A money evolution

Cash usage is falling at unprecedented rates in economies across the world, and many believe the pandemic may have hastened the trend. But are we prepared to do away with paper money altogether?


In March 2020, reports claimed the World Health Organisation (WHO) had warned against using cash amid fears it could be spreading coronavirus. The WHO later pushed back on the claim, declaring it had never issued any official warnings – but it wasn’t the only whisperings of ‘dirty cash.’ China had already begun sterilising money in February out of hygiene concerns, and in March the US Federal Reserve started quarantining dollars from Asia, begging an important question: how clean was cash?

In response, retailers across the world began putting more emphasis on cashless transactions, with contactless payments growing by more than 40 percent globally in the first quarter of 2020, according to a survey by Mastercard. A study by data firm Dynata found the preference for cash dropped by 31 percent in the early months of the pandemic across the countries surveyed, and YouGov research found that ATM withdrawals in the UK had fallen by around 60 percent over lockdown.

The explosion of online shopping further contributed to the trend, with consumers turning to online systems such as PayPal to make their transactions; Amazon’s revenue increased 37 percent to a record $96bn in Q3, as shoppers across the world flocked to the e-commerce giants to get their goods.

A gradual decline
This shift hasn’t come out of the blue, of course; the idea of a ‘cashless society’ has been touted for years, dating back as early as the 1960s with the advent of credit cards, and spurred on by the rise of electronic banking, digital wallets and mobile payment systems, made possible by the explosion of fintech firms such as Venmo, iZettle, Swish and PayPal.

Sweden had already gone almost entirely cashless – at the start of 2018, only one percent of the country’s GDP was circulating as cash – and Finland was edging ever closer too, with the central bank having forecast a cash-free society by 2029.

The pandemic has accelerated the move away from cash usage and the adoption of contactless payments instead

In the UK, cash payments were predicted to represent just nine percent of all transactions by 2028, according to a 2019 report by UK Finance. And in China, more than 90 percent of city-dwellers said they used WeChat Pay and Alipay as their primary payment method, a study by the Brookings Institution found.

But while the move towards a ‘cashless’ future might not be anything new, many experts believe the pandemic is likely to have sped up the trend.

Among them is Natalie Ceeney, Chair of Innovate Finance and leader of the 2019 Access to Cash Review study, which looked at consumer cash needs in the UK. “The pandemic is likely to have dramatically accelerated the decline in cash,” she told World Finance. “Those who can use digital have made a significant shift in their behaviours.”

Luc Gueriane, Chief Commercial Officer at financial services provider Moorwand, agrees. “The pandemic has accelerated the move away from cash usage and the adoption of contactless payments instead,” he said. “A lot of people are now realising the convenience of not using cash and are beginning to have more trust in digital banking products that have helped them throughout the pandemic with money management features.”

That’s good news for the fintech sector, and it brings benefits to the finance industry at large – but how close are we to really going ‘cashless’, what barriers are there, and how would economies ultimately cope with the transition?

How convenient
The potential advantages of a cash-free society are many – not least the convenience that digital and contactless payments bring to consumers. This in turn could encourage increased spending; a study by MIT professors Drazen Prelec and Duncan Simester in 2001 found that shoppers spent up to twice as much when using a credit card versus physically handing over cash, for example.

That could have positive knock-on effects for both businesses and the wider economy.

Going cash-free could also save merchants money, according to Gueriane. “Physically managing cash is an expensive part of any business,” he said. “There are costs associated with handling, storing, and depositing paper money, such as security for keeping the cash safe, or transporting and depositing cash into bank accounts.”

That’s likely to become an even bigger factor if cash usage continues to decline; a study of 750 retailers in Sweden found that if cash transactions fell below seven percent of the total, the cost of handling the physical money became higher than profit made on cash sales.

“Smaller merchants have resisted for years on taking card payments because they don’t buy into the argument that the cost of cash is there,” said Gueriane. “But COVID-19 has pushed retailers to acknowledge the economic benefits of investing in contactless terminals when so few people are actively taking cash out anymore.”

Those costs aren’t only limited to businesses, of course; cash is a costly business for banks, with large sums spent on protecting physical money and monitoring criminal activity – and extra costs associated with actually producing the physical paper and coins.

Cursed cash?
But perhaps the most commonly cited motivation for going cashless is the ability to monitor payments and so eradicate cash-related tax evasion and criminal activity.

“Tax revenue is lost from cash-in-hand payments,” said Gueriane. “Every transaction is recorded on a bank statement, which makes it easier to see if and when money’s gone missing. Money laundering and tax evasion are reduced because there is always a paper trail.”

In his 2016 book, The Curse of Cash, economist Kenneth Rogoff argues that tax avoidance, money laundering, violent crime, the drugs trade, corruption, human trafficking and terrorism are all facilitated by cash.

According to his findings, the value of cash circulating in the US in 2015 was $1.34trn (which, divided evenly, would mean every person in the country having a cash pile of $4,200). With around 80 percent of this money made up of $100 bills, he suggests a significant chunk of this is being used to facilitate illicit activities – which could arguably be wiped out if the country went cash-free.

