the more technologically advanced countries making huge strides in this regard. However, while some leap ahead to the future, many others are still lagging behind and this could lead to exacerbating the economic gaps between different states.
Are there any cashless societies?
Although there are no cashless societies as yet, some are already in the pipeline and we could see the first cashless society in Sweden on 24 March 2023. Recent figures from the Swedish Central Bank show that less than 13% of Sweden’s total population uses cash. This translates into around 80% using cards. Cash accounts for less than a percentage of all the transactions in the country and cash payments are heavily discouraged. For businesses, over 99% of merchants accept card payments.
Is a cashless society the way forward?
While Sweden forges ahead towards a cashless world, the question of whether a cashless society is a way forward remains ambiguous and an unanswered one. Many countries are increasing bank account and card adoption rates, but the number of unbanked remains very high. In fact, according to the World Bank, about 1.7 billion members of the global population remain unbanked, which means that “digital payments tied to major institutions pose a risk of financial exclusion.”
How long until we reach a cashless society
As mentioned above, the future for Sweden is clear. It will become a cashless society in March 2023. However, it remains to be seen how this trend will continue to grow across the world. Some developed countries like the US have deeply ingrained laws, some of which outlaw discrimination by merchants against individuals based on the fact that they use cash as legal tender.
What happens to cash in a cashless society?
Perhaps what will happen to cash in a cashless society is the case that cash will be seen in videos, social media, and museums as relics of the past. Cash still offers many benefits such as improved control over spending and limiting impulse buys as well as the fact that there are no additional fees paid.
However, with cash, you won’t be able to build a credit history or credit score, cash is less secure than cards and finally, cards tend to offer rewards for higher usage and spending rates.
Whether the world slowly begins transitioning to a worldwide cashless society remains to be seen. The truth is, it’s likely that countries will implement this system to some degree or another.
However, perhaps one option is to consider a blend between cash and cashless in order to ensure that the disenfranchised are not marginalised further. At least until their states can be improved. This is a continuous work in progress and takes a lot of time, effort, and resources to achieve.
Disclaimer: Please be aware that the contents of this article and the myPOS Blog, in general, should not be interpreted as legal, monetary, tax, or any other kind of professional advice. You should always seek to consult with a professional before taking action, since the particulars of your situation may materially differ from other cases.