27 May 2016
This is the second article in our two-part series on the cash in New Zealand.
As more electronic payment options become available, many commentators have said that a cashless society isn’t too far away.
Given that cash is being used less to pay for things there are a number of arguments for and against a cashless society.
We discussed the amount of hoarded cash in use by the underground economy in our first article on the cashless society. The underground economy is seen as a driver of cash hoarding.
Research also suggests that traceable cash use makes up less than half of the banknotes currently in circulation.
The argument that a lesser reliance on cash will curb the underground economy is not just related to cash hoarding, but to cash related crime generally. Any retailer will tell you that one basic method of preventing robberies is to leave the cash register empty, open and in full view at the end of the day. Needless to say, removing cash handling all together also reduces petty theft and internal mishandling of cash internally.
The economic benefits of a cashless society include an enhanced tax base, with more traceable transactions. This also leads to increased economic efficiency and velocity of commerce (cash is an inefficient financial asset that is always being eroded by inflation) and eliminates cash handling and transportation costs.
Having a low cash / high electronic payment mix (like in New Zealand) makes a really important contribution to the overall economy. Electronic payments remove friction from the economy by increasing the pool of customers who can transact with all their funds (instead of just the cash in their pocket), As the world becomes more digital, electronic payments will facilitate online commerce.
Reducing cash payments will provide operational efficiencies, and lower money handling and transportation costs as well as lessen the need for cash handling equipment.
The most often cited argument against a cashless society relates to what we know about demographic trends in cash usage in New Zealand. Research shows that lower socio-economic and marginalised groups cannot access electronic payment methods and financial services as easily. They are more cash reliant and as such stand to lose more from the demise of cash as a payment method. Removing the cash default option for those that are less tech savvy or in lower socio-economic and marginalised groups, could mean restricted access to financial services for some.
Privacy and anonymity in payment choice are reduced without cash. Competition in the payments market is also important to consider. Less competition between payment instruments (due to elimination of cash payments) could lead to higher payments pricing, particularly for very low value transactions.
Disruptive events that could stop electronic transactions processing, like a cyber-attack or a bank or payment system failure, could leave people without a means to transact.
Payments NZ will always advocate for more and better electronic payments and more efficient payment systems. But that does not mean we don’t see a continued role for cash. We know the debate about the use of cash is not purely economic. We think the answer to whether we New Zealand will get to see cashless society lies more in human nature than in technological advancements.
Even if people do not use cash frequently, we seem to take great comfort from the tangible and liquid nature of cash. Just knowing that cash is accessible and is an option that is available to us seems to give Kiwis peace of mind. For this reason, it is our opinion that a near-cashless society is possible in the future, but the last step to becoming a fully cashless society won’t happen any time soon.
2. Moody Analytics, ‘The impact of Electronic Payments on Economic Growth’