This article was first published in the February 2013 International edition of Accounting and Business magazine.
Gold was once described as a barbarous relic by celebrated economist John Maynard Keynes. The same may now equally be said of the notes and coins that clutter our pockets.
Many futurists believe that a lot of countries would benefit from ditching paper and metal as a means of exchange. Harmless as cash may seem, they say, it is expensive to produce, especially disadvantageous for the poor, and a huge blessing for criminals and tax dodgers.
2013 could be a pivotal year in the decline of physical money. Even smaller merchants, such as taxi drivers and handymen, are increasingly able to take payment by credit card, and the technology to support ultra-convenient transactions using mobile phones is developing fast.
South Korea, Sweden and Japan are even openly debating the idea of abandoning cash altogether. There is a particularly high-profile campaign to ditch the filthy lucre in Sweden, which is, ironically enough, supported by Abba’s Björn Ulvaeus, co-writer of the song ‘Money, Money, Money’. Sweden already holds the world record for the lowest volume of cash in circulation at just 2.8% of GDP, down a fifth since 2007 and far lower than the average of 8.5% for rich nations.
In addition, the world may soon be treated to a graphic illustration of the shrinking importance of cash, according to Capital Economics. The consultancy argues that if Greece exits the eurozone in a hurry the country could face a brief hiatus before a new currency could be printed. ‘Although the likely temporary absence of notes and coins does constitute a difficulty, it is not as serious as it might first seem,’ the firm’s founder Roger Bootle wrote recently in a prize-winning paper on how to break up the euro. ‘Cash has become less important over time.’
Even a brief stint without notes and coins could advertise the appeals of going permanently cashless. So is the idea of a world without notes or coins possible or desirable?
There is already plenty of evidence that cash is being used less in legitimate transactions. Over the past decade the number of credit card transactions has nearly trebled, according to the European Central Bank. In 2011 alone, non-cash payments climbed by 5%.
The US appears on a similar track. And in 2010, for the first time in 30 years the US Treasury Department did not have to print any $10 bills, while $5 bills were churned at the lowest level in a generation.
Britain’s Payments Council, which is charged with ensuring the smooth functioning of the payments system, says that in 2010 cash payments were 15% less than in 2000. By 2050, the body predicts, cash will be used by only a minority of payees.
For the likes of David Birch, a director at consultancy Hyperion Group, the retreat of cash is something to celebrate. ‘We need a post-industrial form of money,’ says Birch. Cash is so ubiquitous, he says, that we have become blind to just how limiting its drawbacks are.
For a start cash is surprisingly expensive to print, transport, guard and process. The European Commission calculated in 2010 that the cost of processing cash payments was as high as 2% of GDP. And two years before, a McKinsey study had put the annual price tag for cash at something between €60bn and €100bn – and that was just the security, transport and production costs.
The shortcomings don’t end there. ‘Cash is a tax on the poor,’ says Birch. He points out that when you hold money in cash you are essentially giving the government an interest-free loan. ‘Since poor people tend to use cash more, they suffer disproportionately.’ For the Federal Reserve in the US this generated a profit of US$77bn in 2011 alone.
While cash may be a curse for low earners, it is a positive boon for criminals. Although credit cards or internet payments are diminishing the appeal of cash for most transactions, the volume of cash in many nations has actually been rising. The most likely explanation is that the illicit demand for notes has been on the rise.
The clearest example of this is the surging popularity of the US$100 bill, a favourite store of value and medium of exchange for criminals across the globe. Some three billion of these bills were printed by the US government in 2012, the highest level since records began and three times more than in 2006. Ditching cash would be a blow to criminals everywhere. ‘Of course, criminals could find workarounds,’ says Ron Shevlin, a consultant at Aite. ‘But it would make life far harder for criminals, since electronic transactions leave a trail.’
Notes also support a more routine form of dishonesty. Taking payment in cash is the easiest way to avoid paying tax for a large swath of workers, including builders, handymen, nannies, tutors and gardeners. In a dematerialised monetary system, tax collection would become far easier.
Meanwhile, technology is making it more convenient to pay with cards or over the internet for even small transactions. An increasing number of debit cards can now be used simply by the user waving them over a reader. In Britain alone around 19.6 million of these contactless cards have been introduced, with around 73,000 terminals to support them. Transport systems too are increasingly shifting to prepaid cards such as Oyster on the London public transport network, which further reduces the need to carry around cash.
In the US free devices from Intuit and Square allow even lone traders to take payments by credit card. These companies offer free card readers and then take roughly a 2.7% slice of each transaction. Such devices have been soaring in popularity. In addition, PayPal, which now has 100 million account holders, makes it easy for individuals to exchange money – long a bastion of cash transactions.
Nor is this just a trend in rich nations. Kenya, in particular, has been leading the way. An impressive 15 million Kenyans now use M-Pesa, a service that enables customers to pay without cash. Michael Joseph, a former chief executive of the company that pioneered M-Pesa, admits to joking with the nation’s central bank governor that he will soon no longer need to print cash.
Meanwhile ‘smart wallets’ promise to make electronic payments even more appealing. These systems would allow consumers to pay by using mobile phones or simply by typing in a phone number and adding a security code. The real joy of this innovation, which is being pioneered by the likes of Google, PayPal and Square, is that the software would automatically select the best method of payment. The system would avoid taking cash from accounts if it might trigger overdraft penalties and shun credit cards with the highest rates of interest. On the flip-side, cards with generous reward schemes would be given preference. This has the potential to totally overshadow cash in terms of convenience and efficiency.
Of course, a cashless utopia does not appeal to everyone. Shevlin, author of Aite’s report on the cashless society, believes that older citizens will cling to cash. His report showed that 81% of baby boomers in the US were not cutting back on their use of notes and coins, and about a fifth were actually using cash more than a couple of years before. At the current rate of decline, Shevlin points out, the US will still be using cash in 200 years’ time.
Even the most ardent futurists admit that cash won’t disappear any time soon. But cash looks like eventually sharing the fate of gold, becoming ever less relevant as a medium of exchange. Over the coming decades, paying with notes and coins is likely to become a minority activity.
Christopher Alkan, journalist based in New York