The end of cash: The cost of a cashless society

India has withdrawn 86% of its paper money in a bid to eradicate tax evasion, but a world that follows suit may not be very democratic, writes John Hearne.

Cash is a hard habit to break. Last November, India’s prime minister, Narendra Modi, introduced a surprise ban on the country’s largest currency bills, 500 and 1,000 rupee notes, worth €7.15 and €14.30, respectively.

Modi was elected on an anti-corruption platform, and this shock measure was intended to counter a range of illegal activities, including counterfeiting, corruption, terrorism, and primarily tax dodging, which is rife in India. 

It’s estimated that for every €100 paid in tax, another €200 is owed. 

The government hoped that by removing 86% of the cash in the economy, they could draw huge swathes of the black economy out into the light.

On the stroke of midnight on November 7, those 500 and 1,000 rupee notes lost their legal tender status. To replace them, people had to go to the bank. But here’s the kicker. 

If you turned up with more than 250,000 rupees (about €3,550) you had to say why you had so much, and prove you’d paid tax on it. 

If you couldn’t, you would have had to stump up twice the outstanding tax liability.

While it’s not yet clear whether or not the measure has worked, it has thrown the domestic economy into turmoil.

India is wholly dependent on cash just to tick. Between 90% and 98% of transactions are cash-based. The equivalent figure in Ireland is 63%, in Western Europe it’s 68%.

As soon as the measure was announced, huge, snaking queues formed outside banks. 

People rushed to convert their cash holdings. ATMs ran out of money, and the resulting cashflow crisis brought sections of society to a halt.

There have been reports of people being unable to buy food, while farmers haven’t been able to complete planting, because they cannot access the cash to buy seeds.

Weddings — frequently as elaborate as they are expensive in India — had to be postponed as there was no cash to pay for them. When the figures are eventually released, growth in the last quarter of 2016 will likely have taken a big hit.

While few administrations will have the stomach for the kind of shock tactics that India imposed, there’s little doubt that we’re all witnessing the slow retreat from cash in everyday life.

According to the Banking and Payments Federation Ireland (BPFI), the value of card payments here increased by 16.2% in the first 10 months of 2016, driven primarily by the use of debit cards.

And when a little pressure and encouragement are applied, those figures soar. Last year’s ‘Cork Cashes Out’ campaign is a case in point. 

This three-month pilot promoted Cork as Ireland’s first cash-free city. While the campaign didn’t achieve that, it did increase the number of contactless payments by 522%.

Once, regular trips to the ATM were needed to keep the show on the road. Nowadays, fewer and fewer transactions require cash. 

Ok, some shops will stipulate a minimum spend before you’re allowed to use your card, or they’ll hit you with a surcharge if it’s less than a fiver, and these surcharges can vary significantly.

For transactions under €30, you can now ‘tap’ the card — holding it against the screen of the terminal, without having to plug it into the machine or put in your PIN.

Contactless payments, as they’re known, mean small transactions can be undertaken without cash. 

Press the card against the screen, wait for the beep, and off you go with your crisps, coffee, or paper.

The big societal advantage of cashless is the one identified by India’s PM. It’s difficult to sustain a black market, or avoid tax, if every transaction leaves a trail, as all electronic transactions do.

A wide range of criminal activities become considerably more challenging in a cashless society. You might have a briefcase full of unmarked bills, but if you can’t spend them anywhere, what good are they?

In his book, The Curse of Cash, Harvard professor, Kenneth Rogoff, argues that all paper money needs to be phased out. He says that in the late 1990s, some 60% of US cash was held in hundred-dollar bills, a remarkably high proportion, given how rarely they surface in everyday life.

By the time the book appeared last year, he estimated that percentage had risen to 80%, or in excess of $1.34 trillion, held, well, God knows where. 

The only thing that can be said with certainty about this cash is that it’s not in banks.

