What is a cashless society and how does it work – pros and cons

Numbers play an important role in how we interpret information and make decisions. So, let’s take a look at some key figures. 

The European Central Bank indicates that “the total number of non-cash payments in the euro area increased by 8.1% to 98.0 billion in 2019 compared to the previous year, with a total value of €162.1 trillion.” 

However, does this mean that the role of “cash as king” is declining and that we’re moving towards a cashless world? What exactly is a cashless society? How does it all work? 

Cash is still the predominant method of payment in most European countries, but its proportion among retail payments is on the decline. Since the euro was introduced as a currency, the Eurozone has seen a dramatic increase in the use of cash. 

Given this contradictory picture as it relates to the use of cash and digital payments, where is the world headed in terms of achieving cashless societies?

Let’s take a closer look.

What is a cashless society?

Described as an “economic phenomenon in which financial transactions are carried out electronically” as opposed to using banknotes and coins, some consider cashless society our new future. 

We may see each group in a cashless society with its own electronic card or device that will be used to process and complete transactions. 

Some real-world examples of cashless transaction methods include those made by credit and debit cards, mobile wallets, Point of Sale (POS), Internet banking, and mobile banking.

How does a cashless system work?

In short, a cashless system works by initiating financial transactions electronically rather than physically. 

In order to exist, cashless transactions rely on a range of different payment systems, including credit cards, debit cards, digital wallets, mobile payments, online banking, and more.

Once a consumer makes a purchase for a product or service, the payment is processed digitally, securely sending money from the customer’s account to the seller’s account. Both small businesses and large organisations can take advantage of the capabilities of electronic payments to streamline their operations, lower cash management costs, and reduce the risks of fraud and data theft.

Among others, digital wallets have emerged as an increasingly popular part of cashless systems, enabling shoppers to make payments with a simple tap or scan. This, alongside other features, contributes to the broader digital transformation of the financial system.

What about cash production?

Although cashless transactions are gaining momentum, cash production remains a vital function for central banks. 

Even in a dominating cashless economy, certain levels of cash production are essential in order to accommodate people and sectors that still rely on paper money. In addition, cash can have important backup functions in case technology fails or cybersecurity accidents cause electronic payment system disruption. 

In order to achieve a smooth transition towards a financial landscape with prevailing digital payments, it’s important that central banks adequately balance the need for cash production, especially considering the preference for non-cash transactions today. 

Which countries are cashless societies?

As of today, there are no countries that have gone completely cashless. However, there are several that are actively moving towards becoming cashless societies, substantially lowering the reliance on physical currency. 

For example, Sweden is one of the leading examples, where digital payments have gradually become the norm. In 2024, 90% of all transactions in the country will be digital. 

Another example is South Korea, where cashless transactions prevail, influenced by the mass adoption of credit cards, mobile payments, and other digital payment solutions. This trend isn’t something new, as in 2021 only 14.6% of the country’s payments were made in cash. 

At the same time, in countries like China, where platforms like Alipay and WeChat Pay dominate the scene, less cash payments are made.

These are only a few examples of countries where new payment methods facilitate a shift towards a more digital economy and, therefore, a cashless society.

Progress of cashless initiatives in key countries

Globally, countries are taking different initiatives, encouraging the shift towards cashless societies.

This is vivid in countries like India, where in 2016 the government introduced the demonetisation policy and the promotion of digital payment systems like Unified Payments Interface. Such efforts inevitably contribute to the rise of non-cash transactions and the adoption of digital wallets.

On the other hand, the growth of cashless stores in the United States in addition to the popularity of payment cards and mobile payments also marks a shift towards a cashless society. 

It’s important to note that central banks in countries like these are key in promoting and supporting the transition to cashless payments. Their role in the process is to create reliable payment infrastructures and guarantee the security of electronic transactions. 

8 types of cashless payments

Cashless payments can come in many forms and varieties, with different types of hardware and software. 

Below, you can see a few examples.

Bank cards

Prepaid debit and credit cards are just one example of how a consumer can make cashless payments. These cards typically have a magnetic stripe, a chip, and other physical characteristics that set them apart. They offer users convenience, flexibility in terms of payments, speed, and security. 

Some of the major global card issuers are Visa and Mastercard and you can use their debit and credit cards to make purchases in-store through a card machine or online in various online shops. 

Contactless payments

Through a contactless payment, a consumer taps or hovers their card or smart devices such as a smartphone or a smartwatch against a POS terminal. This eliminates any physical contact between the buyer and the seller during a financial transaction.

