Daily Management Review

Why big banks look forward to a cashless society


03/10/2016


Banks are like any other business, but they have a particular position on the market. They permeate every other kind of business, as an intermediate agent in almost every type of transaction, except one: cash. Thus, banks are trying to close the loophole, through the slow deletion of cash from our societies.



Cash is expensive. It is a burden for banks and states. States must produce the currency, which is made quite expensive by the high levels of technology which it contains. The cash must be managed (damaged notes must be replaced, counterfeiting must be tackled) and kept circulating through a large network of agencies and ATMs, at a significant cost. And because cash is used mainly for smaller transactions, rather than large ones which occur mostly through checks and bank transfers, banks tend to see cash as a petty market which yields more trouble than profits.

Cash is also troublesome for banks, because it is both tainted with a shady reputation and worries the authorities. Governments are therefore quick to assume that, where there is cash, there is crime or fraud. The argument according to which cash is a vector towards narco-trafficking, terrorism and organized crime, is often used by governments, regardless of the fact that a huge majority of cash operations are perfectly legal, and carried out by normal, law-abiding citizens. 

Banks are also aware that cash transaction do not boost their profits: they are the cheapest form of transaction (Federal Reserve report, page 58).  So cash transactions brings them few profit, yields no usable data, and generate tedious administrative requests from government agencies.  It is therefore unsurprising that banks dislike cash.

Also within the banks’ environment, numerous players oppose cash: credit card operators, mobile phone network operators, GAFA, chip card producers, online wallet suppliers, etc.  All of these businesses look forward to the disappearance of cash, which remains public’s preferred payment method, but caps their profits.

However, suppressing cash would not be immune from consequence for users. This economic shift would benefit banks and – to some mild extent - governmental institutions more than it would benefit the public.  And it wouldn’t even benefit banks and governmental institutions all that much, in fact.

Governments want increased control over financial circuits, so as to reduce organized crime and tax evasion, mostly. Because a cash payment is a two-party operation, involving no intermediate entities, the government’s controlling and law-enforcement agencies are locked out. But even though computer operations can be traced, criminals know that and didn’t wait long before they transferred petty crime to the online level, using “burner” companies and bank-accounts, which will be abandoned as soon as the crime is committed.  The transfer of funds through bitcoins and other types of crypto-currency will also guarantee high levels of anonymity, as this type of money is transferred peer-to-peer, and doesn’t transit through central banks.  The same can apply to tax evasion, as such practices moved out of the “realm of cash” a long time ago, to circumvent border rules on cash transport.

And banks want the same thing, because whichever part of the economy is left to cash is out of their market. They have therefore been trying to sell and push the idea. According to banks, the cash market is not a profitable one, as cash transport and ATM maintenance represent a significant cost, which is true. However, they often fail to point out that “computerized” currency also has high maintenance costs of its own, as secure financial transfer lines and banking software has a very high cost of its own, even higher than on other markets. A 2012 survey by Deutsche Bank indicated that “Banks’ IT costs equal 7.3% of their revenues, compared to an average of 3.7% across all other industries surveyed”.

In addition, once the money has left their agencies through the ATMs, they no longer have any control of the circuits. Because banking operations always leave a trace on the network, banks are in an exceptional position to gather marketing information and building solid data, which could then be used by themselves or sold. Given that a great many retail transactions occur though cash, this is a blind spot for the banks, which are left oblivious of the data such operation can produce. An entirely cashless market would close that gap.

Although it must be said that banks have indeed been building some traction. Their best success is Sweden, where the proportion of cash has dropped dramatically, even for every-day retail operations. But problems have started occurring (such as slowing down the tourism and entertainment economy). A tourist typically doesn’t have all the accounts set up for his time in the country, nor does he necessarily want to spend the little time he has on account set-ups. In addition, when computer bugs and system break-downs strike, all sales will come to a halt if no cash is available. These potential problems may well slow the trend down. 

One of the country’s main cash actors was even compelled to speak out, regarding the matter.  Jarl Dahlfors, the outgoing chief executive of cash handling firm Loomis in Sweden, says the cashless trend may have gone too far for “unbanked people” such as many elderly, or homeless people. “Do we really want everything we buy to be registered?” he asks. 

Consumers would really suffer from the disappearance of cash. It would no longer have a fall-back solution, in case the network fell. Starting industrialization in remote areas would be impossible before the network infrastructures are set up.  Consumers would no longer have anywhere to hide from data breaches and identity theft. The list is almost endless.

The decrease in cash in our day-to-day lives is not necessarily a good thing, as the banks and online payment operators are trying to convince the public. It will not really benefit states, as it will only strengthen the fraud problem to the online level, but certainly not suppress it. Many financial frauds have occurred on the online level, for many years, and their proportion is on a steep rise.

And it will certainly not benefit the public, as it would deprive it of one transaction method, and the most flexible and free one, not to mention the cultural and societal aspect of money, which embodies a nation’s history and identity. So, to figure out whom this economic shift would benefit the most, it’s best to ask who has been pushing the idea the most. 







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