Introduction – Cash, wrongfully labeled pejorative.
Being in Fintech, you can’t help but notice that the world “cash” has become somewhat of a pejorative. When speaking with people in tech or finance you will often hear the sentiments that credit cards, payment application, and mobile wallets, are all clearly superior to cash! Free of germs, quick, convenient, and dis-incentivize physical theft. Unlike physical cash notes: dirty, cocaine-laced, physical-relics of a time long passed, surely only used by tax evaders, smugglers, and terrorists!
Despite all this ongoing cash bashing, the volume of notes and coins in the world is actually on the rise. And the importance of paper notes is best shown by MasterCard’s consumer research, which points out that 85% of consumer payments globally, are made in cash.
At this point, everyone is familiar with the negative connotations associated with physical cash, and although I do believe that cash will be eradicated within my lifetime, the transition into a world where money is purely digital, needs to be carefully managed by both consumers and regulators. If done carelessly, there can be catastrophic consequences for the security, stability, and financial inclusion of a nation, and its citizens.
In this article I aim to argue exactly why governments, banks, and consumers should be very careful in replacing analog cash, for its digital counterpart. With the most optimal state being a global financial infrastructure that is omni-channel, until digital infrastructure becomes more resilient.
Paper cash dampens the damage to local commerce during times of network outage.
Cash is such a familiar and established part of our daily lives, that consumers, banks, and governments have taken its unique advantages for granted, mainly because it serves as the backbone for a nation’s financial infrastructure, its analog nature making the financial infrastructure resilient against network outages. A former head of Interpol (an organization that you would expect to be in favour of traceable digital money), Bjorn Eriksson is an unapologetic champion of the cash economy for this very reason.
If we speed towards a world where all money is digital, and something such as a power outage, software malfunction, or human error disturbs these digital systems. (This has happened with increasing frequency. Just type into Google “payment network down). Without cash as an adopted option, in scenarios such as these, commerce cannot take place. Of course, this argument does not take into consideration a foreign malicious actor.
If you’ve had the pleasure of living in Europe during the last five hundred years, you would have occasionally heard about stronger nations taking advantage and invading their weaker counterparts. Historically this meant mobilizing an army and occupying foreign land. In this day and age when a foreign incumbent attacks your cashless-ass, all they have to do to halt commerce is take down your network infrastructure.
Having cash payment as a commercial option and not needing to use it is better than not-having cash as an option and needing to use it. In today’s world where pockets of political instability and state-sponsored cyber warfare exist, physical cash is a must-have analog system as an emergency generator for public commerce. The push to fully phase out cash in developed nations would have to come after government, business, and individuals have access to an anti-fragile network infrastructure.
Perhaps I will discuss how to make networking, and communications infrastructure anti-fragile in a later article.
Cash commerce prevents predatory data harvesting, data loss, and its consequences.
In 2018, the financial sector uneasily looked on as details regarding Facebook’s data scandal involving Cambridge Analytica came to light. Uneasily, because the financial sector knows that they are also vulnerable to losing customer data, with potentially far greater consequences to society.
The data trail that digital commerce leaves behind is a goldmine waiting to be hacked by external parties, or leaked by internal ones. Breaches will eventually occur, whether accidental or deliberate. Even the world’s largest banks lose their customer data on an annual basis (simply google news “bank data breach”). Currently, the best way to prevent customer data loss, is to not record the data at all, and cash commerce allows for this.
Fully digitized and trackable commerce data is a double edged sword. It allows businesses to optimize pricing and processes, but this form of optimization tends to skew towards increasing business profits, instead of adding customer value. And in industries such as loans and insurance, there is a thin line between optimizing for profits and predatory behaviour towards consumers.
Data loss cannot be prevented. And companies that collect and store customer data must do so in an encrypted manner. So even if the data is stolen, the attackers won’t be able to use that data for malicious purposes. Until these kinds of encryption standards are widely adopted, cash plays a big part in protecting consumers from data harvesting, loss, and its consequences.
Paper cash must be phased out voluntarily by the consumer, everything else breeds distrust, and grows the informal economy.
The movement towards digital money has be a bottom-up organic shift. Meaning the change from physical cash to its digital analog has to be done voluntarily by the consumers. Assuming that not all participants in the cash economy are drug-trafficking terrorists. One has to ask why so many, even those in developed, economic-powerhouses such as Germany, staunchly insist on conducting commerce with cash.
Economists have differing opinions on how much low interest rates, sluggish wage growth, or the rising cost of living contribute to the use of cash. But all economists agree that the distrust of financial institutions and big businesses are at the forefront of this phenomena. This is why the phasing-out of cash must be done voluntarily by the consumer, if the process is perceived to be coerced by government or institutions, it will only breed distrust and drive the growth of the informal economy. Ironically, this is the opposite of the effect that regulators strive for when aiming to reduce cash usage.
In 2017, India in a controversial move, banned certain high denomination cash notes. Initially, this succeeded in boosting personal income tax collection by over 42 per cent, but side effects have been suboptimal. Within two quarters India’s economics growth fell to three year lows. Hopes for the adoption of mobile wallets and debit card also failed, because within the year, cash supplies crept up again.
There are dozens of examples in the last decade where initiatives that aim to phase-out cash have failed due to perceived coercion by the consumers. In some cases even leading to protests and civil unrest. We can also find examples of Sweden and China, where cashless commerce gained incredible adoption, all of it driven by the willing consumer.
Conclusion – Don’t Go Fully Digital If Digital Is Not Always Reliable
There is no arguing that with technical advancement. The world has become more productive and citizens have better outcomes. This dependence on digital has also made our economy very vulnerable to any forms of network or electricity outages.
In software development, a key component of writing good software is compartmentalizing your software into individual chunks of code that function independently. This process makes your software more resilient to any individual compartment failure, which also makes it easy to debug, and upgrade.
Xanpool believes that a nation’s economy should be viewed in the same way. And that a nation’s infrastructure, which supports its economy, needs to be compartmentalized, so that inaccessibility of any single compartment does not halt the entire economy.
Governments, being in the business of protecting its citizens, should therefore also err on the side of caution, and not restrict the methods of commerce to merely the digital ones. Doing otherwise puts a nation and its citizens at risk from not only malicious foreign parties, but also cyber criminals, and data carnivores that only seek profit.