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10 August 2019

The Cashless Society

Tag(s): Politics & Economics, Business, Languages & Culture
“Money is like muck, not good except it be spread.”
Francis Bacon 1561-1626
                                                                 
 
The decision of the Bank of England to honour Alan Turing by making him the face of the new £50 note was a good one and welcome. Turing’s contribution to mankind was unique. He was one of the architects of the computer which has given the world a revolution in information and productivity. And his contribution to the Enigma programme may have shortened World War II by years and saved hundreds of thousands of lives. But society thanked him for this amazing effort by convicting him of the then crime of homosexual acts. He chose chemical castration rather than prison knowing the abuse he would have faced in gaol and within a year had taken his own life.
 
Some years ago I saw a moving play Breaking the Code by Hugh Whitemore with Derek Jacobi playing Turing and it brought home to me the injustice of the way he was treated. I later learned that my Aunt Sheila, my mother’s sister, had as a very young woman been part of the team that worked at Bletchley Park decoding the German messages. But apart from the news coverage of the decision to put his face on the £50 note, how much will it change our awareness of his remarkable life? How many of us, particularly young people, ever get to handle a £50 note? And in the future, how many of us will handle any notes at all, given that we seem to be moving inexorably to the cashless society?

A cashless society describes an economic state whereby financial transactions are not conducted with money in the form of physical banknotes or coins, but rather through the transfer of digital information between the transacting parties.  Before the invention of money human societies were by definition cashless as transactions involved barter and other methods of exchange. However, we now see a move towards a society where cash is replaced by its digital equivalent, i.e. legal tender exists, is recorded, and is exchanged only in electronic digital form.

This trend is developing at various speeds over the world. Sweden leads the way with a commitment to be cashless by 2023. By 2016, only about 2% of the value transacted in Sweden was by cash, and only about 20% of retail transactions were in cash. This seems ironic as Sweden was the first nation in Europe to adopt banknotes in 1661. The move away from cash has followed steady and accelerating progress with banks convincing employers to use direct deposit in the 1960s, banks combining to launch the convenient Swish smartphone-to-phone payment system in 2012, and the launch of iZettle for small merchants to accept credit cards in 2011. There have been many other innovations to reduce the relevance of cash but despite that 70% of the Swedish population want cash to be retained.

While not as developed as Sweden nevertheless the UK is near the top of the table.  After Sweden comes South Africa on 3.4% of economic activity still based on cash, Brazil 3.8%, the UK 3.9%. The US is on 8.2% and the Euro area on 10.75%

So what are the benefits of moving to a cashless society? Many are quoted but not all are convincing.[i] Cashless payments eliminate a number of risks associated with physical tender including counterfeit money, theft of cash by employees, and burglary, pickpocketing or robbery of cash. But cards can be stolen and used before they are stopped. It is also argued that money-laundering is reduced but I seriously doubt that. Do we believe that the oligarchs for example moved huge bundles of roubles to the tax havens of the West Indies, the Channel Islands, Luxembourg and yes, London?  It is further argued that when transactions are all digitised they are easier to track. If so, why is tax evasion and tax avoidance on the increase? As for burglary the incidence of breaking and entering houses is in decline as would-be thieves prefer the comfort of their own homes, perhaps in Montenegro or Albania, to carry out cybercrimes from the digital economy. That is growing at an alarming rate. Bitcoin and other digital currencies are increasingly used by international criminal organisations as they are anonymous.

It is further argued that governments can better track the movement of money and so improve policies. Their record in tracking the movement of illicit money through digital means is abysmally low. In the UK it is incredibly simple to set up a company with fictitious information and move money electronically through such assets.

It is also claimed that with recorded transactions citizens can refine their budget more efficiently. This is naïve in the extreme as most citizens don’t budget at all; most citizens are increasingly in debt, and making payment easier through contactless cards etc means most citizens find it too easy to spend money they don’t have.

