What is a Cashless Economy?

INTRODUCTION

The introduction of electronic banking, an online transactions and mobile banking has paved way for new era of development where the use and demand of physical cash is gradually declining.

It is a situation where there is little or very low cash flow in a given society, thus every other purchases and transactions will be made by electronic channels. It is a society in which purchases of goods and services are made by credit card or electronic funds transferral rather than with cash or cheques. It is also called as electronic banking.
The Electronic channels are direct debit, electronic funds transfer, mobile payments, multi-functional ATM's, electronic clearing, payment systems such as Immediate Payment Service (IMPS), national electronic funds transfer and real time gross settlement and internet banking.

HISTORY OF TRANSACTIONS

Since the inception of humanity, various payment methods have been used to purchase goods and services. Three Methods have been introduced so far

1. Barter System
2. Money System
3. Electronic System

1. Barter System:

The trade by barter method of transaction has been the foundation for the introduction of money and coins to solve the problem of double coincidence of wants and divisibility faced by trade by barter.

It's old method of exchange and has been used for centuries and long before money was invented. People use to exchange goods and services for other services and goods in return.

2. Money/Coins System:

• Coins as Medium of Exchange

The use of money/coins was introduced after the use of barter method in the Seventh Century, and it has solved various challenges associated with transactions and exchange via barter system. In the history of money, the arrival of banks brought in the need for paper currency. Banks had a limited supply of gold and silver and realized that their lending capacity was constrained by this. Hence, they started issuing paper notes in excess of their reserves. This was followed by the governments printing notes that were redeemable for gold and silver. But they printed notes in excess of their reserves. 
The problem was when people lost confidence in the paper notes and tried to redeem them for gold and silver, the system collapsed, for example, in Germany after the World War I.

This phenomenon of people losing faith in paper money has been repeated often. Whenever governments have printed more currency than reserves, the value of the currency has depreciated. Therefore the use of money as a medium of exchange has its own challenges and disadvantages and this cash-carrying can be further replaced with a better payment system-the cashless policy of any economy.

3. Electronic System:

This system got introduced in Twentieth Century. In 1983, a research paper by David Chaum introduced the idea of digital cash. In 1990, he founded Digi-Cash, an electronic cash company, in Amsterdam to commercialize the ideas in his research.

Electronic money is a digital equivalent of cash, stored on an electronic device or remotely at a server where users store relatively small amounts of money on their payment card or other smart cards, to use for making small payments.

Cash economy is not the complete absence of cash; it is an economic setting in which goods and services are bought and paid for through electronic media. Cash-based economy is one in which day-to-day payment and business activities are predominantly transacted in physical notes. On the other hand, cashless society refers to where physical cash circulating in the economy is minimized while other forms of electronic-based payments are high. In other words, cashless economy is a combination of the cash-based and electronic payment system with the latter exceeding the former in terms of utilization.

IMPACTS OF CASHLESS ECONOMY

The main objective of policy makers is to transform an economy to cashless mode in order to examine the impact on

• economic growth and development of any country;

• various challenges associated with the implication of cashless policy;

• how the cashless policy and other monetary policies can be managed for contribution to the better economy.

Above impacts can be achieved and can help in reducing crime rates as well as boosting an economy with electronic transactions positively but the other goals like inflation cannot be fulfilled by just leading cash-carry economy to cashless.

COUNTRIES REGULATING CASHLESS ECONOMY

Cash really is still king, but a few countries are a step ahead of the rest in toppling its throne. Given that the cost of handling cash is high, it is in the interest of governments, banks and businesses to push for the change towards cashless. In some countries, effective policies have made a difference, whereas in others, it is thanks to consumers being more open to using mobile or plastic payments. Here's a look at some countries that are really making a move toward becoming cashless:

Sweden

Cash transactions are down to just 3% of the national economy (compared to nine per cent in the Euro-zone and seven per cent in the US); three out of four of Sweden's largest banks are phasing out the manual handling of cash in bank branches.

