Going Cashless - The Cost and the Benefit

As my longer-term readers have noticed, I've drawn a direct line between negative interest rates and the move toward a cashless economy.  While I don't want to sound like a tin foil hat-wearing conspiracy nut, I firmly believe that trial balloons are being floated to set us up for what lies ahead, most particularly, the example of Sweden as you can see in this Credit Suisse note regarding Sweden's new less cash reality.  In Sweden, even God appears to be in on the idea of a cashless society; church collection is also payable using plastic and this is what has happened to the average value of Swedish banknotes in circulation since 2011:

A recent analysis by Harvard Business Review looks at which nations would benefit the most from going cashless and which nations are the most prepared to make that leap.  The authors used the following to complete their assessment:

1.) the costs to the banking system to maintain ATMs (154 nations)

2.) create a score for the cost of cash to consumers including transport to and from ATMs and ATM fees (72 nations)

3.) calculate the "tax gap" which is an estimate of the proportion of money owed to the government but which goes uncollected due to unreported and underreported cash transactions

Let's look at a map which shows the cost of getting cash with high cost countries in orange, medium cost countries in yellow and low cost countries in blue:

Let's look at each factor in turn:

1.) The costs to banks of maintaining ATMs tends to be highest in developing parts of the world where infrastructure is lacking and security is an issue (i.e. sub-Saharan Africa) and in geographically large and sparsely populated nations (i.e. Canada and Russia).

2.) The cost of actually getting cash is highest in some of the world's most populous and densely populated nations including China, Japan, the United States and various European nations.

3.) The tax gap tends to be highest in the developing world because they tend to have large shadow economies that function using cash.  The authors note that some nations have shadow economies that are as large as 30 to 44 percent of GDP and, in the case of India, the tax gap could be up to two-thirds of all taxes owing.  

The authors note that their analysis shows that the following countries are among those that have the "greatest potential for unlocking value by policy and innovation-led migration to a cashless society:

1.) United States

2.) Japan

3.) China

4.) France

5.) Germany

For some reason, Canada doesn't even appear on their "digital cash readiness scale", unlike Estonia, Slovenia and Kenya.  It's also interesting to note that these five nations are the five largest economies in the world.  In the case of the United States, a 2013 study estimated that it costs $200 billion to keep cash in circulation on an annual basis as shown on this diagram which breaks down the annual cost of cash by the cost to individual stakeholders:

  

How quickly could "the system" wean us off of our current use of cash?  The transition from cash to less cash has happened very quickly in some cases; in China, in 2009, over two-thirds of all e-commerce transactions  (i.e. online shopping options including Alibaba Group and more familiar names like Walmart and Best Buy) still received payment as cash-on-delivery.  By 2014, 70 percent of payments were electronic with 55 percent of China's smartphone users making mobile payments compared to only 12 percent in the United States.  China's government has granted over 200 licenses that allow companies to set up electronic payment systems, currently dominated by AliPay, TenPay, Union Pay and 99bill which account for 85.5 percent of electronic wallets in China (2014 data).  This suggests conversion from cash to cashlessness (or less cash) could occur relatively rapidly.

The study by the Harvard Business Review is a central banker's dream come true.  By emphasizing the cost savings of a cashless economy, particularly an American economy that will save $200 billion annually with $43 billion of that going to households, central bankers may find it far easier to get non-thinkers to adopt both a negative interest rate policy and a fully electronic money policy simultaneously than it would be if they just forced it down our throats.