Moving towards a cashless society

I was reading an article on Bloomberg which stated that by the end of this month, Scandinavia’s last mint will have closed. Following in the footsteps of Sweden and Norway, Denmark has decided to outsource the production of its coins to Finland. The Danish central bank has already stopped printing banknotes. They’ve become so unfashionable that there’s no rush to find a subcontractor for those. In general, the rule of thumb in Scandinavia is: “If you have to pay in cash, something is wrong.”

From the European Central Bank to India to Venezuela, authorities are falling out of love with cash, particularly the kind of high-denomination banknotes favoured by mobsters and drug dealers.

cash-in-circulation

As the above chart shows, Scandinavia is way ahead of the game. The region is frequently cited as a trailblazer in the global transition to a post-cash society. Sweden was the first European country to implement paper money; now it is the first to eliminate it. Sweden is the place where, if you use too much cash, banks call the police because they think you might be a terrorist or a criminal.

About six months ago, some European economists started to make a case for a cashless society, referring to some Scandinavian countries where the majority of the payments was conducted through non-cash means. Thus, they argued, there was no need to keep on working with cash, as a cashless society seemed to be working just fine. Technically and theoretically, they are right. It is much easier to just swipe a card or just tap with a cell phone to make a payment, but the real issue at hand is that you’d have to have full confidence in the financial system.

Denmark is today one of the countries with the lowest percentage of notes and coins in circulation. As recently as 1991, cash and cheques were responsible for 82 percent of Danish transactions. The cheque went the way of the Dodo in late 1990s, while the use of cash has been dropping steadily ever, even during the current period of negative interest rates.

According to a March report by Denmark’s Tax Ministry, the size of the country’s black economy has fallen by a third between 2012 and 2014, from 45 billion kroner ($6.3 billion) to 31 billion. Although the ministry did not provide a reason for the reduction, it is interesting to note that cash usage also fell during the period.

A June report by the Danish central bank found that the cost of handling cash is more than double that of handling domestic debit card payments. The same report also found that hardly any Danish shop prefers cash to plastic these days. Fear of robbery was often cited as a key reason for their preference. The Danish government is now allowing some shops to refuse cash payments, while the central bank has joined others in exploring virtual currencies based on blockchain-style technologies.

That carries its own set of risks, particularly when it comes to privacy. In 2014, scores of Danish royals and celebrities were shocked to discover that a tabloid had for years paid a rogue consultant at digital payment provider NETS to obtain copies of credit card transactions.

Besides breach of privacy, we are susceptible to other threats like cyberharassment and cyberheist. Communication network needs to be robust enough to complete the transactions. Weak communication may cause partial or failure of transactions to our huge embarrassment. Nevertheless, we will always be under the state control. A tyrant state can expropriate our money in a matter of few minutes. A post-cash society requires trust and an efficient state.

Post-demonetisation of ₹1,000 and ₹500 banknotes, the Indian federal government is pushing hard for transition towards a less-cash society through new digital platforms and incentivising and subsidising digital transactions. Reserve Bank of India has set up a committee in June this year to study the use of blockchain technology to reduce the use of paper currency.

Prior to demonetisation, the bulk of transactions were conducted through cash. Since then, it has reduced considerably and this move has proven to be a catalyst for consumption to be digitally driven and payments to go cashless.  It is pleasing to see smaller merchants such as tea stalls, grocery stores as well as consumers in rural and smaller cities embracing digital payments. Conversion  from  cash  to  cashless  is  not  just  about  consumer  preferences.  It  requires  the  entire ecosystem of suppliers, big and small, in a market to also be ready, willing and able to convert.

The digital transformation of cash is a cost savings to the entire financial ecosystem. From printing to cash management to physical infrastructure to securing and dispensing of currency, cash is very expensive. Government must think out of the box to pass these savings to consumers as incentives to embrace digital transactions.

The India government’s demonetisation decision, replacing 86 percent of currency, was undeniably disruptive. No major disruptive decision comes without upheavals and it has inconvenienced most people, especially those on the wrong side of the socioeconomic and digital divide in India — the poor. The pain to the common man should have been better managed. Digital and physical infrastructure and logistics should have been in place in advance of the November surprise.

How far the bigger and less homogeneous nation like India can go cashless is worth to be seen. Success of the Indian government in pushing the nation to a less-cash nation will not only be a great  achievement, but will set an example for the world. The credit also goes to every Indian undergoing hardships due to cash crunch in this transition towards a cashless society.

Cash plays an important role in our modern economy, particularly among the poor, and every step forward towards cashless future should be with great caution, keeping the poor section surviving solely on informal economy included in the transition process.

As we go cashless, we will miss the crisp, the smell, the sound and the feel of a new paper currency!