A pressing issue for both banks and policy makers is what to do about the outdated concept of cash payments. It has long been known that cash is the payment method of choice for criminals and terrorists. To this day, cash is used to launder billions of dollars worth of proceeds from criminal activities every year, and there is very little our authorities can do to stop it. Cash transactions also give central banks and governments less oversight over how and where our money is being spent, denying them valuable economic data that could be used to better manage our economy. Yet for some reason we still allow this antiquated form of payment, even though the alternatives are far more convenient and less costly.
In the 21st century, electronic payments are ubiquitous and widely available, even in the most remote parts of the world. Banks have embraced the internet and allowed their customers to make online payments, and internet access is fast becoming free and universally available. Credit and debit cards now allow customers to seamlessly spend money in multiple currencies while the complex foreign exchange operations are handled in the background. Visa and Mastercard also offer recourse for consumers who have been cheated by retailers, by allowing them to raise chargebacks and get their money back. And as if that’s not enough, mobile payments are now turning our phones into bank cards, making electronic payments more convenient than ever before. Why anyone would want to use cash in this day and age, other than for criminal purposes, is truly puzzling.
There are two fundamental problems with cash. The first is that cash transactions cannot be monitored by governments and banks. This makes it ideal for criminals such as drug cartels and human traffickers who use it to hide their activities from law enforcement. Electronic transactions on the other hand are captured in government databases where they can be flagged as suspicious and used as evidence in prosecutions. The non-traceability of cash also makes it ideal for tax evaders, who choose to simply not declare their cash income.
The second major problem with cash is that it threatens the stability of our financial system. Banks operate in a fractional reserve system that allows them to lend a large percentage of deposits to consumers, businesses and governments. This provides our economy with the capital necessary to grow, and allows consumers to get mortgages and credit cards. When depositors withdraw cash however, this money is removed from the banking system and cannot be lent out. Banks only have so much of their depositors’ money in reserve, so if too many people demand cash, banks will face a serious problem. This is why banks often limit cash withdrawals.
We have to come to terms with the fact that cash is unnecessary for law abiding citizens in this day and age. In a cashless society, many forms of crime and tax evasion will be simply impossible, as every transaction in the world will be monitored by governments and taxed accordingly. Our financial system also faces challenges after the restructuring following the crash of 2007-08, and cash withdrawals are not making things any easier. We need to protect our financial institutions in order to avoid a repeat of the last financial crisis, and outlawing cash would help immensely in this regard. It’s time for us to abandon the prehistoric relic of cash, and bring payments into the 21st century. Fighting it is futile, so let’s embrace a cashless society and focus on evolving our economy for the future of payments for the benefit of all.