[Dave Birch] I was involved in a fascinating discussion about the cashless society on China Radio International [MP3], which was a first for me. Listening to it, I was struck again by the extent to which many commentators interpret “cashless” as meaning “credit cards” and the extent to which many commentators interpret “privacy” as “anonymity”. I don’t have to time to go into this right now, but these simplifications seem to me to account for the nature of the comments that I’ve seen in discussions of David Wolman’s new book on The End of Money. In both cases, the debate collapses into a “back or white” set of choices that does not reflect the spectrum of possibilities made available by modern technology. We need to ask ourselves what we as a society want from money and then challenge the technologists to deliver it. Our current arrangements are entirely irrational and ridiculous: look at the US, where both $1 bills and $100 bills have outlived their usefulness.
Of course, our relationship with dollar bills is pretty much entirely emotional and irrational. Most of us — except for drug dealers or the otherwise criminally inclined — haven’t actually needed high-denomination banknotes for a long time.
I’m picking on the US, but the point is generally true. A developed country shouldn’t need cash. China illustrates this point particularly well since we can see it developing in front of our eyes right now and the same questions about money are being asked there as (should be) being asked in the US.
The issue of large bills only facilitates those who do not want the money in the bank, such as underground banking, corrupt officials, and tax evaders. Ordinary people really do not need it.
So it seems that the main use of large-denomination banknotes in China will be the same as it is in Europe, the USA and everywhere else: crime. But it’s especially attractive for one specific kind of crime. And I don’t mean the oldest profession, although I am about to excerpt an interview worth a prostitute.
About 95 percent of her clients pay cash, which is her preference. Mostly because she can underreport it on her taxes. But also because it’s less of a speed bump at the start of the session. The client just leaves an envelope full of bills on the counter and then excuses himself to wash his hands. No need to acknowledge the crass commercial underpinnings of the encounter.
With a credit card, she has to use a Square reader (which takes a processing fee) and look at the guy’s license to confirm it’s his card.
Well, in time, mobile payments will take care of that sort of thing, in both the developed and developing world, so we don’t really need to worry about that. But note the first part of the interview: the main attraction of cash in this illegal business is tax evasion. One of the reasons why my taxes are so high is because other people aren’t paying their fair share (putting the issue of government profligacy and incompetency to one side for a moment).
In a 2011 study, University of Wisconsin-Madison professors Edgar L. Feige and Richard Cebula wrote that 18 to 19 percent of total reportable income is hidden from the IRS, which means that the country misses out on nearly $500 billion in tax revenues. The Justice Department estimated in 2008 that secret offshore bank accounts were responsible for about one-fifth of the tax gap, suggesting that the remaining 80 percent is attributable to unreported cash.
If we get rid of cash we don’t get rid of crime, but we might get rid of a fair chunk of tax evasion, which would be a start. So why aren’t we doing it? Probably just conservatism in most countries, but there are some legitimate concerns about what a cashless society might be like. What about privacy, for example? (The panel touched on this but it is such a complex issue that I’m going to write a separate piece on it another time. All I want to say at this point is that it is entirely possible, using known and understood techniques, to build electronic payment systems that can deliver privacy rather than anonymity.)
The panel finished by agreeing that a cashless society would never happen. I’m not so sure. If you look around, you see islands of cashlessness popping up everywhere. In Dutch pharmacies and Kenyan breweries, on Swedish buses and Delta airlines. Sweden strikes me as a particularly interesting case because of the “anti-cash” alliance between government and labour unions that is forming there.
Andrea Wramfelt, whose bowling alley in the southern city of Landskrona stopped accepting cash in 2010, makes a bolder prediction: She believes coins and notes will cease to exist in Sweden within 20 years.
As an aside, Luca Silipo, the Chief Economist – Asia Pacific at Natixis Bank, wasn’t quite correct when he said that the main alternative to cash is the credit card. In China, as in the UK, it is the debit card. But in any case, it won’t be cards that get rid of cash, as we all understand, but mobile phones. And he also questioned the 1% figure for the US economy, so just as an another aside, I wanted to point out that that figure is reasonable. In countries that have a very high use of non-cash in retail payments (e.g., Finland) the GDP cost is around 25 to 30 basis points. In medium-usage countries (such as the UK) its probably 80-90 basis points. The US uses more cash than the UK, so 1% seems a reasonable figure to me. And, apparently to other people too.
One 2003 study estimated that moving from a wholly paper-based network to a completely electronic one could save an economy 1 percent of its annual GDP (a $150 billion sum for the United States). A 2004 AEI-Brookings paper calculated that, even factoring in the benefits of anonymity that cash provides—accounted for by measuring the bonuses grocery store customers were willing to give up by declining rewards cards—cash is twice as costly as debit. Anne Layne-Farrar, one of the authors of the Brookings study… says the relative costs of cash have continued to grow, with the rise of self-checkout, e-commerce, and mobile payments making electronic payments even cheaper.
So where are we then? If we were thinking logically we’d have national strategy to reduce the use of cash. But when it comes to cash, we don’t think logically. David Wolman, who was kind enough to come to London to talk at this year’s 15th annual Digital Money Forum, summed the situation up nicely in a recent interview.
Everyone always thinks cash is cheap and fast and safe. It’s not cheap, and it’s not fast, and it’s not safe!
That’s not to say that the electronic alternatives are perfect, but they are better. The correct conclusion to draw right now is that we should be working together to determine what society should expect from payment systems and then designing payment systems that meet society’s goals. If one of those goals is privacy, then we can design private systems. If one of those goals is anonymity (it isn’t) then we can design anonymous systems. If one of those goals is low cost, then we can design low cost systems. If the goals are to make low-value transactions cheap, fast and safe… we can do it with the technology we have available to us right now. What are we waiting for?
These are personal opinions and should not be misunderstood as representing the opinions of
Consult Hyperion or any of its clients or suppliers
These are the personal opinions of Consult Hyperion and its guests and should not be misunderstood as representing the opinion of its clients or suppliers. To discuss how any of the technologies discussed in this post can benefit your business, please contact Consult Hyperion.