The Hidden Costs of Cashless Societies

As digital payments become more commonplace and countries like Sweden unveil plans to go completely cashless, it’s important to take a step back and consider the implications. While going cashless provides undeniable conveniences, it also comes with hidden societal costs that are easy to overlook in the excitement over tap-and-go commerce. In this blog post, we’ll analyze the pros and cons, with a closer look at impacts on privacy, inclusion, resilience, freedom, and more.

The Rise of Digital Payments

First, let’s examine the trends driving adoption of digital payments. Smartphones have put a payment terminal in everyone’s pockets, making it easy to transact with a quick tap. New payment technologies like Apple Pay, Google Pay, Venmo, and Square have simplified checkout and money transfer. More retailers now accept contactless payments and mobile wallets.

The COVID-19 pandemic accelerated cashless adoption, with customers avoiding cash over virus spread concerns. Peer-to-peer payment apps like PayPal and CashApp saw volume increase 200% in 2020. Debit card usage in the US surged by 29% and credit card volume rose by 21%.

Governments are also nudging society to go cashless. Singapore aims to triple digital payments by 2023. South Korea wants coins and bills eliminated by 2027. Sweden may become the world’s first cashless economy within years. The benefits are clear — digital payments mean faster, more convenient commerce. But what do we stand to lose?

Privacy and Surveillance Risks

Going cashless means giving up the anonymity that physical currency provides. Your financial transactions become trackable data that is collected, stored, and analyzed. Retailers can monitor your spending patterns down to the minute details — what you buy, where, and when. Apps have access to your location history based on mobile payments. Your behavior becomes an open book, ripe for examination in ways that cash transactions are not.

This data can be used to serve you highly targeted ads and recommendations. While this offers some benefits, it also enables surveillance of your activities. Banks and financial providers become the ultimate gatekeepers of your information. Cashless systems require full confidence that they will steward your data properly, a big ask given the regularity of hacks and data breaches.

Governments also gain expanded visibility into citizens’ transactions, enabling financial censorship and a loss of freedom. China’s upcoming central bank digital currency will allow authorities to directly view transactions in real time. This is convenient for government oversight but concerning for individual liberty. Cash provides a useful anonymity hedge that fades in a cashless society.

Exclusion of Marginalized Groups

Another risk with going fully cashless is that it can exclude entire segments of the population from participating in the economy. An estimated 8.4 million US households are unbanked, having no checking or savings account. Another 24.2 million households are underbanked according to the 2019 FDIC survey. Without access to digital banking and payment tools, these groups must rely on cash to conduct business and buy necessities.

The unbanked and underbanked often include lower income households, undocumented immigrants, the elderly, and homeless populations. A cashless system does them no favors, instead cutting them out of everyday commerce and exacerbating financial inequality. Similar dynamics play out in developing countries where mobile phone and internet access cannot be taken for granted. Large segments of the population in regions like Africa and South Asia still depend heavily on physical currency.

Cash acts as an inclusive form of payment and provides financial access. Eliminating it means disenfranchising those who have come to rely on its usefulness, efficiency, and anonymity.

Increased Vulnerability to Technical Failures

Cashless commerce leans heavily on the seamless functioning of complex IT infrastructure. This includes payment terminals in stores, backend servers and databases, mobile apps and websites. But as we know, technical systems are prone to crashes, bugs, and outages.

Eliminating cash removes a useful fail-safe when problems inevitably occur. If payment apps go down, mobile wallets stop working, or banking systems need maintenance, what do cashless consumers do? They may be unable to make transactions or access transportation, leaving them stranded. If servers are breached and systems compromised, the lack of a cash backup is keenly felt.

Similarly, natural disasters like hurricanes can cause power failures that bring electronic payments to a halt. Cash ensures commerce can still be conducted during grid outages or emergency scenarios when technical systems are overwhelmed. It provides useful resilience that cashless systems currently lack. The presence of physical currency acts as a hedge against technical troubles that will continue happening.

Increased Government Control

Going cashless hands governments greater oversight and control over citizen spending. China’s upcoming central bank digital currency will allow authorities to directly monitor transactions in real time. While framed as improving efficiency, this also enables surveillance and financial censorship. Certain purchases could be banned or flagged. Activists could have their accounts frozen. Authoritarian regimes could stifle dissent through financial control measures that cash provides immunity from.

Even democratic governments may abuse these powers in subtle ways, shaping citizen behavior through “nudging.” Make certain choices more expensive or inconvenient while incentivizing “approved” spending. Cash makes this harder to engineer. Its existence decentralizes control over commerce away from monetary authorities. Eliminating physical currency means losing a vital check on potential government overreach over financial flows in society.

The Loss of Monetary Resilience

Cashless systems rely on faith in central banks to responsibly manage monetary policy. However, citizens lose an important hedge with cash — the ability to settle transactions in a sovereign currency should confidence decline in institutions issuing fiat money (currency declared as legal tender but lacking commodity backing). Basically, eliminating cash means total dependence on money maintained by the central bank’s reputation alone.

Cyprus’ financial crisis in 2013 led to withdrawal limits on bank accounts and proposals to tax deposits. This triggered a loss in trust and urgent desire among citizens to hold physical cash as a hedge against bank seizures. In India, the government’s sudden demonetization of certain rupee notes caused demand for cash as a resilient store of value. Cash provides an escape valve should faith in government-issued money falter. Removing it takes away that option. This may incentivize alternative systems like cryptocurrency as citizens seek monetary refuge outside official currency.

Unintended Social Costs

Going completely cashless could also incur some unexpected societal costs. For instance, the presence of cash provides a subtle reminder to maintain prudent financial habits. Handing someone a physical $20 bill triggers different psychological switches than just clicking a Paypal transfer. Eliminating the tangible, visceral nature of currency may encourage more careless spending and runaway debt. It also reduces the ability of parents to educate kids on money management practices like allowances.

Cashless systems also enable “paywalling” of public spaces. Retail establishments can refuse admission to those lacking cards or smartphones used for digital payment. This could lead to further bifurcation of society between “payment worthy” citizens versus second-class “cash-only” residents blocked from everyday activities. Such scenarios should be guarded against.

Aspects of culture and tradition also revolve around physical currency, such as tossing coins in fountains or leaving cash-filled envelopes as holiday gifts. While not hugely significant, the loss of these customs should be acknowledged.

Nuanced Perspectives Needed

None of this is to argue against the adoption of digital payments, which offer tremendous convenience and innovation. However, in the understandable excitement over faster and seamless commerce, we should be careful not to overlook the merits of retaining physical cash — privacy, inclusion, resilience, decentralization, and more.

The solution is not likely found in maintaining the status quo. Cash cannot realistically remain as widely used for decades more in a digitalizing world. But the solution also does not lie in accelerating towards becoming an entirely cashless society. Iceland and Sweden have reconsidered plans to eliminate cash after recognizing systemic risks.

Instead, we need nuanced public policy that allows us to thoughtfully transition based on the technological readiness across various economic sectors. Cash-lite is likely superior to fully cashless. We must also ensure underbanked groups aren’t left behind through digital financial inclusion. And privacy must be championed through prudent data governance.

With balanced perspectives and inclusive policymaking, countries can harness the conveniences of going cashless while avoiding unwanted side effects. This is about optimizing technological benefits for society, not blindly charging ahead. The hidden costs matter.