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World Changing Ideas

What Happens When We Become A Cashless Society?

Imagine a future where everything is seamlessly paid for via your phone. It's a beautiful vision—with some dangerous unintended consequences.

Illustration: Eric Palma for Fast Company

The U.S. government didn’t issue banknotes until 1862. Before that, people paid for goods and services with a mix of government-minted coins and currencies issued by private banks. And now cash is on its way out, accounting for just 40% of payments in 2012 and dropping. There are many benefits to removing cash from the economy, such as eliminating black markets and allowing more easy monetary policy. But there are also concerns when every single transaction can be monitored, examined, or manipulated. Regardless of where you fall, though, one thing is clear: As online shopping becomes yet more prevalent, and prepaid credit cards take the place of more and more low-value cash transactions, cash is well on its way to becoming obsolete.

Privacy In A Cashless World

Governments and their agencies love electronic transactions. Without cash, it’s much harder to hide money from the tax man. The police and government agencies like the NSA love the trackable records that cashless payments leave behind. Last year, France and Spain both enacted laws that limit cash transactions. In Francem it is now illegal to use cash for anything more than 1,000 euros (around $1,080). In Germany, economist Peter Bofinger supports a ban on cash, calling it an anachronism. "The markets for undeclared work and drugs could be dried out," writes Germany’s Der Spiegel, "and central banks would find it easier to enforce their monetary policies."

The promise is that banning cash would end black markets, but for honest citizens, the end of paper cash brings many unsettling downsides. Credit card transactions are already trackable, and electronic cash could bring that lack of anonymity to every single transaction you make.

While anonymous digital cash is technically possible, governments are unlikely to pass up the chance to have all currencies tracked as they move through the system (like with credit card transactions), or with new digital currency that carries a record of its own history along with it.

Once this information exists, it will become a target of government agencies such as the police and intelligence services and trafficked to insurance companies, tax collectors, fraud squads, and even marketers. If, as Ben Dyson and Graham Hodgson suggest in their paper Digital Cash, digital cash were issued by a federal or government-run bank and then administered by private agencies, then you would have to read the small print in your contract to see just who your information might be sold to when you bought anything.

"When all our payment transactions are tracked," says Rainey Reitman, activism director at the Electronic Frontiers Foundation, "it creates a trove of data we have no control over. It's easy to imagine a daring divorce lawyer or a government agent trying to gain access to our financial history to try to build a story about who we are."

Rich And Poor

The rich may be better equipped to buy themselves privacy, says Reitman, "whether that's setting up corporate entities for their transactions or making political donations through PACs. However, for the average person trying to use a traditional bank account to process a payment online, there's no anonymity."

For poorer people, cashless transactions just aren’t practical. Prepaid credit cards are one alternative, as are vouchers that can be bought in grocery stores for cash and used to pay for iTunes, Amazon, Spotify, and other online services.

"There are many people who are unbanked and cannot receive lines of credit for a whole range of reasons," says Reitman, "and a ban on cash would particularly impact the unbanked community."

Around 8% of the U.S. population remains unbanked, and 20% of households are underbanked, meaning that "they had a bank account but also used alternative financial services (AFS) outside of the banking system," according to figures from the 2013 FDIC national survey. And while the U.S. unbanked population remains more or less constant, worldwide the numbers dropped by 20% (to 2 billion adults) between 2011 and 2014, according to the World Bank, as 700 million people gained access to financial institutions.

In 2014, according to a Gallup poll, 29% of Americans didn’t have a credit card, and that figure is rising, in part because millennials don’t like them. Bankrate published figures putting the number of millennials without a "major" credit card at 63% (this may be in part thanks to the CARD Act of 2009, which makes it harder for under-21s to get a credit card). The main alternative for things like online shopping is prepaid cards, but they are burdened by high fees, further punishing poorer people. (Although the situation is improving.)

In Sweden, a country on the front lines of cash elimination, the low-income population has already adapted to the cashless present. Homeless people carry credit card readers supplied by the charitable Situation Stockholm magazine. The New York Times spoke to 65-year-old Stefan Wikberg, who now has a home and sells Situation Stockholm to make a living. "Now people can’t get away," he told the New York Times. "When they say, ‘I don’t have change,’ I tell them they can pay with card or even by SMS." Wikberg says his sales have increased by 30% since he started taking cards two years earlier.

"We didn’t know how it would turn out, or whether people would be reluctant to give their credit card information to a homeless person," said Situation Stockholm’s Pia Stolt in a news report, "but the results have been great—vendors’ sales are up 59%."