Rogoff says that the dollar still tends to be the go-to store of value, and medium of exchange, in economies where faith in the domestic currency is shaky, and argues that much of this cash is financing drug- and human-trafficking, terrorism, and other criminal activities.

He also says, as an aside, that since the wages of illegal immigrants are invariably paid in cash, a cashless economy would be a more effective deterrent than any wall.

Open up a map of the world, stick a pin in it, and you’ll find evidence of the march from cash. In South Korea, only 20% of transactions are cash-based. 

The plan there is to remove all coins from circulation by 2020. The government is urging consumers to put their small change onto ‘T-Money’ cards — electronic travel passes that can also be used in convenience stores.

All central banks would like to see the end of coins. For one thing, they’re bad value for money. The small denominations cost more to make than they’re actually worth. 

Here in Ireland, the ‘rounding’ initiative introduced towards the end of 2015 hoovered up €126m in unused coins and saved the central bank a packet in minting costs.

In Europe, Belgium, Denmark, and Norway have been at the forefront of the cashless society, but Sweden has made by far the most progress.

Since 2009, when the Swedish Central Bank eliminated its highest denomination bill, the value of cash in circulation has dropped precipitously, such that 80% of transactions no longer require it.

You can’t use cash on buses and trains. Most bars and restaurants will refuse it. About half of all banks don’t take deposits or give withdrawals. 

Even street vendors and farmers’ markets take cards. Signs on shop doors, saying ‘We don’t take cash’, are increasingly common in a country where even children use debit cards.

Mobile payment platforms have had a central role in Sweden’s triumph over cash. ‘Swish’ is a direct payment app, a collaboration between a collection of Swedish and Danish banks. 

It allows consumers to make electronic payments in real time, without the need for cards.

Elsewhere, of course, the rise of Apple Pay and Android Pay has opened up the world of mobile payments to a much wider audience.

For the consumer, the argument runs that a cashless society is a safer society. In Amsterdam, a couple of summers ago, I tried to pay for a coffee with a fiver. The guy behind the counter waved it away.

“Cards only,” he said, indicating the tablet on the counter. Only then I noticed the lack of a cash register.

“All of the cafes around here are card-only,” he said. “We don’t get robbed anymore.”

It’s hard to find evidence of any great decline in street crime as a result of cashlessness. 

We may be carrying less cash, but cards are still valuable items, as are phones. And it’s not as if criminals simply give up, and decide to go straight, when one avenue is closed to them.

Using your card does, however, get you automatic protection against fraud, and grants you consumer protection that you don’t get with cash.

Dermott Jewell, of the Consumers’ Association, is ambivalent about the rise of cashlessness. 

He says that the piecemeal introduction of cards, contactless payments, mobile payments, and even rounding has been all about changing the mindsets and habits of consumers.

“Consumers have, in most cases, had a choice in how they spend their money, but this is changing and is not necessarily always in their best interests, or of particular benefit. 

"Service providers require consumers to pay by direct debit, in order to avail of discounts on their energy, telecom, and other bills.

“However, these require monitoring, as the discounts cease after a period of time and must be renegotiated.”

Mr Jewell says that while some of the changes may benefit the consumer, there’s little question but that they all benefit traders, service providers, and finance houses.

The banks are all for cashlessness. What’s not to love? It mechanises processes, has no reliance on branch banking, and ends the need to transport cash.

You would think that they would be incentivising the use of debit cards. However, both AIB and Bank of Ireland charge you 20c and 10c, respectively, to use your debit card to make purchases. None of the other banks do, and all of the banks allow free contactless payments.

Governments, for reasons already explored, are even more enthusiastic about electronic payments. The last budget saw the imposition of a 12c stamp duty on all ATM withdrawals, in part, no doubt, as a means of nudging us all away from cash. 

So, if both banks and governments are urging cashlessness, it’s hard not to be suspicious. 

Spending cash has become a deliciously anti-establishment thing to do.

