CASHLESS ECONOMIES:

THE FLIP SIDE

Ameya Thakur
IIM Lucknow
In a New York Times article back in 1991, the idea of a completely cashless economy
was described of an order of complexity similar to, perhaps beyond, what would be
required to make Star Wars work. Modern economies of Sweden, Denmark and the
likes suggest we are surely en route to the death of cash. It is quite ironical that
Sweden being the first European nation to mint a national paper currency in 1661
will most likely be the first to stop using it. Data from the Bank of International
settlements reveals that currently about 1.75% of all transactions in the Swedish
economy are done by bills and coins. There are countless perceived benefits from
having a smooth all pervasive payments system devoid of physical currency. Surely
there must be some flaws in the seemingly picture perfect cashless world.

In 2014, an average
of 1.1 million data
records were stolen
per security breach
and
the
total
number of records
amounted to

As like with every public service, access to

cash needs to be a choice and not a
compulsion. There are also serious concerns
about privacy within such a system. Every
transaction leaves a trail although it is
debatable whether the upside outweighs the
flaws. This basically translates to all
information being available to commercial
players who we cant trust to keep it safe.
Though there will be no more physical
thefts, electronic frauds will increase as the
more than a billion
trend in Sweden suggests. Hackers will
target financial data and with no more cash in hand, there will be no fail safe. Some
might argue that this is nothing but paranoia, however none can guarantee the nonoccurrence of such a scenario. In case you lose your wallet or are robbed, your exposure
is limited to a certain small amount of your total wealth. However if a hacker manages
to hack into your account, the door is wide open for your funds to drain out. Gemalto,
a data security firm provides glaring insights into data breaches. In 2014, an average
of 1.1 million data records were stolen per security breach and the total number of
records amounted to more than a billion. The financial impact of these breaches can

be catastrophic to say the least. It is also argued that a cashless world would be a much
safer world without illegal money transfers, leading to lower crime rates globally. Sadly
there are no facts to justify this logic. Charles Kenny, a senior fellow at the Centre for
Global Development states that the global Anti-Money-Laundering (AML) system
manages to detect just 1% of the global money laundered. It is rather convenient for
terrorist organizations to transfer money illegally through electronic means than
transport loads of cash which can be seized. There will always be newer regulations
and restrictions to combat criminal financial activities but criminals can always find
other ways as they arent bound by any rules unlike the authorities.
In the move to make it convenient for people to pay online or through mobile there are
some who are being left behind. For instance the elderly are more comfortable
transacting using cash as they are unwilling or unable to adapt to technology. But as
shops stop accepting cash and public buses insist on only electronic transactions, this
segment of society is ignored. It is also a system which does not favour the physically
challenged. The blind can sense the denomination by the weight, thickness and
markings on the currency. With electronic payments there is no way for them to
ascertain the actual amount of money transacted.
Consider the situation in Japan currently along with the assumption of it being a
cashless economy. The interest rates are negative with the logic that there will be no
hoarding of money and lending rates can be reduced drastically to provide an impetus
to businesses. The situation would be ideal for central banks as they can play in the
negative interest rates territory without fear of the customer pulling out their deposits
simply because they cant. For an individual it is a helpless situation as there cannot
be any cash that you can keep in your homes to save on the interest you are paying on
your own deposits. The ultimate impact of such a ploy is currently uncertain but a
cashless economy will certainly help it by eliminating the customer behaviour factor.
Finally, bank runs will be a thing of the past. During the financial crisis of 2008-09
depositors rushed to ATMs and bank branches to withdraw their money once the belief
in banks was failing. Following the collapse of the Lehman Brothers, cash in circulation
increased significantly in the United States which reiterates the security people feel in
cash as an asset. This might embolden banks and financial institutions to behave in a
manner which some might deem reckless as they did in the build up to the subprime
crisis.
However, thought is now being given, by the proponents of cashless banking
themselves, to whether it would be desirable in totality. The Swedish national bank,
Riksbank has very recently called for a legal requirement to ensure banks provide cash
handling services and wants access to cash to be a legal right. For India, there is a
long way to go before we claim to be a cashless economy, but should we aim for
achieving that tag is something that should be thoughtfully debated upon.