The future of money in the age of digital currency is one of the topics we’ve been exploring most frequently in a variety of recent client talks and articles. Here we discuss the future of cash in particular and how it might evolve into the fabled cashless society. We’d welcome your thoughts on the topic.
Cash-free: choice or burden?
Eliminating cash has huge potential benefits including convenience, security, and cost reduction for retailers, banks, and governments. For customers, there is the benefit of flexibility – a priority increasingly driven by younger generations more comfortable with digital technology and the on-line world. The combination of these forces means the need for cash has reduced significantly. As our own Steve Wells, reports, when traveling to client events around the world in the last year, he has visit places as diverse as Romania, India, the US, the Netherlands, Croatia, and Greece without any need for cash.
Another factor here is that social insecurity may be a major motivation for people to avoid using cash in their daily lives. For example, within the western world at least, a rising share of people simply don’t have any money to convert to cash once they’ve met their weekly expenditure. Many young adults are weighed down with student loan debt, and without money in the bank and hence no access to cash, the only other option is to use credit cards. Hence, financial inequality may itself be helping to make cash extinct in many economies.
Globally, many governments would like to eradicate cash as a measure to help reduce corruption, crime, shadow economy activity, and tax avoidance. For example, Sweden has been leading the shift to a cashless society and most consumers use debit or credit cards or their mobile phone for payments. A key reason to push the cashless agenda is that it is easier to monitor economic activity when all transactions are digitally registered.
A concern here is that, from a retailer’s perspective, cashless transactions gives the consumer an irrational feeling of detachment from their money. When money is not physically present in the transaction, consumers may be more likely to spend with less inhibition and lose track of how much they have left. Indeed, this may be one reason why so many retailers are pushing the cashless agenda. For banks, governments, and citizen services such as welfare benefit payments, the use of digital solutions to replace cash reduces the administrative requirements and cost overhead of handling cash.
The future of cash
In the mid-term, developed countries might stop using cash in the form of coins and paper currency. Instead they are likely to move to electronic transactions, using cards or phone apps. This might be a phased process, and initially we may see smaller value coins and notes taken out of circulation. For example the UK recently considered taking 1p and 2p coins out of circulation. To help reduce shadow economy activity and tax avoidance, the Indian government has removed 500 and 1,000 rupee notes from circulation and effectively banned their use.
In general, for a variety of reasons, developing countries still have a long way to go. The cashless movement could lead to exclusion of poor and more vulnerable segments of the population that do not have bank accounts or cell phones. Similarly, older generations still often rely on cash rather than using digital payment solutions. Smartphones are gaining a much larger foothold, but until they penetrate the whole of the population worldwide and in developing countries in particular, cash is still likely to exist. FinTech startups taking on banking in developing economies are coming close, but do not yet pose a risk to cash as yet.
Political, social, and sovereignty-related arguments are likely to slow the move to a cashless world – particularly in more nationalistic economies. Further opposition may come from those who see this as a further incursion of Big Brother into our lives and yet another erosion of individual privacy.
In the longer term, we will see a growing range of initiatives that effectively eliminate traditional uses of use of cash – these include:
- The increasing use of mobile devices with payment apps
- The use of chips under the skin, as already offered to employees at Three Square Market for access control and the workplace cafeteria
- Cheaper credit cards issued through challenger banks and retailers to develop brand loyalty
- A switch to national or trading bloc cryptocurrencies.
However, we expect cash will not die out globally for at least the next 20-30 years. It will probably happen gradually, as the world becomes more digital and our institutions develop the ability to extensively protect and encrypt data. Perhaps we can expect the use of cash to cease within 30 years on a social scale – especially in retail and government services (pensions, benefits) – as more and more citizens become fully engaged with digital financial options.
The potential of digital mediums of exchange
One interesting possibility here is the rise of new forms of trading tokens. Future waves of such digital currencies might allow us to receive tokens in return for employment, for providing local services, and as rewards for completing educational tasks at school and at work. Our airline frequent flyer miles, and store points could also be converted to such tokens. Instead of receiving a ‘like’ for posting an article on social media, our supporters could reward us with a fraction of a token. Such a widely accepted medium of exchange could lay the foundation for micropayments to work effectively and efficiently across society and to enable the unbanked and cash poor to participate more fully in the economy.
While there are clearly many potential benefits to the shift to an entirely digital medium of exchange, there are also significant hurdles and concerns to be addressed. The pace of transition could vary quite dramatically between nations and the process may require a fundamental reshaping of economies.
This article was originally published on LinkedIn