They can also be tapped against mobile phones which have mobile applications designed to accept payments. Such contactless payments work with Near Field Communication (NFC) and RFID technology. 

Mobile wallets

Through mobile wallets, a user can send, receive and store money directly on their phone. They can go shopping and use their mobile device to make payments instead of using a credit or debit card. This is first done by linking the user’s bank account to their mobile app.

Sending money to friends and family is easy as the user will only need to enter a name, phone number, email address, or another form of identification in order to complete the transaction.  

QR codes

A Quick Response (QR) code is a black and white, two-dimensional sort of barcode which is scanned using a mobile device. 

Once the merchant scans the QR code, the device can process payment through the consumer’s linked bank account. 

POS devices 

Traditionally, POS devices were only considered as hardware, which is used by merchants to mark the chosen goods and accept customers’ cards. 

However, with constant developments in the fintech space, besides physical POS devices, there are other solutions such as mobile POS and virtual POS.  

Gift cards and vouchers

Gift cards are physical or virtual cards that are pre-loaded with funds and enable the user to shop at selected merchants, which accept cashless payment methods. 

Gift cards are a brilliant way to increase brand awareness and serve as an effective marketing tool for many businesses. 

Electronic Clearance Service (ECS) 

ECS is a type of cashless payment method, which is widely used for making bulk payments. These include payments such as monthly instalments, paying for utility services, and disbursement of payments such as pensions, salaries, and dividend interest.

You can use ECS for both credit and debit services and in order to start this service, a person’s bank needs to authorise these “periodic credits and debits”. It is considered a safe cashless payment method, as users can provide specific instructions to their bank or financial institution. These can include the maximum sum of the debit, the validity period, and the purpose of the transaction.  

Unstructured Supplementary Service Data (USSD)

USSD is another cashless payment method through which a consumer can make payments without the use of an Internet connection or a smart mobile phone. 

To use this payment method, a customer needs to dial a specific number to reach a call centre. Payments are then made, as long as the mobile number and the bank account of the user are in agreement and linked to each other. 

Why a cashless society is good

There is a long list of benefits of a cashless society, many of which will not only offer us increased convenience but also improve digital footprints so that there’s less scope for corruption and illicit activities. 

Below are a few of them. 

Reducing disease transmission

Although the German central bank, the Deutsche Bundesbank, in a study indicated that “cash poses no particular risk of infection for the public,” there are some health-associated risks related to handling cash. This is because of various bacteria that are transmitted through its proliferation. 

In fact, in 2020, the World Health Organisation suggested that consumers rather use their contactless cards instead of cash to reduce the transmission of diseases, such as COVID-19.

Improved budgeting for consumers

The mobile apps which accompany many bank accounts and online banking solutions offer their users an easy-to-view list of all their expenses made and income received. 

This helps them keep track of their expenses and ultimately can improve their budgeting.  

Reduced business risks and costs

Moving cash around costs money. It requires strong security measures to protect such a valuable resource. 

However, in a cashless world, the risks associated with handling cash can become a thing of the past. 

Improved transaction speeds

Using debit and credit cards, smartwatches and key fobs, and even mobile apps to make payments offer increased transaction speeds. The reason is that they are processed much faster than cash-only transactions. 

Less time and costs

In a cashless world, many consumers will spend less time handling, storing, and depositing cash at physical bank branches. This is mainly because the need for cash will be eliminated. 

Smoother international payments

Travelling abroad used to mean having to purchase foreign currency in order to enable you to enjoy your trip to another country. 

However, if the foreign country accepts cashless payments, you could simply swipe your card or use your mobile app to process the transaction, while the exchange rates and commissions are calculated automatically and debited from your account. 

In addition, making payments as remittances abroad or any other type of international payment will become easier because of the online nature of the transaction. 

Compiling more comprehensive economic data 

Governments across the world spend significant resources on compiling economic data, which is then used to make policy decisions. 

In a cashless world, digital transactions leave a trail and this data can be collected much faster, for a wider scope of the population, enabling governments and organisations to make better-informed decisions. 

A tool for addressing corruption

An estimated $1.26 trillion is stolen from developing countries through corruption, tax evasion, and bribery. 

With a digital paper trail, there will be less opportunity for money laundering and other illicit activities. We have also seen that the elimination of high-denomination notes can contribute to reducing criminal activity.