Alternate Currencies

If government-issued cash does eventually disappear, alternative currencies may take its place. These nonofficial payment systems are already thriving around the world, from the TEM (Alternative Monetary Unit) in Greece to the Demi, where Canadians cut $20 bills in half to form a new currency. And then there are less official alternate currencies, like Tide detergent, which is stolen from convenience stores and used to buy drugs.

Alternate currencies have many advantages. One is that they can stimulate the local economy. Greece’s TEM, for instance, which is used in the city of Volos, can be used to pay for goods and services, but as it is only accepted in the city, it has to be spent there, too. And because the rules state that nobody can hold more than 1,200 TEMs, or owe more than 300, it can’t be hoarded like regular money. You have to spend it in order to accept more, which keeps the cash flowing through local businesses.

Ethical Money

The kinds of rules that are applied to hyper-local currencies could also be useful on a wider scale. When money is all electronic, instead of hard-to-track paper, you can experiment with innovations in monetary policy far more easily than when a lot of the money in the system exists as cash in people's pockets. For instance, all money could be set to automatically devalue itself slowly, encouraging its owners to spend it. This makes huge cash hoards less useful, and—like the Greek TEM’s ceiling—keep money flowing. Electronic cash also allows the spender to attach certain caveats to their purchases, like how we can already use the Creative Commons to say how our copyrighted works can be used. For instance, you could earmark your electronic cash as ethical, so it could only be spent at other ethical places down the line. This may devalue the "cash," as it becomes less useful, but you would assume the extra cost up front, similar to how we already pay a premium for ethically produced foods.

Or parents could restrict their kid’s allowance to only be spent on wholesome pursuits, like books, or prohibit it from being used in fast-food restaurants.

Sweden

Some of these what-ifs have already been turned into reality. To see how a society might operate without cash, we can look to Sweden, which is almost cashless already. In Stockholm, you don’t need to carry bills or change. You can make donations to your church using a credit card, and give money to a friend using an inter-person payment app called Swish—when splitting a restaurant check, for example. Many banks don’t accept or provide cash in their branches, and payment apps are on the rise.

Swedish banks and businesses have good reason to prefer electronic payments. Stockholm has been a heist capital, with robberies targeting banks and cash-carrying security vans, including the famous Västberga helicopter robbery. But it’s not just the banks that prefer payments that can’t be stolen. Stockholm native Peter Mathsson says that locals rarely use cash. Even the smallest transaction is made with a card. And while Swish is gaining in popularity for person-to-person payments, Mathsson says that phone payments aren’t yet widespread. "Most people have phones that are paid for by their employer," he says. "They want to keep their personal transactions separate." Mathsson is talking about early schemes that billed payments to your cell phone carrier. New options like Apple Pay tie into your credit cards instead, avoiding this problem.

Living experiments like Sweden prove that cash-free living is not only possible, but desirable and potentially advantageous. But like any technological revolution, it’ll be the small details that hold things up.

One could argue that much of the U.S. is already cash free. As a foreigner, when I visit I’m amazed to see people pay for a single cup of coffee with a credit card, often without signing or entering a PIN. People are already happy to operate without cash, and with new options like Apple Pay, which lets you use your iPhone and your fingerprint to pay with better security than an actual card, that trend is likely to accelerate. But as with most other new technology, it will be unevenly distributed. Already, you may choose to shop at Starbucks instead of with the coffee cart on the corner because you don’t have any change. Services like Square, which lets anyone take credit cards with their smartphones and tablets, may let the coffee-cart guy join the game, but that's taking time for full adoption.

The end of cash may seem like fancy thinking, but look at how money has changed since credit and debit cards started to usurp cash. We already route money around with bank transfers enacted from our tablets, we pay for Uber cars with the convenience of a phone app, and we travel abroad without even thinking about buying foreign currency before we go. And PayPal, the original cashless
payment system, turned 18 years old this year.

Cash is already on its way out. The question is how long will it take before it becomes a niche product, like vinyl records and film cameras? Or perhaps it will never die off, but still be used to buy fruit from roadside stalls, or by hipsters who will call it "artisanal money."

Perhaps cash will begin to be seen as low-class, with customer separating by income level. The poor will pay more for the privilege of giving up cash thanks to higher charges, or the lack of a bank account.

"If the government banned cash tomorrow," says the EFF’s Reitman, "I’m certain some people would find a way to continue to exchange goods and services without always using a digital currency. Unfortunately, it would be a lot harder and riskier than cash."

See the rest of the World Changing Ideas Of 2016

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