It’s not only in the US that this is happening, of course; in 2016, the European Central Bank (ECB) announced it would stop printing and issuing €500 notes, “taking into account concerns that this banknote could facilitate illicit activities.” When the move was announced, €500 bills accounted for nearly a third of the €1trn cash floating around at the time, much of it believed to be linked to money laundering, terror financing and the shadow economy.

It’s not just the large-scale criminal activity that cash can cover up, though. Counterfeit notes, robberies and employee theft are all issues associated with paper money, with the latter alone costing American businesses $50bn a year, according to a report by the Statistic Brain Research Institute in 2017.

It was indeed the attempt to quash this kind of crime that accelerated Sweden’s move towards going cashless, according to Jonas Hedman, associate professor at the department of digitalisation at the Copenhagen Business School. “Something unique to Sweden was a spate of robberies, which resulted in the unions of various organisations like bank employees, bus drivers, cab drivers and others pushing for a cash-free society in order to protect their members,” he said in an interview with the Wharton School.

Eradicating cash, however, doesn’t necessarily equate to eradicating crime. That’s at least the opinion of Innovate Finance’s Ceeney. “Reducing cash is often cited as having huge benefits in terms of tackling crime, but this is extremely misleading,” she said.

“The sad reality is that criminals usually find a way, and as cash use reduces, crime simply shifts to other targets, or is laundered in different ways. In Sweden, as cash reduced, bank branch and cash transit robberies declined to almost nothing. At the same time, the theft and hijacking of other valuables rose. In the same way, many criminals now target the vulnerable online in ‘push payment’ scams, rather than turning up at their door trying to solicit cash.”

Friedrich Schneider, Professor of Economics at the Johannes Kepler University in Austria, carried out research to find out what impact eliminating cash would actually have on tax evasion and crime. His results concluded that if cash was abolished, the shadow economy would be reduced by 20 percent, corruption by 18 percent and crime by five to 10 percent – that’s significant, but it clearly doesn’t just get rid of it altogether.

Money laundering and tax evasion are reduced because there is always a paper trail

Criminals could switch from cash to cryptocurrencies, with the likes of Bitcoin having already garnered a reputation for illicit transactions on the dark web.

There’s also the added threat of cybercrime. The UK’s Financial Conducts Authority (FCA) reported that data breaches at financial services companies rose by more than 1,000 percent between 2017 and 2018, with cybercriminals stealing £503m from the country’s financial institutions in the first half of 2018, according to UK Finance. The more we rely on digital, the bigger the risk might become. It’s not just targeted bank hacks that pose a threat, of course; many have argued about the dangers of relying solely on digital infrastructure when flaws in the system or power outages can cause mass meltdowns. Visa’s IT collapse in 2018, when a broken switch led to more than five million failed transactions across Europe, is a case in point.“Cash works even when the power goes down, whereas digital payments don’t,” said Ceeney. “This has raised concerns within central banks and governments as to the resilience of a digital infrastructure were cash to become obsolete.”

A survey by Paysafe found that half of consumers globally believed cash to be the most reliable form of payment during a crisis. “When a hurricane is approaching the US, Federal Reserve officials have told me they see an increase in the demand for cash by up to 500 percent,” Brett Scott, author of The Heretic’s Guide to Global Finance: Hacking the Future of Money, told World Finance.

“Because people recognise that an offline form of money is what you need when there’s a natural disaster. Ultimately if you want your economy to survive, you need these resilience elements in your monetary system. If you want a multi-modal, resilient payment system, you’d better keep cash – which is why the central banks should be promoting it.”

Sweden’s setbacks
In recognition of these issues, Sweden has started to backtrack on its cashless plans. In 2018, the Swedish Civil Contingencies Agency advised consumers to keep a cash pile for use in the event of a war or cyber-attack, later suggesting that it should be made obligatory for supermarkets, pharmacies, petrol stations and health services to accept cash. In November 2019, the country voted on a law making it mandatory for banks holding over £5.8bn in deposits to offer an adequate level of cash services. Following suit, the UK announced in its March 2020 budget that it would legislate to protect the nation’s cash infrastructure.

“We heard a very consistent message from policy makers, regulators and business leaders in Sweden that their digital revolution had gone too fast,” said Ceeney. “The Swedish parliament has even debated ‘what do we do when we are hacked by the Russians?’”

It wasn’t just the prospect of cyber-attacks and digital failures that drove the decision, though. The biggest problem was the fact a significant portion of the population was cut out. Many believe going cashless risks excluding vulnerable groups and exacerbating inequality.

Counterfeit notes, robberies and employee theft are all issues associated with paper money

“Sweden’s population demographics are similar to those of the UK, and like us, they had people in their population who were unable to use digital payments, and yet were struggling to get cash or use cash,” said Ceeney. “They were in danger of leaving people behind.”

