We are using less cash each year. In 2015, cash made up only 45% of payments in the UK. First came plastic, then chip and pin, and then contactless technology, which is slowly turning our wallets, phones, rings and even flesh into handy payment systems.
Convenience is the obvious explanation, but this trend towards so-called cashless societies has in some places been deliberately encouraged through state-led demonetisation. After all, cash and crime go hand-in-hand. For individuals, that can mean saving a few quid paying cash-in-hand or using cash to buy things they shouldn’t. But the anonymity of cash extends to organised criminals too: Kenneth Rogoff of Harvard University estimates that over 50% of cash is used ‘precisely to hide transactions’.
For instance, late last year Prime Minister Narendra Modi announced that all 500 and 1000 rupee bills (representing 86% of the value of cash in circulation) would be taken out of circulation in the space of 50 days. Ostensibly this was aimed at tackling crime and corruption – a worthy aim, at least – though the actual effects were often extraordinarily disruptive. Only 15% of adults use bank accounts for payments in India, and up to 97% of transactions are made in cash. The policy has failed, at least in the short term: cash withdrawals in 2017 were actually higher than in 2016. The sudden change meant unbanked poor were often forced to pay informal lenders to exchange old bills. Mr Modi was too hasty.
There are lessons for us here. Vulnerable groups depend on cash for their incomes, through churches, charities, and begging. While a longer term shift to digital payments could help protect the poor from exploitation by moneylenders and avoid the costs of cash, the sudden short term change proved costly in India. In countries which have seen gradual shifts away from cash, organisations have been able to adapt; Swedish churches now accept digital donations.
Where rapid change has been successful, it has usually been organic. Take mobile payments. Mobile payments have the same (or even greater) convenience of cash, but without the risk or anonymity. This has been successful in countries of vastly different economic standing, from ZAAD in Somaliland to Swish in Sweden. Perhaps the most impressive is China’s WeChat, initially a social media app, but which expanded in 2014 to include mobile payments. WeChat Pay began as an electronic form of “red packets” (monetary gifts for special occasions) and now functions as a digital wallet, which can be used to send money, split bills, and pay for services online and at point of sale. Some 24% of transactions in China happen through WeChat Pay, with its parent company Tencent now occupying 38% of China’s 38 trillion yuan mobile payments market.
WeChat’s success is attributed to the convenience of mobile payments using quick response (QR) scanning, which is faster than barcodes, cheaper for users than mobile alternatives such as near field communication (NFC), and cheaper for businesses than payment terminals. Business take-up has been particularly rapid in China, where smartphone usage is widespread but credit cards (provided by laggard state-led banks) are not.
Indeed, looking again at Mr Modi’s policy, it appeared in the months after his announcement that mobile payments platforms were the real winners of the decision. India’s largest app, Paytm, experienced a 250% surge in transactions, though even this was not sustained. Recent history suggests gentle support for gradual, organic change (like the emergence of successful mobile payments apps) will be more sustainable and effective over the long-term than sudden changes in policy.
But is there value in anonymity? Yes, cash can facilitate tax avoidance and the street-corner drugs market, but there are also many legitimate reasons for preferring the anonymity of cash. It’s just a question of bringing it into the 21st Century.
Cryptocurrencies like Bitcoin replicate the anonymity provided by a cash transaction, but do so digitally. The last few years have seen a huge increase in their usage and, subsequently, their value: there is now over £43 billion-worth of Bitcoin in circulation.
As with any new technology, there have been teething problems. Cryptocurrencies have experienced dramatic fluctuations in value since the creation of Bitcoin in 2009. Ethereum, a blockchain cryptocurrency like Bitcoin, lost 50% of its value in the space of a week after peaking at 400USD per ‘ether’ in June. They are also vulnerable to hacks. Buying or trading cryptocurrencies is not simple, and often expensive.
For the majority of us, we are some way away from putting our life savings into Bitcoin. Surveys show that people associate cold, hard cash with a sense of security and continue to prefer cash for small transactions. In some countries experiencing low interest rates, such as South Korea, increases in the per capita value of cash in circulation suggest that cash retains an important function as a store of value. Change is coming, of course, but we needn’t hurry it.