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Is a Fully Cashless World Inevitable?

by internationalbanker

By Joseph Moss, International Banker


The nature of payments and transactions has undergone a dramatic transformation in recent years, with the world rapidly moving away from physical forms of payment, such as notes, coins and cheques, and towards the digital realm. The COVID pandemic has only further expedited this trend through lockdowns and social-distancing restrictions designed to prevent onward transmission of the coronavirus, leading to the handling of physical currency becoming even less common. And with digital transactions offering distinct benefits over cash in terms of convenience, speed, security and even public health, a cashless world appears inevitable.

But truth be told, the pandemic accelerated an already buoyant global trend of going cashless, which had gathered steam under the fintech (financial technology) revolution that kicked off around 10 years ago. “Sweden is rapidly moving away from cash. Demand for cash has dropped by more than 50 percent over the past decade as a growing number of people rely on debit cards or a mobile phone application, Swish, which enables real-time payments between individuals,” the governor of Sweden’s central bank, Riksbank, wrote in June 2018 in a piece for the International Monetary Fund (IMF). “More than half of all bank branches no longer handle cash. Seven out of ten consumers say they can manage without cash, while half of all merchants expect to stop accepting cash by 2025. And cash now accounts for just 13 percent of payments in stores, according to a study of payment habits in Sweden.”

An October 2022 Pew Research Center survey also revealed that, in less than a decade, the share of Americans who had chosen to go “cashless” in a typical week had risen by double digits. “Today, roughly four-in-ten Americans (41 percent) say none of their purchases in a typical week are paid for using cash, up from 29 percent in 2018 and 24 percent in 2015,” Pew reported. “Conversely, the portion of Americans who say that all or almost all of their purchases are paid for using cash in a typical week has steadily decreased, from 24 percent in 2015 to 18 percent in 2018 to 14 percent today. Still, roughly six-in-ten Americans (59 percent) say that in a typical week, at least some of their purchases are paid for using cash.”

As we shift into the post-pandemic era in 2023, it’s fair to say that the need for cashless digital solutions is fast becoming the rule worldwide rather than the exception. And most countries seem to be on board with this shift, perhaps no more clearly exemplified than by India, which alone accounted for almost 40 percent of all worldwide digital transactions in 2021. Most notably, Indian regulators, including the Reserve Bank of India (RBI), approved the introduction of the United Payments Interface (UPI) in April 2016—not long before the government’s infamous demonetisation shock policy was announced near the end of that year—via the Bank’s payments umbrella organisation, the National Payments Corporation of India (NPCI), as a digital real-time mobile payment system that today brings several key digital financial services to anyone with a phone and a number linked to his or her bank account.

Indeed, India’s digital payment volume has surged at an average annual rate of around 50 percent in the five years through 2022, making it one of the world’s fastest. Yet during this time, UPI’s expansion was recorded at around 160 percent annually. In the year to June 2022, moreover, transactions more than doubled to 5.86 billion as the number of UPI’s participating banks climbed by a hefty 44 percent to 330 in total. UPI’s transactions then reached a record Rs 11.17 trillion (US$135 billion) in September 2022, representing almost 86 percent more in transaction volumes across the year.

Arguably the biggest challenge facing the cashless movement, however, is ensuring that the poorest, typically unbanked segments of society are not left behind by such innovation, particularly as they tend to be the most reliant on physical cash and often do not have the means to set up digital payments. Indeed, the October Pew Research survey also found that around 30 percent of Americans whose household income is under $30,000 a year use cash for “all or almost all” of their purchases in a typical week. “That share drops to 20% among those in households earning $30,000 to $49,999 and 6% among those living in households earning $50,000 or more a year.”

India’s solution has been to make UPI compatible with older non-touchscreen phones to serve a potential 400 million additional users across India’s less connected rural areas. Rolled out in March 2022, this new feature followed a major upgrade by the NPCI in 2018 that allowed those in rural areas with lower rates of internet connectivity and smartphone ownership to make payments by simply dialling a number and leaving a missed call with UPI. “The simplicity that this digital payment avenue offers, its seamless interoperability and high levels of security have played a key role in driving its popularity,” Gaurav Hinduja, co-founder of digital-finance platform Axio, recently noted in a January 30 Times of India article. “With a single point of contact for all digital transactions, UPI has simplified payments. No longer do people need to enter confidential banking details across multiple touchpoints. For merchants, UPI proves cheaper than POS machines. UPI transactions are estimated to cost less than 45 paise (around $0.005) per transaction, compared to the 1.25-2.5 percent services charges for POS machines.”

But not all cashless initiatives are progressing as smoothly as India’s. Most recently, Nigeria has experienced significant roadblocks along its cashless journey, prompting many in Africa’s biggest economy to conclude that it is not ready to complete the transition just yet. Problems began after it was announced by the Central Bank of Nigeria (CBN) in late October 2022 that it would be redesigning old naira banknotes, ostensibly to remove excess physical cash from the system that was being hoarded across the country, and that a January 31 deadline had been set for the old notes to cease being legal tender.

Nigerians thus had just three months to swap their old banknotes for the newly designed naira notes. But a shortage of the new notes issued by the CBN required a 10-day extension for note swapping to be approved by President Muhammadu Buhari. And with the overwhelming bulk of money having been deposited in bank accounts ahead of the initial deadline, many Nigerians have found it decidedly difficult to obtain the new currency, not only due to the shortage but also because of the endless queues that have formed at banks and ATMs (automated teller machines) equipped with insufficient quantities of the notes.

In turn, the shortage has pushed rates charged by POS (point-of-sale) operators through the roof, while a lucrative black market has emerged for those lucky enough to hold excess quantities of the notes that can be offloaded at a premium to those in need. “I was saying a while back that the rules of economics do not work in Nigeria esp when it comes to currency speculation,” tweeted Nigerian radio personality Osi Suave on February 2. “Before this currency redesign it used to cost 100 naira to withdraw 5000 naira. Today same POS operators are charging 1000 to get 5000 naira.”

Some see the actions taken by Nigerian authorities as similar to those implemented in India in late 2016 when its shock demonetisation drive caused long queues at banks and even a handful of civilian deaths amid the resulting chaos. But while India has since largely succeeded in going cashless via UPI and other digital payment means, the view of Nigerians that their own country can achieve comparable results appears less optimistic. “The recent struggles faced in Nigeria’s push towards a cashless economy highlight the need for the government and the Central Bank of Nigeria to address the current challenges before fully transitioning to a cashless economy,” Victor Oluwole, head and editor of Business Insider Africa, wrote recently in the publication.

Nonetheless, with global digital payment platforms being launched, updated and made more accessible all the time and most regulators seemingly favouring more digitalisation through innovations such as central bank digital currencies (CBDCs), a cashless world seems unavoidable in the end.


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