You buy something with cash and no-one knows anything about it. Buy it with a card or mobile payment app and an indelible record is left behind, a footprint that never fades. 

In a world of spies and hackers and big data, where is the guarantee that this data will remain forever secret, forever protected?

Cash is a bearer instrument. Once you have it, you can spend it wherever you like. But if we’re relying on Visa and MasterCard to mediate what we do with our money, is there a risk we will not be allowed to spend without their imprimatur?

Back in 2010, both companies blocked all donations to Wikileaks. Three years ago, they reportedly blocked payments to a number of anonymisation and virtual private network (VPN) services.

Not everyone is marching happily down the road to cashlessness. In Sweden, a loose coalition of interests, calling itself Kontantupproret, or ‘Cash Uprising’, is putting up a spirited resistance. 

The group is made up of a number of vested interests — the ATM and cash-transportation industries, in particular — as well as some small business owners, immigrants, and pensioners.

Last summer, the Swedish deputy finance minister took delivery of a petition signed by 136,000 pensioners asking the government to safeguard the use of cash. They argued not everyone has access to a bank account, and citizens have a right to decide how they pay for what they need.

And you have to ask, in a world where there’s no longer any spare change, how do charity collectors or beggars or street artists get by? 

Financial writer, Dominick Frisby, says that, as we shrug off cash, we risk disempowering sections of society that will find it difficult to embrace new technologies.

“The danger,” he says, “is that governments force it and get their regulation wrong, which is likely. Money is tech. It needs to evolve organically. 

"If governments make cash illegal, the need for cash will not disappear. They will just create a black market. Thus, like the ‘war on drugs’, for example, they will create much bigger problems than they originally had.”

These concerns go to the heart of the cash versus cashless debate. Worldwide, 2.5bn people don’t have access to any kind of financial institution account. Moreover, not all of these ‘unbanked’ — as they’re known — are in developing countries.

In an address to the Mobile World Congress, last year, MasterCard CEO, Ajay Banga, said that nearly 70m Americans are either ‘unbanked’ or ‘underbanked’ — this last term meaning that they have poor access to retail banking. He said that the figure in Western Europe is 100m.

Enter the GSMA, the world trade association of mobile operators. It has the underbanked firmly in its sights, believing that mobile technologies can bring the joys of cashlessness to a much wider audience.

GSMA’s report, ‘Mobile Financial Services for the Unbanked’, says that many of those without access to retail banking can, instead, use their mobiles to provide low-cost access to financial services.

Like M-Pesa, for example. 

Introduced by telcos in Kenya and Tanzania, in 2007, this platform allows users to store and send money within their mobile accounts, without the need for a bank account.

It’s now one of the leading mobile money systems in the world, and allows millions of users both to store money digitally and to transfer it to each other via text message. The service has since been expanded to South Africa, Albania, Romania, and India, where, it’s hoped, it can ease the liquidity crisis brought about by the country’s recent demonetisation.

Time will tell whether or not innovations like these will be sufficient to replace cold, hard cash, which has been around for some time.

The earliest coins were discovered in what was once the province of Lydia, on the coast of Asia Minor (now modern-day Turkey), in 700BC. And, of course, Turkey is one of the latest countries to decommission its coins.

A card-payment system — called ‘Troy’ — named for the ancient city, is being rolled out to all point-of-sale terminals, with the aim that all cash be completely removed from the economy by 2023.

If it goes according to plan, a system that functioned continuously for 2,700 years will vanish in less than a decade.

Tapping for money becomes commonplace for consumers

The days of jingling pockets are coming to an end. The rounding initiative begun two years ago has already seen the beginning of the end of 1c and 2c coins.

The rest of them are not far behind, and once they’re gone, notes are likely to follow soon after. And as the cashless society takes hold, you can bid goodbye too to your credit and debit cards. 

The only thing you’ll need when you leave the house will be your keys and your phone.

