No banknotes or coins: is a cashless economy likely?

A cashless economy has been a staple of human thinking for millennia. The Garden of Eden was a cashless society. H G Wells portrayed a cashless society in The Time Machine.

In that classic novel the upper echelon of society, the Eloi, pursued a life of indolence and luxury, living, it seemed, off the bounty of the land. There is, however, no such as a free lunch, even in a cashless economy. The Eloi eventually paid the price with their own lives, after being lured underground and eaten by the Morlocks.

Likewise Star Trek has always been portrayed as a cashless society. And The Village in cult television series The Prisoner had a cashless society at its heart. It operated on a system of undefined credits.

Given that none of the captive villagers ever seemed to work to earn their credits, perhaps it was an example of a guaranteed universal income system.

Cashless economy: dream or reality?

Is a cashless economy actually possible? Many people think so. They point to the likes of Bitcoin and ApplePay as viable alternatives to cash. But they are missing the point. As clever and as high-tech as they are, these are cash equivalents rather than cash replacements.

Discussion of the possibility of a cashless economy has an embedded quasi-philosophical issue. How does one define cash? A simple approach is to describe cash as physical money. A truly cashless economy, then, will be one that has done away with physical money.

Hyperactive SIX

Life Ball in Vienna, courtesy of SIX, © Life Ball, Jürgen Hammerschmid

The Zurich-based provider of Switzerland's financial infrastructure, is active, even hyperactive, in its attempts to reduce the risk of physical money. SIX Payment Services (SIX) gushed recently that it is cementing its position as a leader in providing cashless money solutions for events.

It says it has been central to enabling a range of events across Austria, Belgium and the Netherlands to be cashless this year. SIX says that it has already provided or that it will be providing cashless solutions at the following events in 2017:

• Formula 1 World Championship, Austria
• Life Ball, Austria
• Hahnenkammrennen, Austria
• Eurosonic Noordersleg, Netherlands
• Fifteen Seconds Festival, Austria
• Nova Rock Festival, Austria
• Electric Love Festival, Austria
• Boomtown, Belgium
• Moto Grand Prix, Austria

Cashless money is faster

It states that cashless transactions are typically much faster than cash purchases, meaning that queues are reduced and fewer staff required, saving the event organisers additional costs. Cashless events also eliminate the need for additional security required to handle and store cash.

In the past three years, it calculates that it has now tripled the number of events for which it has provided cashless payments solutions. It then adds that it plans to continue to grow its cashless proposition in the future.

“From music festivals to motor racing, we are able to provide and service their individual needs which are sometimes very different,” explains Thomas Grabner, managing director of SIX Payment Services in Austria.

WiFi and temperature control

As well as equipping the area with a secure internet connection, SIX says that it also ensures that its terminals will function in all environments and temperatures – from -20C to over 45C.

However, even his own colleagues, are not prepared to accept cashless payment, says Andrej Eichler, head of financial industry services at SIX Payment Services in Zurich.

He has spent his entire professional life installing and maintaining networks of automated teller machines (ATM) and payment cards programmes. He feels very strongly that we will never achieve a fully cashless society and is not afraid to say so.

A true believer in demand for uncontrolled payments

 Andre Eichler, SIX Payment Services, courtesy of SIX

“I am a true believer there will always be strong demand for anonymous uncontrolled payments, for good and unfortunately also wrong reasons, like from criminals. We are helping to automate ATM estates to reduce total cost of ownership or introducing features such as QR-based withdrawals.”

“If I want to reward a waiter for good service, I want to tip in cash to ensure the waiter gets the tip. If I pay using a card the waiter won't receive the tip. The boss will likely pocket it. And my grandmother still likes to send birthday cash to her grandchildren.”

“Another issue is that people like to feel secure. The money I own, if I want to I can take it home with me and count it. A small number of countries [including the UK] have passed the 50% usage of means of payment other than cash. It might take another decade to reach 65%.”

Strong fan of a cashless economy

He is, though, a strong fan of cashless payments for personal use, including the rapid transmission of money to his children should they need it. P2P payments like TWINT in Switzerland do the trick from mobile to mobile.

From the purely technical perspective, he is a fan of tokenisation as practised by Apple. “Apple issues a token valid for a limited time for a specific payment,” he says. “You can use your phone as a means of payment. If the phone is stolen, the token is rendered worthless. You do not lose your cash.”