Sweden is probably the closest developed country to achieving a cashless society.

 Norway

Within the Scandinavian region,Norway is also making the transition to cashless, with approximately 11% of the population not carrying cash at all.

Somalialand

Though one of Africa's poorest countries, a mobile revolution has created an informal electronic banking system with more efficiency and convenience than many far more developed countries in the world. Cash is disappearing and there is no need for credit cards because even street vendors accept payments by mobile phones. A survey in 2012 found that the average customer made 34 transactions per month on their mobile phone is higher than almost anywhere in the world.

Kenya

The biggest African user of mobile money is Kenya, where there are 15 million subscribers to M-Pesa. Though originally a method to send money home from cities to families in rural areas, M-Pesa is widely used for many things from receiving salaries, to paying bills and school fees, slowly making cash obsolete.

Canada

As of January 1, 2013, no more new Canadian currency is being printed.Why?

Firstly, there has been a decrease in demand for new bills. Secondly, the plastic bills have a longer life expectancy. The biggest reason: a push toward driving a cashless future. According to a poll by PayPal Canada, 56% of Canadians already would prefer to use a digital wallet than cash. Also, Canada is a world leader in plastic payment, where payment by credit, debit and bank cards is almost 70% compared to a world average of 40%.

South Korea

Starting out as a very cash dependent society, the Korean government has successfully put into place policies to encourage cashless behaviour which many other Asian countries can learn from. For example, South Korea introduced a preferential 40% to 25% VAT treatment for consumers who pay with cards, moving the share of cash from  within four years from 2002 to 2006. South Korea was touted as the leading Asian nation in the Economist Intelligence Unit's E-Payments Adoption Ranking.

Some other top contenders include:

Belgium (where an estimated 93% of the value of consumer spend was cashless),

France (92%), UK (89%), Australia (86%), Netherlands (85%), Hong Kong (75%) as countries where cashless payments are nearly ubiquitous, and attributes the broad movement away from cash to the uptake of new cashless payment technologies such as mobile, EMV Chip and a modern payments infrastructure.

Countries such as the United States (where an estimated 80% of the value of consumer spend was cashless) and Singapore (69%) are approaching the “tipping point” to becoming nearly cashless, and remaining cash use is largely a product of consumer habit. China (where an estimated 55% of the value of consumer spend was cashless) and the United Arab Emirates (26%) are among a group of countries where the respective governments have taken strong leadership in promoting electronic payments to support their social and economic goals.

Conversely, emerging economies such as Indonesia (31%), Russia (31%), Japan (30%) and Egypt (7%) are just embarking on their cashless journey, but are in many cases changing cash share of payments at a much faster pace than developed nations.

Having relatively recently put all the elements of a modern consumer payments infrastructure in place, countries such as Brazil (57%), Poland (41%) and South Africa (43%) are now in a transitioning stage, and are quickly shifting share away from cash.

India uses too much cash for transactions. The ratio of cash to gross domestic product is one of the highest in the world—12.42% in 2014, compared with 9.47% in China or 4% in Brazil. Both India as well as Pakistan has the potential to transform into a cashless economy by shifting from conventional mode of cash payments to electronic ones.

CONCLUSION:

Before the emergence of modern banking system, banking operation was manually done which lead to a slowdown in settlement of transactions. This manual system involves posting transactions from one ledger to another with human hands. The economy worldwide is therefore leading to cashless rather than cash-carry. Cashless economy is a step ahead to a better n mod economy where give and take will be cashless. This will help to boost growth rate and development of economies worldwide.

Reference

• Daniel, D. G. Swartz, and A. L. Fermar. Economics of a Cashless Society: An Analysis of Costs and Benefits of Payment Instruments. Brooking's Joint Centre. (2004).

Links

• https://en.wikipedia.org/
• http://www.totalpayments.org/
• http://www.livemint.com/
• http://www.academia.edu/
• http://newsroom.mastercard.com/