Cash is dead, long live Cash!.. I review cash's relevance in society, what makes it tick and how a cashless society could look using Sweden's example

In May 2023, the Reserve Bank of India (or RBI, India’s central bank) announced the gradual withdrawal of the INR 2000 currency note (the highest denomination note in India, equivalent to c. $25) from circulation.

Their stated objective was to reduce high value notes in circulation (lower denomination notes like INR 500 and 200 would however continue to exist). This announcement stirred a lot of debate in the country, as it brought back memories of the government’s demonetisation initiative in 2016 (an overnight withdrawal of notes amounting to 86% of cash circulating in the country, aimed at reducing black or unaccounted money and containing the proliferation of fake currency notes in the economy).

Also in May 2023, the RBI announced the expansion of its Digital Rupee pilot (India’s wholesale and retail Central Bank Digital Currency or CBDC) launched late last year, to include more banks and cities in India.

These developments and the continued growth of UPI (Unified Payments Interface, India’s real time payments system) which I discussed in more detail in a previous post, point to an increased digitisation of the payments space accompanied by a reduction in the role of cash in the economy.

During my last 14 years in the banking and payments industry, I’ve seen first-hand the gradual shift from offline to online and from cash to digital payments. We have come a long way, I distinctly remember conversations with one of my corporate clients who resisted signing up to the bank's online banking portal for years, citing security fears and insisting that they will continue to submit manual payment instructions at the branch every day.

This shift is a global phenomenon, with different countries at different stages in the journey. Nordic countries like Norway and Sweden are often seen as the shining stars as they approach near ‘cashless society’ status. The shift from cash to digital for any market is highly correlated to the penetration of bank accounts, cards, smart phones and internet (+ digital literacy), with government initiative and even law playing an important role.

As the rise of digital payments continues to hog the media limelight (including this week’s launch of FedNow instant payments in the US), I have been reflecting more about the role of cash in society. As much as I like to carry a card holder (instead of a bulky wallet), there is many an occasion where I frustratingly need to find or pull out cash to pay someone. I know cash isn’t going away just yet, so I decided to find out a bit more.

Firstly, let's see what the numbers say

1. Oddly enough, while digital payments have grown significantly in India during the last few years, CIC or ‘currency in circulation’ provides a contrasting stat. While CIC expectedly declined immediately post demonetisation in 2016, it has since seen a significant uptick. In fact, it has nearly doubled from c. 17 lakh-crore INR (c. $200 billion) prior to demonetisation to c. 34 lakh-crore INR (c. $400 billion) in 2023
2. ATM (cash machine) withdrawals are also up; there has been a growth of 200%+ in India in 7 years (post demonetisation and the introduction of UPI)

And interestingly this phenomenon isn’t isolated to India. Even China has seen a rise in CIC, and one could point to an expansion in GDP or inflation as reasons. However, while ‘CIC to GDP’ ratio in India is up from c. 10% in 2017 to 13% in 2022, the ratio is down from c. 10.5% to c. 8.8% in China.

An HSBC research report suggests that while inflation is partly the reason for this (demand for cash-in-hand has risen to meet regular expenses, especially in rural areas), they believe distress in India’s informal economy is the major contributing factor. With setbacks in recent years (including the pandemic), the sector they say has been pushed towards cash-based activities, especially those that fall outside the tax net.

So, what makes Cash tick even today?

a) Access; elderly folks, low-income and rural households tend to rely on cash

• Lack of access to smart phones and internet is a big factor
• Lack of familiarity and digital literacy is another

b) Privacy, including for illegitimate activity

• Some folks prefer confidentiality when it comes to certain purchases (e.g., cigarettes, wine) and avoid any records on their bank statements
• At the other end of the spectrum, some people still insist on cash for part or the full value of transactions (like real estate) to avoid taxes (although this I understand is on the decline based on sources in the sector)

c) It’s ‘Always On’; Technical glitches, internet access issues or phone charge can come in the way of a digital payment, while cash has no such issue

d) Cheap and Convenient

• When it comes to certain low-value transactions, cash still reigns due to costs involved (e.g., the barber shop I went to in Edinburgh insisted on cash-only)
• Some transactions feel more natural with cash; imagine tipping a valet who brings your car and then has to show a QR code (it’s just not the same)

e) It feels 'Personal'; people feel comfortable that they can see and feel cash in their hands, they trust the virtual handshake that signifies a cash payment

Can there be a cash-less society?

There isn’t one yet, but Sweden comes closest. It has been the poster child for the idea of a cashless society.

Sweden has historically been on the forefront when it comes to payments. It was the first European country to issue bank notes in the 17th century (notes were in use in Asia prior to that). It was also amongst the first to install an ATM or cash machine (in fact, exactly a week after the first one came up in the UK in the mid 20th century). Even today, some of the best known payments companies globally (e.g., Klarna, iZettle) are from Sweden.