Irony of ironies, perhaps. Cashless payments help customers protect their cash holdings.

UK far from being the first cashless country

Bank of England chief cashier Victoria Cleland was quoted in the Financial Times recently commenting that cash is very much alive and kicking.

Figures from UK Cash & Cash Machines 2017, published by UK Finance on 11 August, present supporting detailed statistical information on the country's use of cash for daily use, as well as forecasts covering the next 10 years.

• 2016 was the second year when consumers used cash for fewer than 50% of payments
• 26% of all consumer cash payments were for a value of £1 or less
• 61% were for a value of £5 or less
• Almost nine in ten cash payments made by consumers were in the retail, travel and entertainment sectors
• The number of cash payments for less than £1 has halved over the past decade
• Over three-fifths of cash payments were for a value of £5 or less in 2016, reflecting the extensive use of cash for low value convenience-type purchases
• Just 1% of total cash payments were made by businesses in 2016

Cash payment average rising

The average value of a cash payment has increased over the past 10 years from £11.58 in 2006 to £15.80 in 2016 owing to inflation and changing consumer preferences, as cards are increasingly used to make low-value payments, particularly using contactless payment systems functionality.

There were 2.9 million consumers who rarely used cash in 2016, representing 6% of the UK’s adult population. People in younger age groups are more likely to be rare cash users than people in older age groups, with more than one in ten of those aged 25-34 making one cash payment each month or no cash payments at all.

At the opposite end of the scale, there were 2.7 million consumers (5% of the adult population) who relied almost entirely on cash to make their day-to-day payments during 2016. These people were relatively evenly-spread across different age groups.

Lower income groups rely more on cash

However, people with lower household incomes were far more likely to rely mainly on cash when compared with their more affluent counterparts. Over half of all consumers who relied predominantly on cash during 2016 had total household incomes of less than £15,000 per year.

Over the next decade the number of cash payments is forecast to fall by 43% to 8.7 billion payments. Meanwhile the total value of cash payments is forecast to fall by 23% to £185 billion in 2026, says the report.

But Adrian Buckle, chief economist at UK Finance, is not predicting the imminent demise of physical money. “It is clear that over the past few years we have witnessed a significant shift away from cash use in this country with contactless cards causing a decrease in the use of notes and coins.

Cash will remain for foreseeable future

“However we don’t believe that the UK is on the verge of becoming cashless, as some reports have claimed. People will always want to choose the payment methods that best suit them and, for the foreseeable future, in lots of cases that will continue to be cash.”

Anecdotal evidence suggests that Germans remain notorious for their liking of physical cash in preference to alternative means of payment. As do Scots.

According to data from the Bank for International Settlements, Sweden is leading the way in reducing the use of physical money.

Different picture in less developed world

The picture is very different in less developed parts of the world. A World Bank report on the cashless economy from mid-2016 says that there are many reasons exist for preferring cash, but the main one is that cash is entrenched in people’s daily interactions.

Despite the apparent benefits of speed and security for consumers and merchants to migrate to electronic payments, user behaviour is notoriously hard to change, concedes the World Bank.

In addition to the “sticky” habits of financial behaviour, sub-optimal transaction account and payment service product design (such as interoperability, reliability, user focus and access) have an impact.

Hampering adoption

Particularly in the developing world, the combination of limited uptake by consumers to pay electronically and the elevated fees that retailers must pay to accept electronic payments, hamper adoption.

The paper refers to a study commissioned to understand the current behaviours towards and perceptions of digital payments among consumers and merchants in low-income communities in India.

Key insights indicate that the adoption and use of electronic payments have yet to make strides.

• Cash transactions are a matter of habit: 97% of retail transactions in India are conducted in cash or by cheque.
• Few consumers use electronic payments
• Only 11% used debit cards for payments in the past 12 months
• Few merchants accept electronic payments
• Only 6% of Indian merchants accept electronic payments

Trapped in cash ecosystem

Merchants and consumers are trapped in a cash ecosystem, which inhibits their interest in electronic payments, observes the World Bank.

In the UK, Bank of England statistics show there is more cash in circulation today than ever before, with more than £1,000 of banknotes alone per adult, totalling £43.4bn

The cashless economy, then, remains in the world of fiction.