Cash no longer king

It seems that the UK is well on its way towards becoming a cashless society, but what will be the impact on existing underlying financial services infrastructure and security systems?

Cashless transactions are on the increase across the globe, especially in emerging economies such as Africa and Asia that do not have the legacy of ingrained cash payment cultures. In these markets, smartphone adoption is so prolific that mobile payments are becoming the preferred and potentially only means of conducting all types of financial transactions. Morgan Stanley’s recent blue paper on ‘The Mobile Pay Revolution’ carried research from Juniper which forecast that the value of mobile transactions by smartphones and tablets would increase to US$3.2trn (£2.9trn) by 2017, up from US$1.5trn (£980bn) in 2013.

Independent Bitcoin and cryptocurrency publication CoinTelegraph produced statistics demonstrating the rise of mobile payments in Sub-Saharan Africa, where traditional banking has been disadvantaged by transportation constraints and other infrastructure issues.

Ironically, it could be that mature economies, such as the UK, are at risk of being held back in the digital revolution by the legacy of more traditional infrastructure.

Nevertheless, in the UK, we are already starting to see the move away from cash gain traction, with ‘digital disruptors’ such as Uber taking full advantage.

In the world of online purchasing, where ‘immediate’ is the expected service level, cashless technologies are the only viable means of payment, but their convenience also extends to more physical interactions such as bus journeys, vending machines and car parks. But there is still work to be done to enable mass adoption and the opportunity is ripe for new and innovative solutions.

Established online payment system operators such as PayPal are being challenged by emerging alternatives such as Apple Pay and Samsung Pay, which are offering consumers even more reasons to ditch their cash. Interestingly, Apple Pay saw 1m credit card activations within its first 72 hours of availability alone.

The advent of a fully cashless society would, of course, have a major effect on consumers, but what would be the impact on the central government and business communities? There are both advantages and disadvantages to such a move.

The management of a cash economy is costly: in the US, the production cost of coinage is double face value and the overall process of managing cash is expensive as well as time-consuming and comes with inherent security risks. Counterfeit cash is a major problem with, for example, an estimated 3 per cent of all UK pound coins in circulation being fake.

But removing cash would not remove fraud. Interestingly, Sweden, which is almost completely cashless, has seen cases of card fraud continue to rise. There would certainly be benefits to the elimination of cash, but the cost of the transformation would be huge; it would not be a vote-winner among many demographics and established banks do not have much of an incentive to make the change on their own.

Cash makes it possible to maintain anonymity, which, unsurprisingly, is why it is the preferred payment medium of criminals

Cash makes it possible to maintain anonymity, which, unsurprisingly, is why it is the preferred payment medium of criminals. In the ‘cash in hand’ economy, personal cash income is not always declared and is not easily traceable and therefore VAT and income tax can potentially be avoided.

By abolishing cash, governments could gain greater transparency in their economies, including criminal activity; it would also increase their tax revenue. The Greek economic crisis is due in part to a relaxed approach to taxation, resulting in declining revenues for the government. In the UK, avoiding VAT and income tax by paying cash-in-hand is estimated to cost the UK Treasury more than £2bn a year.

Before the UK can become a cashless society there are hurdles to overcome regarding infrastructure and security: who pays for the transformation and how are the new processes regulated? How do you address the 12 per cent of the population who are unbanked?

What about tourists and immigrants who need to exchange foreign currencies without a bank account? These are all areas that would need to be addressed. There are also issues around social behaviour: elderly members of society may find the transition away from cash extremely difficult; also how will parents teach their children about money without physical aids?

There is also a question as to whether privacy would disappear in a cashless society, with all transactions potentially being traceable. Some may argue that the emergence of cryptocurrencies and their underlying blockchain technology could provide this privacy, though these have their own associated complications, such as their lack of regulation and unsustainable energy consumption.

Safeguarding security in a cashless society could be even more costly than when dealing with physical cash. Not only would organisations need to ensure that their infrastructure and processes were robust enough to deal with threats to their point of sale, they would also need to ensure that the data being created through these transactions was secure and handled in accordance with regulatory standards.

The impact of online theft could be far greater than that of physical theft, and the ultimate responsibility for ensuring security online is not always clear. A foolproof protection mechanism is yet to be developed.

The benefits of a cashless society would likely be welcomed by many businesses for the increased convenience it brings; and by governments, police and other security authorities as a way to limit or prevent crimes associated with cash and the ‘shadow economy’.

Undoubtedly though, a cashless society would come with its own risks. It stands to reason that if a society moves increasingly towards a digitised economy, the risk of cyber-attacks on banks and financial institutions will rise concurrently; these must be mitigated and dealt with effectively.

As consumers adopt this technology, it is increasingly in the interest of banks to nurture the development of digital technologies, allowing them the opportunity to improve their customer’s experience in order to protect revenues.

The future of a cashless society may be uncertain, with many challenges to overcome, but the potential benefits are difficult to ignore.

Matthew Bingley is a client innovation executive at Atos, the digital services company

Key Points

Cashless transactions are on the increase across the globe, especially in emerging economies like Africa and Asia.

The advent of a fully cashless society would have a major effect on consumers.

Safeguarding security in a cashless society could be even more costly than when dealing with physical cash.

Statistics from CoinTelegraph through The World Bank: Who are the Unbanked?