In the last 15 years, a series of federal measures were introduced to reduce crime (following a spate of robberies) and tax evasion, in-turn leading to a push towards digital payments.

In 2007, a substantial tax deduction for purchase of household services, such as cleaning, was introduced. In 2008, a similar tax deduction for services related to house repairs and maintenance was introduced. The objective was to reduce undeclared work.?

In 2010, it became mandatory for firms selling goods or services in return for cash to have a certified cash register and to offer the customer a receipt. Also, the Swedish Tax Agency was allowed to conduct more supervision and inspections.

Between 2012 and 2017, during two intervals, the Riksbank (Swedish central bank) conducted a changeover of banknotes and coins. The window for exchanging old notes for new ones was short, only nine months.

In 2012, Sweden’s six largest banks came together to create an instant payment system called Swish. It is an app based payment method which links the user's mobile phone to their bank account. Users can make P2P (person to person) money transfers and pay in-store, either by entering the payee (receiver) and amount or scanning a QR code.

Now more than a decade on, these developments have transformed the landscape:

• In a population of c. 10 million, over 80% use Swish today
• Nearly everyone in Sweden has a debit card
• Cash transactions have fallen, and CIC (cash in circulation) is down from SEK 100 billion in 2007 to SEK 45 billion a decade later
• Cash accounts for c. 2% of value and < 10% of volume of total transactions

A tech savvy society and a forward thinking government helped shape this transformation. Some unique laws helped too:

• Merchants are allowed to refuse cash or mandate card-only payments in their stores (unlike other markets, even in Europe)
• Kids as young as 7 are allowed to own bank cards, shaping an early experience of payments very different from using cash

While these developments have been broadly embraced, it has not been without pushback. Some of the issues cited include:

There is a digital divide; A cashless society can shut out a segment of the population (e.g., elderly folks, refugees). An example I came across was related to buying bus tickets where people were expected to buy using Swish or a card. While this is handy for those accustomed to using smartphones, those with an old school phone or without a phone at all will struggle

Digital payments can fail; technical glitches aren’t unavoidable, an example being the entire Swish network going down in 2022

New security concerns are emerging; while carrying cash has its own security risks, digital payments have led to new forms of cyber crime and theft involving money, data and identity

Meanwhile there has been other innovation globally, which may further spur a move away from cash

As I mentioned earlier, penetration of digital payments is correlated to penetration of bank account, cards, smart phone and the internet (+ digital literacy).

1. Offline central bank digital currencies (CBDC); Several markets, including India, are exploring CBDC’s. Design considerations include limiting the internet dependency (either for short time periods or for small value payments) for payments via CBDC. Some ideas include on-device wallets or hardware like cards which can make contactless (via NFC or near-field communication technology), or even sound based payments. The other advantage of a CBDC is that your money is from / with the central bank rather than with a commercial bank (a trait similar to cash)
2. Using Biometrics - Face Pay

Toni Cowan-Brown (co-host of ‘Another Podcast’) shared a video of buying merchandise at Formula 1 Miami using her face via an innovative solution from J.P. 摩根

家乐福 (a leading French retail group) introduced a similar feature in a couple of their stores in the UAE where you could pay for all your shopping by simply smiling at a payment terminal instead of reaching for the card or phone (enrolment happens prior to coming to the store)

3. Using Biometrics - Palm Pay; While the above Face Pay technology could be extended to palms, some companies and consumers have gone a step deeper. Several Swedes (c. 4000 per a report a few years back) have implanted microchips which can store different kinds of data (from ID to door-opening blips, train tickets and even bank cards). This makes it possible to pay by simply waving the hand?

4. Using feature (or non-smart) phones; Closer home, the National Payments Corporation of India (NPCI) launched the 'UPI 123PAY' service so that UPI payments can be made on feature phones utilising interactive voice response systems, missed calls or proximity sound-based payments.

5. And then there are interesting companies like Crunchfish AB , which are pushing the boundaries by conceptualising digital payments without the need for phones, internet or even connectivity to core banking systems. (No surprises, they are a Swedish company).

Some of these ideas may seem fanciful or even dystopian, however the general direction of travel is clear. Over lives are increasingly becoming digital and so are payments. However cash still has a role to play, so let's protect it where it makes sense or replace it with solutions that don't leave some people behind. We also need to take into account an evolving world with risks such as cyber crime, war and natural disasters where we need a fail-safe for our payment systems (be that cash or something else).

I asked a friend where he uses cash these days. He shared a recent incident at the petrol pump (gas station). The pump attendant filled petrol and then displayed the QR code to collect the payment. My friend took out his phone to scan the code, and as he was about to enter the pin the phone battery ran out. He wasn't carrying his wallet so he was suddenly helpless.

Thankfully then, he spotted Gandhi smiling.. there was some cash in the car!

I hope you enjoyed reading this, please do share your thoughts and insights. In case of any factual inaccuracies, kindly let me know.