A cashless society is one where physical paper and coin currency is no longer used for financial transactions. Instead, all transactions are done electronically by credit or debit cards, online payment services like Apple Pay and cryptocurrency. As the economy becomes increasingly digital, many are clamouring for a cashless society.

What are the benefits of a cashless society?

Supporters of a cashless society argue that electronic transactions are much more convenient for consumers and producers. Purchases and sales could be conducted easily and quickly, making businesses more efficient without the need to store and use cash.

Banks and other businesses currently must invest large amounts of money to protect their cash reserves. For example, many banks must hire large security teams and use state of the art security systems to prevent theft. Without the use of cash these costs would vanish, which could improve the profitability of many banks and businesses. Banks also no longer need to maintain many branches and ATMs, further reducing costs.

It also costs the government a significant amount of money to produce banknotes as well mint new coins. The Royal Mint issues 1.5 billion new coins every year and in 2021 the Bank of England produced over 4.5 billion banknotes. Eliminating cash usage would free up money for investment in other areas such as public services or infrastructure projects.

Another major advantage of a cashless society is a severe reduction in crimes such as theft and tax evasion. Every year, the HMRC^[i] releases a “tax gap” report. The “tax gap” is the difference between the amount of tax the HMRC should have received against how much they actually received. In the tax year 2020-2021 the “tax gap” was estimated to be around £32 billion. Since cash is virtually untraceable, it can be a useful tool for criminals. It was estimated that criminals accounted for 16% (£5.2 billion) of the 2020-2021 tax gap. If collected, the extra tax revenue could have been used by the government to invest in the economy or reduce the budget deficit and keep finances stable.

Sweden is perhaps the country closest to being a cashless society. Sweden’s Central Bank estimated between 2010 and 2019 the number of Swedes using cash fell from 39% to just 9%. Both the government and banks encourage the adoption of a cashless society with the creation of Swish, a mobile payment platform, and a new Swedish e-Krona digital currency. Approximately 97% of the Swedish population has been issued with a debit card. In 2019 the value of cash in circulation has dropped to 1% of its GDP in Sweden.

What are the risks of a cashless society?

Many are concerned a cashless society will not live up to its promises. For one a cashless society would increase our dependence on technology. Any small malfunction or power outage could lead to consumers being unable to make purchases when they need to. A small reserve of cash could be useful in case of an emergency.

Studies show that consumers are more careless about their spending when using electronic methods of payment such as credit cards instead of cash. It may be easier to overspend when not looking at a finite sum of money in your hands. This could lead to an increase in the volume of household debt leading to a reduction in consumption and material living standards.

In addition, the transition to a cashless society could exacerbate inequalities. For those who cannot afford smartphones, they may be unable to use mobile payment services and require cash to maintain their consumption. Also, many elderly citizens may be less comfortable with technology and prefer to use cash. Rural communities with poor broadband speed and internet connectivity could be left vulnerable. Many developing nations without good internet infrastructure and poor access to smartphones cannot afford to transition to a cashless economy.

Many small businesses could suffer in a cashless society. Many mobile payment services and cards charge a service fee every time it's used. This will bite into a small business’s profit margin. Reduced profits could risk leading to the firm’s closure, which causes unemployment.

Moreover, there may be damaging security risks in a cashless society. Online crime has reached unprecedented levels in recent years. The government estimates that cybercrime costs the UK £27 billion each year damaging all economic agents. Law enforcement can do very little to trace and stop online crimes. Data leaks could also be more common. Since all online transactions leave a digital trail, many argue that a cashless society could mean a breach of privacy as financial institutions could harvest your data and track your spending habits.

Reducing the use of cash may not actually deter criminals as they can switch to other forms of decentralised currency^[ii] such as cryptocurrency.

A cashless society could give rise to overpowerful banks. Subsequently banks can charge negative interest rates making consumers pay to deposit their own money. This may disincentivise saving which could harm consumers and businesses in a recession^[iii] or emergency. Furthermore, in a situation where a bank goes bust uninsured consumers may be unable to withdraw all their deposits and see their savings vanish into the pockets of the bank’s shareholders and creditors.

Besides, a cashless society, in extreme circumstances, could facilitate oppression. In totalitarian^[iv] states, citizens can essentially be frozen out of the economy upending their livelihoods.

Footnotes:

[i] HMRC - His Majesty's Revenue and Customs, the government department responsible for assessing and collecting taxes

[ii] Decentralised currency - a bank-free method used to transfer wealth or ownership of any other commodity without the need of a third party

[iii] Recession - When a country’s Gross Domestic Product falls over two consecutive quarters

[iv] Totalitarian - relating to a system of government that is centralized and dictatorial and requires complete subservience to the state 

Bibliography:

A Cashless Society- Benefits, Risks and Issues (Interim Paper) - Institute and Faculty of Actuaries

What Is a Cashless Society and How Does It Work? | Britannica