Businesses will no doubt benefit in a number of ways. There is a cost, particularly to retailers, in managing and accounting for cash. A recent industry survey estimated cash handling costs each retailer in the UK on average £3,638 per annum, adding up to a total national bill of £17.8 billion. The biggest beneficiaries will be the banks who have been working for years to make conventional banking harder and force us or at least nudge us to get used to being without the convenience of local branches and local ATMs. The psychology here is that as we are forced to change our habits and go online to do our banking the argument is that the consumer wants this new direction as if it was a consumer-pull trend rather than a supplier-push activity.

Even bigger beneficiaries will be the credit card suppliers. It is not well-understood, though it’s certainly no secret, that the average transaction charge by Visa and MasterCard is around 2% of the value of the transaction. This is a scam as most of their costs are fixed rather than variable. The variable part is in the financing rate that they apply to the consumer. However, they more than make up for that on the high rates of interest charged to those who pay late. So, of course, these companies have been lobbying for years to eliminate cash so that we are all forced to pay by card and so enrich the shareholders of Visa and MasterCard. Prior to their IPOs in 2009 and 2006 respectively Visa and MasterCard were cooperatives owned by some 25,000 financial institutions. Now anyone can own their shares and excellent prospects they probably are but I believe the majority of their shares are still held by the same financial institutions.

I have other concerns. In a digitised economy, payment made will be traceable. Governments and other institutions will have access to this information. It can be used to build profiles of individuals’ spending patterns. Companies like Apple, Google, Facebook and Amazon, already far too dominant in their influence over people’s lives, are all setting up their own payment systems. Facebook is even proposing to create its own currency. All of them will exploit the opportunities created in a cashless society.

Not everyone has access to a bank account or a credit card. Not everyone has the confidence to negotiate electronic payment systems using a smartphone. Not everyone has the intellectual capability for using complex electronic systems. The poor, the near poor, and many of the elderly are unbanked and will be very much disadvantaged in a truly cashless society. Charities often depend on the loose change that we find in our pockets and purses. And while it is possible to get a contactless machine for charitable collection they are not cheap and many charities would not be able to afford them.

And what about the young? How will they learn and understand the value and meaning of money if they never see it except in museums? From the age of nine I was earning money as a chorister in the church choir. When I was ten years old and starting grammar school my father bought me a lockable cash box with a number of sections. There was a space where I could write the subject of each section such as bus fares, lunch money, pocket money and savings. My father taught me how to prepare a weekly budget to cover each of these items and then we agreed the total money that he would give me in cash. From a very young age I had a Post Office savings book in which presents of money from generous relatives had been deposited. By the age of eleven there was enough in there for me to buy my first portable radio, a Sanyo.  In the future children will grow up without such lessons and so that will be another nail in the coffin of a society addicted to debt in which the vast majority have no savings.

 Cash never crashes. Digital payment systems sometimes do. Visa had a massive outage recently affecting millions of people. I always have some spare cash so if a credit card is refused or the system is down I can still pay. If hackers drain your bank account, without cash you will have no alternative source of money.

When all money is electronic, if the Central Bank charges the commercial banks a negative interest rate, which is now the case in the Eurozone, they can pass it on to customers (in the form of fees) who will no longer have any cash to pull out and stuff under the proverbial mattress to avoid the negative rates.  Dropping the interest rate is typically a move to stimulate the economy, but the result is that money loses purchasing power.

If we reach the stage of a cashless society without solving all these problems, particularly those of the unbanked, then in effect we are returning to a primitive society in which barter will become a significant means of exchange. At least that is not traceable.


[i] Though I confess that on our recent cruise on the Danube visiting five countries in eight days, all with different currencies, the ability to pay by card rather than buy various amounts of currency was useful. I paid for a Coke in the café at Marshall Tito’s mausoleum in Belgrade by debit card. It duly appeared on my bank statement as £1.24 with no other charge. However, on our recent family holiday In Portugal we went to restaurants that only took cash.




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