Just last month, Apple Pay arrived in Ireland. Its main rival, Android Pay preceded it by about three months. 

These are known in the trade as Near-field communication, or NFC payment platforms. In a nutshell, they allow you to use your device like a debit or credit card.

You download the wallet app to your device and enter your card details into it. 

If you wish to make a payment in one of the participating stores, you hold your phone or tablet or smart watch up to the terminal.

In most cases, you don’t even have to wake the device up. 

The sensor picks up the proximity of the terminal and completes the transaction automatically. You walk out with your purchase and the relevant amount is automatically deducted from your card account.

Ulster Bank has launched Apple Pay in Ireland as part of its customer-centric innovation, transforming mobile payments with an easy, secure and private way to pay that’s fast and convenient.

Apple Pay was first rolled out in the States more than two and a half years ago. In the first three months of its life, the company reported that over one million cards were registered on the app. 

Here in Ireland, two banks are currently embracing the platform. You can use Apple Pay with KBC and Ulster Bank debit and credit cards.

The technology works with an iPhone 6 or later, an iPhone SE, iPad Pro, iPad Air 2, iPad mini 3 or later and an Apple Watch paired to an iPhone 5 or later. 

Set up Touch ID, Apple’s fingerprint sensor, and you can use Apple Pay to shop in participating websites and apps, without the bother of having to fill out lengthy account forms or shipping and billing info.

Two banks have also taken on Android Pay — KBC again, as well as AIB. Android works with Android phones and tablets with Android 4.4 or later. As with Apple Pay, you just install the app and enter your card details.

As well as point of sale transactions, you can use the technology on the range of participating websites and apps — which are of course growing in number all the time.

So the big question. Is it safe?

Yes, says Jillian Heffernan of the Banking and Payments Federation of Ireland (BPFI).

“With both Apple Pay and Android Pay, the card number and identity of the cardholder aren’t shared with the retailer,” she says, “and actual card numbers are not stored on your device or on Apple/Google servers. Also, in the event that the cardholder loses their device, they can temporarily suspend or completely delete the ability to use Apple or Android Pay from the device.”

While the cut-off point for contactless payments is €30, it’s possible to use Apple Pay and Android Pay for higher value transactions with a number of participating merchants — and there is an extra layer of security in that event.

You’ve got to unlock your device and hold the back of it to the contactless payment terminal until you see a checkmark. The phone will beep and/or vibrate to confirm that the payment has been made.

Jillian Heffernan says that while cash is still king, the old methods of payment are slowly ceding ground to the new.

“While figures show that cash is still the most popular form of payment at point of sale — particularly for lower-value items – consumers are increasingly using debit cards, contactless and other electronic payment options in preference to cash for the greater convenience and security they provide. 

"These latest initiatives, and others likely to follow from across the banking sector, will further bolster the use of non-cash payment options.”

While the banks rush to reassure you that all of these methods are secure, it’s worth pointing out that the consumer also has a role to play here.

Only download mobile apps from official app stores. These include the Apple App Store, Google Play Store, and Blackberry App World. Always keep your mobile phone’s operating system updated with the latest upgrades. 

Older software may have vulnerabilities and weaknesses that could expose you to security and fraud risks.

The BPFI also recommends you do what very few people do, which is to use a reputable brand of anti-virus software on your mobile phone. 

Don’t share or give your mobile banking security details, including your passcode, to anyone and never store these on your phone.

Finally, remember that public wifi hotspots aren’t always secure. 

Only access online/mobile banking on safe networks.

It’s a Bit harder to trace online currency, but not impossible

Pity Welshman James Howells. Back in 2009, when Bitcoin was in its infancy, the IT worker ‘mined’ 7,500 Bitcoins on his home computer.

They were so cheap as to be almost worthless at the time, but by November 2013, their value had risen to more than $1,200 each. 

By then however, Howells had done some spring cleaning and had inadvertently dumped the hard drive on which all that value had been stored.

