Development is an inevitable phenomenon and it is always welcomed in every phase of growth of a nation. Since we live in an economy based on cash and service transactions, it is necessary to be aware of the rapid changes that are happening in this sector. We have come a long way from the age old barter system, metal coins and paper cash and have reached a phase where solid cash circulation will be replaced by a cashless economy and a cashless society is no longer just a figment of imagination. While cash still reigns globally on aggregate, progress towards cashlessness is particularly pronounced in most of the countries and in this situation, it is better if everyone has an understanding of what a cashless economy is and what its pros and cons are.
Simply put, a cashless economy is where fewer notes exist in circulation as compared to the total money supply in that economy. For instance, in a country like India, about 14% of the total money in existence is present in the form of cash, the rest is digital money. In most of the economically advanced countries this percentage is close to 5%. The aim of a cashless economy is to move towards 0% usage of cash. But, a perfect 0% can never be achieved in current economic scenario. However, the closer the number is to 0%, the better it is close to the state of being a cashless economy. In cashless economies, only smaller bills will exist for small menial transactions. Any transactions above a certain amount will have to be done digitally.
Hence, we have seen the basic tenets of a cashless economy. The most highlighted advantage of this is, of course, convenience and the ease in transactions. There is no need to carry cash as such and is a safer mode of transactions. Emergency situations of financial needs like hospital cases or those that happen during journeys can easily be managed. Also, access to a bank account and a corresponding linked digital finance portal can unlock numerous comfortable economic opportunities, particularly for senior citizens and women, who are twice as likely to be excluded from formal financial system in economically backward countries. Today’s generation is well versed in technology and cashless transactions are hassle-free and easily accessible with just a smartphone. Another point of attraction is that online payments let one view history of their expenses and plan their budget in a smart way.
How a cashless economy plays an important role in reducing the problem of corruption in a country is also a factor that should be considered. As every transaction can be easily checked, production and circulation of black money and counterfeit money can be prevented, or their sources can be identified, and taking necessary actions against that can result in decrease in the rate of corruption in economy. Money laundering, another problem existing in most of the nations, can also be brought under control with the help of well monitored digital transactions. The unforgettable event of demonetisation in India, announced on November 8, 2016 by Prime Minister Mr. Narendra Modi, stands as a proof that these malpractices can be checked and controlled to an appreciable extent by reducing the circulation of solid cash.
Another immediate benefit to the government would be a higher seigniorage. Seigniorage, simply put, is the profit from the printing of currency. Cashless money exists in the form of digital data on a computer. Hence, it does not have to be printed. As a result, the seigniorage is high. As seigniorage is a source of government revenue, digital transactions can save a lot of production cost and this excess saving can be used to provide tax waivers to the people. So, digital money is simply a more efficient way to operate an economy.
A cashless economy can also lead to better distribution of support promised through various welfare schemes. Most of the developing countries have many such schemes which seem to be beneficial in advertisements and documents. However, in reality, they fail miserably as money earmarked for the purpose never reaches the people due to exploitation and corruption that has crept into the government systems. However, this is not possible with digital money which can be directly sent to the bank account of the beneficiary. Thus, eligible recipients, especially in the rural areas, can benefit a lot from a cashless economy.
One can also see reduced rate of tax avoidance in a cashless economy. In a society that uses solid cash in transactions, there is a chance that discrepancies may be attempted and go unnoticed. A 2016 study conducted by the nonpartisan Centre for Studies in Economics and Finance (CSEF) looked into the effects of electronic payments on tax evasion in Europe. CSEF found that the use of electronic payments such as debit and credit cards reduced tax evasion, and that there was a positive statistical relationship between cash withdrawals and tax evasion. As digital money and money services would bring about increased transparency in transactions, it provides governments with enhanced abilities to track and analyse citizens’ financial activities. Ultimately, this would decrease tax evasion and increase tax payouts to the government as the financial background and transaction of each individual is monitored and analysed.
The lower risk that cashless economy offers should also be acknowledged. If stolen or lost, it is easy to block and prevent the misuse of digital devices, but it is nearly impossible to get lost or stolen cash. Hence, it offers the users a sense of confidence in financial dealings. Digital modes of transactions, thus offer a kind of security that conventional methods of cash transactions can’t.
However, we must not be ignorant regarding the problems associated with this modern mode of transactions. Major among them is the difficulty experienced by ordinary people when a transition from a cash-using economy to a cashless economy takes place. Confusion and ignorance regarding the use of technology may prevent people with minimal education from using this. Also, digital transactions question autonomy in decision making as the user has to depend upon and is always under the surveillance of a third party—the digital platform.
Another problem is the lack of availability of high-speed internet connectivity. A lot of regions, especially rural ones do not even have uninterrupted electric supply. It would, therefore, be impossible to encourage digital transactions there since the concepts of internet connections and wi-fi connectivity will be out of question in such places. In the absence of high speed connectivity, users can never be sure about digital payments and will always have to carry cash as a second option.
The increased risk of security breach is another problem associated with the concept. A cashless society may bring about increased risks to personal and national security. The introduction of digital mode of transaction is seen by many as a loss of their personal freedom. Again, from a personal security standpoint, the risks we experience when we lose credit cards or our phones would only be intensified in an environment without paper currency. Today, becoming a victim of digital hacking can lead to denied payments, identity theft, account takeover, fraudulent transactions and data breaches. Hence, without high security and protection, cashless economy cannot function in a satisfactory manner.
The
risk of overspending too cannot be overlooked. Though digital transactions can
track and show your spending history, young people and teenagers may misuse it.
Also, according to behavioural financial theorists, the pain of parting with
money is felt more intensely in the usage of solid cash. So, one should
definitely have a disciplined mentality, if opting to go for cashless
transactions.
A cashless society was an utopian dream once, but it is not that
anymore. As any developmental process, it
has its own advantages and disadvantages. Also, care
should be taken to ensure that the cashless economy includes people from every
strata of the society and is not confined to educated users only. As
prospective customers in a cashless economy, we should understand the digital
process and its features, and adapt to them in a suitable manner.