This clearly isn’t a situation unique to Sweden. According to estimates from the Federal Deposit Insurance Corporation (FDIC), 5.4 percent of US households are unbanked, meaning they wouldn’t be able to function in a cashless society.

That figure is closer to two percent in the UK, according to the Financial Inclusion Commission, but the Access to Cash Review found that around 17 percent of the population would struggle to cope if the country went cash-free. And it’s not just the elderly who would be excluded, according to the research, with poverty the biggest indicator of cash dependency, and other vulnerable groups also frequently reliant on cash.

Gueriane believes this element of exclusivity is one of the biggest barriers to societies going completely cashless. “The crisis has made it clear that a lot more action is needed around making digital banking solutions available to all individuals,” he said. “Many programmes (digital banking solutions as well as crypto) are working to help make banking more financially inclusive.

However, if there isn’t buy-in from all involved, then there is a risk of a cashless economy becoming financially exclusive to certain demographics.”

The cash rebellion
It’s not just vulnerable groups and low earners who are on the side of cash, though. In the US, a survey by Genesis Mining, ‘Perceptions and Understanding of Money 2020’, found that 60 percent of respondents were opposed to the idea of paper money being replaced with digital-only money.

Diary studies by the Federal Reserve found that cash is still the preferred payment method for many in the US. “These studies have shown that cash use is still dominant in low-value transactions, below $20,” said David Stearns, software engineer at Stripe and author of Electronic Value Exchange. “That’s especially true for the very young, who don’t yet have access to a card, and the older demographic (45+).” Stearns points to the importance of cash in cultural traditions, such as tipping and gift-giving. But for some the biggest issue is having freedom of choice – and the desire for a diverse monetary system that includes centralised, state money.

Partly for this reason, Brett Scott believes there’s mounting resistance against the idea of a cashless society. “I’m seeing a lot of pushback,” he said. “I’m on a Facebook group with 25,000 members, which is ordinary people who are suddenly worried about this issue. The state should be protecting the diversity of the monetary system.”

Concerns over privacy
Central bank digital currencies could be one solution to maintaining this diversity as we move towards a potentially cashless future. China’s central bank is trialling a digital yuan as an alternative to cash, while Sweden’s Riskbank is piloting the e-krona – a digital wallet that allows users to make payments, deposits and withdrawals on a mobile app. The latter has evolved out of concerns that consolidation of payment services “could restrain competitiveness in the market and make society vulnerable,” in the words of a 2017 report on the project.

The report states: “The development towards an almost cashless society entails households having little opportunity to save and pay with risk-free central bank money and this can ultimately lead to a decline in the resilience of the payments system. A possible e-krona could function as a complement to the payment forms that are currently offered in the private sector.”

But this wouldn’t overcome susceptibility to cyber-crime and the vulnerabilities of digital infrastructure, and nor would it overcome another potential barrier to going cashless – concerns over privacy. Unlike with cash, transactions would still be traceable – which is exactly what some fear, according to Scott.

He believes getting rid of cash could be dangerous in countries where states already have widespread control. “The prospect of monitoring political subversion and opposition looms large in certain countries,” he wrote in an essay on the topic. “The end of cash will probably mean the beginning of an all-encompassing panopticon that can be used for widespread surveillance, tracking and manipulation of individuals.” Stearns agrees that privacy may be a concern for some – and a potential barrier in the future. “Cash is the only anonymous payment method, so consumers who care about privacy will resist its elimination,” he said.

Cryptocurrencies could offer a way around these issues, since transactions are invisible – but they aren’t without their issues, not least, once again, digital vulnerabilities and the shadow economy.

The road ahead
Ultimately, many believe it’s unlikely cash is going to just die out tomorrow. “Just like there is no total paperless office, you will see cash living alongside other forms of payments for some time,” Bernardo Batiz-Lazo, Professor of FinTech History and Global Trade at Northumbria University, told World Finance. “Innovation in payments is incremental, however the emergence of central bank digital currencies – and possibly social-media related digital payments such as WeChat and AliPay – may mean more diversity.”

Cash is the only anonymous payment method, so consumers who care about privacy will resist its elimination

Yet it’s clear younger generations are adopting digital payment systems faster than their predecessors; 47 percent of Gen Y and Z respondents use mobile payments more than any other payment method, according to an international Paysafe study (compared to 28 percent of Generation X and 10 percent of Baby Boomers). As that generation comes to dominate the economy, that’s likely to have an impact on cash usage in the future.

But with ongoing concerns around financial exclusion, security and resilience, how we deal with this shift is likely to become one of the biggest financial questions in the coming years. If economies are to harness the benefits of a cash-free society, governments, central banks and private institutions will need to rally together to extend digital reach to the financially excluded, find solutions to potential privacy concerns, and establish ways to maintain resilience and diversity in the monetary system, all without compromising on security.

Even then, the road to a global, fully cashless economy – where money flows smoothly between borders, and cash-related criminal activity is nothing more than a spectre of the past – is likely to be long and winding. Economies will need to prepare themselves for a bumpy ride ahead – and for some, the transition may come at a price.