When he discovered his mistake, he embarked on a frantic search through his computer files for a backup, and when that proved fruitless, he dashed down to his local landfill only to be confronted by acres of mountainous waste. 

This missing hard drive with its $9m was gone forever.

Bitcoin is what’s called a cryptocurrency, and is only the most successful of a number of these that have appeared in the past eight years.

It is a digital asset, designed to operate like a conventional currency as a store of wealth and a medium of exchange. 

The prefix ‘crypto’ signifies that cryptography is used both to create new units of Bitcoin and to secure transactions in the currency.

That’s the theory. Beyond that, it gets complicated.

Bitcoin

Conventional currencies are created by a national or supranational monetary authority. The big differentiator with Bitcoin is that there is no equivalent centralised system of creation or control.

Bitcoins are ‘mined’ by individuals like the unfortunate Mr Howells by solving mathematical problems using special software. 

Effectively, these individuals or pools of individuals offer their computing power to record Bitcoin transactions and are rewarded with transaction fees and newly minted Bitcoins.

These are then stored digitally and can be used to buy and sell goods and services, or they can be converted into conventional currencies.

While Bitcoin is accepted in an increasing number of online markets, you don’t find too many retailers in Ireland that are happy to take them.

Marvin.ie however is one notable exception. This is an online takeaway business which allows customers to order from one of hundreds of takeaways around the country. 

In addition to accepting all the usual methods of payment, you can also pay for your curry or your pizza or your chips using Bitcoin. 

Co-founder and MD James Galvin says that the company decided to accept Bitcoin in order to offer customers as many payment options as possible, and to give the business a competitive edge.

“We knew Bitcoin was growing hugely in popularity and we felt as it wasn’t too hard to integrate, and the fraud risks were minimal, unlike credit card systems. It was an easy decision to make.” 

The company works with a payment merchant called Coinify which handles the bitcoin payments side of the business.

“It acts for all intents and purposes like any other online payment system, not dissimilar to Paypal. Bitcoin is still only around 5% of our total orders. It’s slowly growing, but what I find interesting is that we’ve never had one recorded issue of fraud.”

One of the key advantages of Bitcoin, its proponents argue, is the fact that transaction fees are really low. 

It’s possible to move large sums of money internationally by paying only a fraction of the fee you would pay for transferring an equivalent sum denominated in a conventional currency.

As a store of value, the currency is subject to the vagaries of any asset. 

Recent times have seen huge swings in its fortunes. Over 2016, the price of Bitcoin rose from $400 to $1,000.

By January of this year, it was trading near all-time highs at around $1,150. Then it lost 20% of its value overnight following developments in the Chinese economy (around 95% of Bitcoin transactions happen in China, which makes developments there hugely influential).

Then there’s the whole anonymity thing. While all Bitcoin transactions are stored publically and permanently, the identity of the user behind an address remains unknown. 

Privacy advocates naturally love this, but the secrecy element is causing headaches elsewhere.

Law enforcement agencies have expressed concern over Bitcoin’s use in criminal activity. 

In fact, more than one commentator has asserted that if it wasn’t for its use in the trade of illegal goods and services, Bitcoin would never have taken off. Finding definitive evidence of this however not easy.

The now defunct Silk Road — which specialised in the online trade of a wide variety of illicit goods and services — dealt in Bitcoin, while there are any number of reports of the use of Bitcoin in the trade of everything from child pornography to arms.

That doesn’t necessarily make the medium of exchange inherently wrong of course. 

It’s also worth pointing out that while the cryptography and peer-to-peer architecture on which Bitcoin is based make it more difficult to identify who sold what to whom, these are electronic transactions. 

By their nature they leave a trail.

Ross Ulbricht, who ran Silk Road, is currently serving a life sentence for facilitating the sale of drugs. 

There have been several successful convictions of individuals who used the currency for illegal activity, proving that while it may be difficult to trace transactions, it can be done.


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