Why a cashless society is bad

With all the benefits mentioned above, you might wonder if there are any dangers of a cashless society. There are certainly some concerns worth considering.

Privacy concerns

Cash enables you to send and receive money anonymously. 

However, with a digital transaction, there’s always a footprint you leave behind. This can be used against you, and even worse, it could have negative ramifications if it falls into the wrong hands. 

Safety and security

Digital payments are not completely safe yet. The world of hackers is rather dangerous and if you find yourself with a drained bank account with no money left, it could take a long time before the institution restores your funds. 

Therefore, basic cyber safety is an essential skill that we all have to learn.

Technological issues

As much as we rely on it, technology is never perfect. Trusting your finances to a machine could come with some technological glitches. 

This could cause loss of funds, frustrations, lost time and effort. 

Economic inequality

Going cashless could disenfranchise the unbanked. This could be damaging to those in poor areas and the digitally incompetent groups such as the elderly people, resulting in decreased social equality, which could become more disrupted.

Additional fees

Reduced cash handling should ideally come with reduced costs. But, if one provider of digital services or a small group of them band together, they may charge fees for using their services, which could negate such savings from reduced cash handling. 

Merchants already pay a transaction fee for every payment that they process, and such fees could be prohibitive for some merchants who trade in low-value and low-volume transactions.  

Overspending

Managing spending needs to be revised. Because of the convenience of swiping, tapping, or clicking, it’s easy to lose track of how much you’re spending. 

Impulse purchases that are put on one’s credit card could see a jump leading to overspending and going over the budget.

Negative interest rates

When banks hike interest rates, individual consumers can currently withdraw their funds and go elsewhere. 

With all payments being digital, the shift of fees on consumers might end up being costly.

Centralised control

It is difficult to imagine exactly how cashless societies will be regulated. Will there be a central bank that oversees all income and expenses? What will the role of financial institutions and governments be? 

This could lead to imposing additional taxes, while more totalitarian governments could use the system for mass surveillance. 

Concluding thoughts

Whether the global financial system will gradually fully transition to a worldwide cashless society remains to be seen. The truth is, it’s likely that countries will implement this system to some degree or another.

However, perhaps one option is to consider a blend between cash and cashless in order to ensure that the disenfranchised are not marginalised further. At least until their states can be improved. This is a continuous work in progress and takes a lot of time, effort, and resources to achieve. 

Frequently Asked Questions

Is a cashless society possible?

A cashless society is not only possible, it’s already in the pipeline with some of the more technologically advanced countries making huge strides in this regard. However, while some leap ahead to the future, many others are still lagging behind and this could lead to exacerbating the economic gaps between different states. 

Are there any cashless societies?

Although there are no cashless societies as yet, some are already in the pipeline and we could see the first cashless society in Sweden on 24 March 2023. Recent figures from the Swedish Central Bank show that less than 13% of Sweden’s total population uses cash. This translates into around 80% using cards. Cash accounts for less than a percentage of all the transactions in the country and cash payments are heavily discouraged. For businesses, over 99% of merchants accept card payments. 

Is a cashless society the way forward?

While Sweden forges ahead towards a cashless world, the question of whether a cashless society is a way forward remains ambiguous and an unanswered one. Many countries are increasing bank account and card adoption rates, but the number of unbanked remains very high. In fact, according to the World Bank, about 1.7 billion members of the global population remain unbanked, which means that “digital payments tied to major institutions pose a risk of financial exclusion.”

How long until we reach a cashless society

As mentioned above, the future for Sweden is clear. It will become a cashless society in March 2023. However, it remains to be seen how this trend will continue to grow across the world. 

Some developed countries like the US have deeply ingrained laws, some of which outlaw discrimination by merchants against individuals based on the fact that they use cash as legal tender. 

What happens to cash in a cashless society?

Perhaps what will happen to cash in a cashless society is the case that cash will be seen in videos, social media, and museums as relics of the past. Cash still offers many benefits such as improved control over spending and limiting impulse buys as well as the fact that there are no additional fees paid.

However, with cash, you won’t be able to build a credit history or credit score, cash is less secure than cards and finally, cards tend to offer rewards for higher usage and spending rates.

Disclaimer: Please be aware that the contents of this article and the myPOS Blog, in general, should not be interpreted as legal, monetary, tax, or any other kind of professional advice. You should always seek to consult with a professional before taking action, since the particulars of your situation may materially differ from other cases.