The Invisible Economy: The case for a cashless society in Britain

Slowly but surely, the digital age has changed many aspects of our lives, from how we interact with people to the way we source information. It is only natural, then, that our means of exchange also undergo rapid change.

Physical cash has long been the dominant staple used by many to pay for goods and services, but due to a demand for speed and efficiency, the world has now gravitated towards online payment methods. In Britain, 10 percent of adults choose to live a largely cashless life. This ratio rises to 16 percent for those aged 25-34.

The departure from cash extends far beyond Britain, and has emerged as a global phenomenon.  

Sweden leads the way on the march towards a completely digital system of money. The nation is expected to become cashless by 2023. Only 13 percent of Swedes could recall using cash for a recent purchase. Demand for cash is literally disappearing in the Nordic Nation: the amount in circulation has fallen from 80 billion kronor (£6.6 billion) to 58 billion (£4.8bn) in the last 4 years: a 27 percent reduction.

However, there are several reasons why Sweden has transitioned relatively smoothly. For one, it has low levels of inequality, with a Gini Coefficient of 0.28 (2017), according to data from the OECD. 

sweden2.jpg

(Image Credit: NPR) A cashless storefront in Stockholm: Sweden leads the way on a march towards a digital-only economy

In nations with extensive regional inequality, financial exclusion is a prevalent concern, related to the access which individuals have to useful and affordable financial products and services that meet their needs. In Britain, this is characterised by the ‘North-South divide’, which explains the relative prosperity of the South, and deprivation in the North. In the North West, only 58 percent of citizens are primarily independent of cash, the lowest in the country. 

It is no coincidence that people on lower incomes are most reliant on physical money. Access to credit is the main reason, as poorer people cannot always afford to borrow. Unevenly distributed broadband coverage and 300,000 cash machines disappearing each month are also critical problems, leaving many rural residents behind.

Some retailers, across the Atlantic, have made moves to make the acceptance of cash mandatory. Philadelphia legislators made history in March by becoming the first U.S. city to ban cashless stores, citing low-income and homeless individuals as being unfairly discriminated by the policy.

Cash, and its association with crime, has long been on the minds of the authorities. According to Harvard Professor Kenneth Rogoff, “underreporting of business income by individuals who conduct a significant share of their transactions in cash” is the single biggest contributor to the “tax gap,” the approximately $500 billion annual difference between federal tax voluntarily paid and tax due. It is also worth noting that illegal transactions in the United States for the four main illegal drugs – heroin, cocaine, marijuana, and methamphetamine – are worth $100 billion a year. Almost all of which is carried out in cash.

Going digital could, therefore, be vital for undermining under-reported and nefarious activity.

ken rogoff

Soldiers stand guard next to narcotics wrapped in silver packages in Tijuana

(Picture: Brookings Institute) Harvard Economist Kenneth Rogoff has argued a digital economy could stem the illegal flow of drugs, human trafficking, and other criminal activities dependent on physical cash.  

Correspondingly, in the developing world, cashless legislation has incentivised technological innovations leading to productivity gains and contributed to poverty alleviation.

Three years ago, India’s Modi-led government took the unprecedented ban on two major bills (1000 rupee and 500 rupee notes,) which accounted for 86 percent of the money supply. Modi hoped to reduce high crimes that depend upon the anonymity, liquidity and portability provided by physical money. According to a 2010 World Bank estimate, the shadow economy in India makes up one-fifth of the country’s GDP.

Despite initial chaos, demonetisation has contributed towards a rapid shift towards mobile and digital payment technology. Innovations also took shape, such as the Unified Payment Interface (UPI). This allows bank customers to make or receive payments from individuals belonging to another bank, all via smartphone, using either each other’s mobile number or virtual ID. According to data released by National Payments Corporation of India (NPCI), UPI has achieved a monthly volume of 800 million rupees ($11.1 Million), five times to volume of UPI transaction in December 2017.

india demonetisation“What (demonetisation) did was help convert a lot of users… People realised that it is much more convenient, secure and much more seamless especially for online purchase,” said Kunal Bajaj, head of Indian mobile payment company MobiKwik

If Britain can make a success of a cashless future, local economies could also get a boost from digital payments because greater productivity attracts more business activity, talent, and tourists. Previous research by Visa indicates that GDP could be boosted by an average of 6 percent by 2025 over a business-as-usual scenario. 

Screen Shot 2019-11-12 at 10.38.21Research by Visa has indicated a cashless transition could have catalytic economic growth impacts. (Visa Cashless Cities Report)

Although the benefits of a cashless society are clear, barriers to digital payments adoption remain. Inadequate digital infrastructure, limited access to digital payment products, and cultural attachment to cash, all impede the transition to a cashless economy.

In spite of these hurdles, it is difficult to envision cash still being around in 50 years’ time in a world of rapid technological change. Approached with caution, this uncharted new world could open many new possibilities, both for the developing and developed world. Britain must make a success of this digital transition, or risk being lost in the dust.

Written by Jack Jones

Sources and Wider Reading

Visa- Cashless Cities Report: https://usa.visa.com/dam/VCOM/global/visa-everywhere/documents/visa-cashless-cities-report.pdf

The Hindu: https://www.thehindu.com/news/national/three-years-since-demonetisation-cash-is-back/article29912351.ece

New York Times: e2ba6bbf1b9b_story.htmlhttps://www.nytimes.com/2017/01/10/magazine/should-we-trash-cash.htmlhttps://www.wsj.com/articles/the-sinister-side-of-cash-

Wall Street Journal: https://www.wsj.com/articles/philadelphia-is-first-u-s-city-to-ban-cashless-stores-11551967201

Washington Post: https://www.washingtonpost.com/business/india-going-cashless-could-be-a-model-for-the-world/2019/06/05/d8fec830-87ee-11e9-9d73-

Brookings Institute: https://www.brookings.edu/blog/order-from-chaos/2015/12/03/the-network-effect-trafficking-in-illicit-drugs-money-and-people-in-latin-america/

The Guardian: 1472137692https://www.theguardian.com/money/2019/jun/06/adults-uk-cashless-contactless-payments

NPR: https://www.npr.org/2019/02/11/691334123/swedens-cashless-experiment-is-it-too-much-too-fast?t=1573557650901

Bloomberg: https://www.bloomberg.com/news/articles/2019-03-26/who-is-banning-cashless-stores-amazon-go-could-be-next

New Statesman:  https://www.newstatesman.com/spotlight/fintech/2018/11/cost-cashless-society

 

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