When all transactions become digital

Many new platforms have been created that I believe will eventually make physical money obsolete. Many things will change, but first I would like to consider how close we are to this becoming a reality.

Certainly credit cards, debit cards, and direct deposit make cashless transactions accessible to the everyday user, but with digital payment there is no need to have cards or cash.  Starbucks on one of the first companies to introduce mobile payments for cashless transactions which make the purchase solely electronic (bar code scanner).  Later, we saw non-proprietary mobile payment platforms emerge such as Level Up .  Most recently, banks are starting to warm up to Near Field Communication (known as NFC, a wireless technology with a communication range of about 7 inches used to transmit data) via smartphones as a way to conduct transactions (MasterCard PayPass is the same technology, but this communication protocol is becoming embedded in smartphones instead of a card).  In another direction we see BitCoins (encrypted electronic cash that can be transferred from peer to peer without any financial clearinghouse) as a currency that exists solely in digital form and is traded against existing physical currencies (USD, GBP and Euro are traded regularly).  Such platforms will continue to evolve over time.  Access to these payment channels will increase, become more secure, and become more user friendly.

As the usage of digital monetary changes increases we will see many socioeconomic impacts as well.

Likely Benefits include:

  1. Biologically, there will be less physical exchange of things which should suggest that communicable diseases will be less likely to spread (e.g. Flu, Cold).
  2. Businesses that deal with both electronic payment and cash will likely see a lower cost of operation without the burden of having to collect, count, deposit, and make change in cash. Additionally, the likelihood of petty theft will be lower.
  3. Banks will be impacted in many ways.  ATM maintenance will lower (assuming banks wish to have a physical presence for check deposit or account maintenance).  Collecting, counting, transferring costs will go away.  Robberies will likely decrease.  Need for physical branches and branches with significant security measures will also decline.
  4. Government spending will decrease because it will not need to manufacturer, destroy, or detect counterfeit money. The cost to make a penny is about 1.99 cents per cent — never mind the cost to destroy the penny at the end of its life, or the cost of moving that penny around. The annual budget for the US Mint has around $400MM in expenses associated with producing circulating currency and employs about 821 people.
  5. Tax collection will be higher due to traceability and auditability of electronic fund transfers.
  6. Decline in black market sales activity due to tractability and auditability of payments.
  7. Cost of processing the transaction will lower (right now it is 2-4% of the transaction) but as clearing companies try to gain market share the cost may lower.
  8. Environmental impacts to creating, managing, and destroying cash to be eliminated. Carbon emissions, natural resource consumption, etc. may be reduced because the raw materials needed produce currency isn’t needed, the armored cards used to transport cash will no longer need to be driven around, and the emissions generated from shredding bills and melting coins.

Likely problems include:

  1. For businesses, time to collect payables will increase on average due to delay in electronic clearing vs. instant cash receivable.
  2. Increase cost in electronic crime detection and prevention.
  3. Increase sophistication of money laundering.
  4. Tipping is going to get awkward, though some economists feel tipping is an antiquated custom.
  5. Overall cost of certain goods and services may increase if merchant is held to a higher tax burden. Particularly small businesses (e.g. bars and restaurants).
  6. Black-market activity may be displaced somewhat with bartering (e.g. guns for drugs). Additionally, a black market currency (physical) may either be introduced or retained from existing cash format.
  7. Lack of a low cost payment tool (i.e. a payment mechanism for people without smartphones).

This is just scratching the surface of changes that a cashless economy would hypothetically encounter.  Granted, many hypotheses indicate whether the impact is more or less than today, I expect the overall efficiency of the payment system to increase with the eliminated cost of managing physical objects. Additionally, this does not explore what it would take to eliminate cash – topic for another discussion.

Next time you get a chance, ditch the greenback and try one of these new forms of payment (“e”-back?) and see if you like it.  Also, I’d be interested to see what other people think may change in a cashless society.

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