The Dangers of a Cashless Economy 

Historically, currency has always been physical; whether that be in the form of £20 notes, gold coins or farm animals, the exchange of value has almost always occurred through the exchange of tangible objects. However, as the world progresses, currency evolves with it and the 2000s have seen the rise of contactless payments, cryptocurrencies and digital money as the new mainstream form of transaction, and while at face value there are no issues with this transition, there may be some negative consequences of the modernization of the financial system. 

Dangers of a Cashless Economy to the Individual 

Financial Exclusion 

The rise of cashless systems means there is now a heavier reliance on devices and smartphones to allow transactions to occur in modern society. While this may not initially appear to be a problem in countries such as the UK or the USA, in more rural areas where infrastructure is less developed the need for a reliable internet connection and functioning technology can make these transactions harder to execute. For example, in 2016, when the Indian Government introduced The Demonetization Policy many rural communities struggled to remain connected to the rest of the country due to poor levels of internet access and low levels of digital literacy. Additionally, in the US, approximately 4.5% (5.9 million) households were ‘unbanked’ in 2021, meaning they had no access to traditional banking services potentially due to the newfound complexity and difficulty that comes with accessing modern digital transaction systems and online banking services. 

Both of the examples above highlight how the development of online financial systems can negatively impact communities around the world as they risk losing control and access to their own personal finances, things which could have devasting consequences in the long term.  

Risk of System Failure 

System failures and power outages can both lead to technical vulnerabilities in computer systems and cyber-attacks which can disrupt the transfer of funds. Unlike cash, which is comparatively harder to halt the flow of, any form of internet or power outage in a developed nation would essentially bring the economy to a stand-still, preventing transactions from occurring. 

In June of 2018 Visa experienced an outage across Europe, preventing 5.2 million transactions from taking place in a mere 10 hours. This is just one example of how an over reliance on digital currency can lead to problems and how even a small outage can bring an entire economy to a pseudo-stationary state.  

Loss of Understanding 

The change from physical currency to a number on a screen, while arguably more efficient and convenient, does create an issue for younger generations when it comes to understanding the true value of money. The absence of a physical representation of what is being spent in a transaction can lead to a lack of responsibility with regards to money, potentially leading to overspending and debt. In a study performed at MIT researchers found that subjects are more likely to overspend when using credit cards or other digital means of purchasing goods when compared to cash. This, along with the risk of buy now, pay later schemes championed by organizations such as afterpay, could create issues in the future as overspending and debt increase in younger people. 

Advantages of a Cashless Society 

While it has its risks, a cashless society does come with several upsides: 

• Increased Convenience of Transactions 
• Reduced crime – i.e. robbery/theft of physical cash 
• No risk of accidental physical damage to money/funds 
• Easier implementation of financial policy
  • Due to the nature of electronic transactions, it is now almost impossible to transmit/hold funds without leaving some form of paper trail. This allows lawmakers to easily identify those evading taxes and money laundering due to the loss of the transactional anonymity often associated with cash purchases. 
  • Additionally, digital transactions allow for economic statistics and data to be collected efficiently and accurately, meaning that, in theory, economic policy can be implemented quickly in response to sudden changes in the economy, and could be more data driven than it was previously. 

What Does Cashless Mean for Financial  Institutions and Businesses 

While the shift to a cash-free world may seem arbitrary for large financial institutions, the move away from physical money does promise some benefits for these organizations.  

Unlike physical cash, digital transactions require a financial organization (like a credit card company) to facilitate the transaction. This means that many companies with sectors covering things such as digital banking, credit cards and digital wallets (including debit cards and bank transfers) may see an increase in revenue and in turn become more influential in modern society.  

Furthermore, cashless operations promise lower operational cost and less logistical issues as there will be less need for the storage and security of cash in bank branches, ATM and high security vaults (N.B. reduced costs in this area may be offset by increased costs in cyber security and software engineering). 

Finally, looking at businesses more broadly, digital transactions allow for increased customer data and habits to be collected and analyzed by companies, meaning targeted advertisements and suggestions can be made to consumers, potentially leading to an increase in revenue across the board for businesses both in and outside of the financial sector.  

What does a cashless society mean on a larger scale 

As mentioned above, a cashless society would lead to more efficient and accurate implementation of economic policy. Furthermore, it is now possible for central banks to implement negative nominal interest rates (typically used during periods of deflation to stimulate borrowing and in turn spending) which are harder to use in practice when using cash in lieu of digital money.  

The increased efficiency and ease of transaction which is seen with the absence of cash promises to create more cash flows in economies around the world, especially those that have not yet fully embraced digital finance, both due to the ease of transaction and due to the increased spending which is seen when using digital methods of purchase. Because of this, in future we may see increased economic growth as productivity and cashflows grow in less developed countries. 

From an investor’s point of view, the risk of infrastructure failures, software bugs and other things of the sort all increase the systematic risk which all investment portfolios are exposed to, reducing the stability and safety of investments.  

A shift in the job market could also be seen around the world as countries develop and move to digital finance as the demand for cybersecurity experts, data analysts and digital financing advisors increases and demand for more labour based jobs such as bank telling decreases. 

Conclusion 

Overall, while there are risks associated with the development of cashless societies around the world, there are many benefits that come with digital financing that promise greater economic growth, productivity, ease of transaction and more efficient and accurate implementation of monetary policy. All things which outweigh the potential dangers that come with it (many of which will resolve themselves as countries develop and adapt to this system).