The Implications of Moving Toward a Cashless Society

Is cash on the way out? Physical, tangible currency has been at the heart of the world’s financial system for millennia, but that time may be coming to an end.

Thanks to the growing popularity of debit cards, mobile payments and digital currencies, some people think the U.S. could become a cashless society — a culture where goods and services are purchased solely with cards and electronic funds.

But what are the implications of moving toward a cashless society? The shift from paper money would come with plenty of consequences, both positive and negative. With that in mind, here’s a breakdown of what a cashless America might look like, how it would affect the country and how likely such a dramatic change really is.

Is money becoming obsolete?

Cash may not be obsolete yet, but it’s definitely declining. Paper money now accounts for just 26% of all transactions in the U.S., according to the Federal Reserve. That number is down from 30% in 2017 and 40.2% in 2012.

Meanwhile, card payments make up 51% of all financial transactions, and, for the first time in American history, debit cards are the country’s most commonly used payment method.

That transition is even more extreme in other nations. Sweden, which plans to eradicate all paper money by 2023, managed to cut its cash usage to just 13% in 2018 — a drop from nearly 40% in 2010.

Other countries seem to be on similar paths. India announced its own “demonetization campaign” in 2016, and the U.K. managed to cut cash spending by a full 16% in 2018.But why do so many governments want to cut out cash? Here’s a quick rundown of the pros and cons that come with eliminating paper currency.

What are the benefits of a cashless society?

• Less crime: There’s some evidence that eliminating cash will reduce crime rates, as criminals would theoretically have less money to steal. This idea hasn’t been definitively proven, but there is some evidence behind it. A 2017 study in The Journal of Law and Economics compared crime rates between counties that received government benefits electronically with those that received them in cash or check. The result? A 9.2% decrease in crime in the areas that went cashless.
• Traceable payments: In a society without paper money, every transaction leaves a paper trail. This means people could never lose their receipts, customers could always dispute miscalculated purchases and all financial crimes would have a built-in chain of evidence.
• Faster purchases: The thinking here is simple: Without the hassle of searching for dollar bills and fumbling with change, people will ultimately waste less time. Simply swiping or inserting a card — or using contactless mobile payments, which are often even faster — would shorten lines at grocery stores, coffee shops and any other place that suffers from payment-based congestion.
• Easier currency exchange: International travel would also be easier without cash, making currency exchanges totally obsolete. Instead of waiting at the airport to withdraw foreign bills, travelers would just pay digitally and let their cards or phones calculate the exchange rate for them.

Potential issues in a cashless society

• Hacks become more threatening: Data breaches at Equifax, Capital One and JP Morgan Chase have compromised the finances of hundreds of millions of Americans in recent years. Without the availability of cash, these hacks become even more threatening, as consumers have no way to make payments if they lose control of their checking account.
• Exclusion of certain groups: According to the latest FDIC data, 6.5% of Americans — approximately 8.4 million households — were without bank accounts in 2017. Another 18.7% of U.S. households were “underbanked,” meaning they had some sort of bank account but also often frequently used services outside of the traditional financial system. Abolishing paper money would put all of these people in financial jeopardy.
• Harder to control spending: Numerous psychological studies have found that consumers value purchases less when they use cards, as cash forces them to see the money literally leave their wallet. For example, one experiment by researchers at Duke University found that people who used cash to buy a mug later valued the item as costing about $3 more than people who used a card for the same purchase.
• Exposure to tech issues: Similar to the hacking issue, a full dependence on bank accounts would leave consumers incredibly vulnerable to technological errors. Any sort of shutdown — such as the one that affected millions of Barclays customers last year — would become even more detrimental in a cashless society.

How would a cashless society work?

So what would a world without paper money look like? To get an idea, it’s helpful to look at a place like Sweden, which is probably the country closest to fully eliminating cash. As of last August, only around 1% of Sweden’s GDP came from cash spending.

Swedes now make 80% of their payments by card. People also use Swish, a Sweden-based cash app that claims to have more than 7 million users. For comparison, the entire country has a population of about 10 million.

America’s cashless system would likely look pretty similar. Debit cards are already the most common form of payment, and payment apps like Venmo, Zelle and Square Cash are becoming increasingly popular. For example, Venmo now has more than 40 million digital users, which is more than large U.S. banks like Wells Fargo and Bank of America.

A cashless America would also probably include other digital-first systems, including mobile payment services like Apple Pay and even cryptocurrencies such as Bitcoin, Zcash and Litecoin. Online-only banking, which is generally a safe and convenient alternative to traditional banks, may also become more popular.

What’s the likelihood of the U.S. becoming a cashless society?

Despite all of these new payment options, America is likely a long way from becoming a cashless society. In fact, the country might be going in the opposite direction.

Cashless retailers like the Amazon Go store, which launched last year with plans of expanding to 3,000 locations by 2021, have largely fallen flat. Sweetgreen, a fast casual chain with nearly 100 locations, went cashless in 2016 but then announced this year it would return to accepting paper money. For its part, Amazon has already retracted its plans to make its Go stores cash-free.

States and cities across the U.S. have taken a stand against cashless stores, saying retailers cannot reject a customer based on their chosen payment method. Earlier this year, Philadelphia became the first major U.S. city to ban basically all cashless stores, and other cities such as New York, San Francisco and Washington D.C. have all proposed similar legislation.

New Jersey passed its own ban this March, joining Massachusetts as one of two states to make payment-based discrimiation is illegal.

The reason? An overwhelming percentage of Americans still use paper money, even if it’s just once in a while. According to a December 2018 Pew Research Center study, 71% of Americans still use cash at least once a week. Considering that figure, and continuing legal action against cashless stores, it seems unlikely that the U.S. will make the shift any time soon.

Final word

America might not become a cashless society in the next decade, but that doesn’t mean it couldn’t happen eventually. The increasing availability of digital, mobile and card-based payments — and their growing popularity — will continue to change the way people interact with hard currency.

That’s why it’s worth understanding the implications of a cashless society, as the pros and cons of a digital-first system will only become more prominent moving forward.