Why our looming cashless society will come at a devastating cost

Peter Taylor,
August 2, 2016
Herald Sun
MAKE no mistake. We are moving at lightning speed towards a cashless society.
Within a generation, notes and coins will almost certainly be redundant — not just in practice but made so by law.
Shops and other businesses will be banned from accepting them. Banks will no longer distribute them.
Physical currency will be consigned to history, gathering dust on the shelves of collectors’ shops and in the recesses of our couches.
And the consequences will at once be brilliant and grave.
The forces at play are overwhelming and the statistics illuminating.
Thirteen years ago, the Reserve Bank started publishing comprehensive figures on the use of debit cards in Australia.
Then, we were spending an average of $787 for every man, woman and child each month using debit and credit cards.
At the same time, we were withdrawing about $600 every month in cash, using debit cards at automatic teller machines and in stores, and through cash advances on credit cards.
In 2008, the amount of cash we withdrew each month peaked at almost $700. It has since fallen every year and is now 15 per cent below that apex.
All the while, our spending on debit and credit cards has climbed relentlessly.
Each of us now spends an average of $1824 every month on plastic — $3.08 for every $1 in cash that we withdraw.
Cash withdrawals are dwindling.
Collectively, we make purchases using debit and credit accounts 543 million times each month, or 22.8 times for every woman, man and child.
Elsewhere, most notably in the Nordic states, cash payments have dwindled so far that the forces are marshalling behind a move to a cash-free society. It is no longer science fiction.
The biggest bank in Norway has called for an end to physical currency, while legions of branches there and across Scandinavia have ceased handling it over the counter.
Here, there is no masterplan in our retreat from cash. It is simply a product of market forces.
Flush with riches from Australia’s debt-fuelled housing boom, our banks have invested heavily in innovation in pursuit of a competitive advantage.
Consumers have responded with gusto.
They have embraced technology such as tap-and-go card payment systems that are mostly faster at the register than an exchange of notes and coins.
Their appetites whet, young adults in particular are at the vanguard of the next wave: tap-to-pay smartphone and wearable-chip technology that will send cards the way of cash.
For the banks, the great treasure is the information they glean when we tap, swipe or click to buy.
Each time we shun cash in favour of an electronic payment, we hand over a thread of information about ourselves.
Little by little, it becomes a tapestry of astounding detail: Do we prefer Coles or Aldi? Do we holiday in Portarlington or Port Douglas? Are we gym junkies or couch potatoes? Do our children attend public or private schools?
In the age of personalised digital marketing, this information has immeasurable value.
Consumers are rapidly adopting new cashless payment options.
And as we veer into an era where companies could use it to discriminate — where health funds, for example, might theoretically scrutinise the dietary and exercise habits of prospective customers — there are also frightening ramifications.
But of far greater significance are the consequences for the broader economy.
To be clear, there will be profound social and economic benefits when we abandon cash by decree.
Among the biggest beneficiaries will be the banks.
Overnight, they will no longer need staff — nor the associated equipment, space, infrastructure and contractors — to count, sort, secure and transport wads of polymer and bags of metal.
Likewise, they will be able to strike out the expense of stocking and maintaining a network of teller machines that currently numbers about 31,500 nationwide.
The government will no longer have to concern itself with printing and minting, freeing up resources to focus on the mechanics of central banking and supervision of the retail banks.
Retailers, like the banks, will be liberated from the shackles of tills and floats, and all the security and procedural concerns that go with them.
And the complexion of street and organised crime will change beyond recognition — probably for the better — limited to fewer people of far more sophisticated means.
Put together, it is an alluring proposition.
Then comes the cost.
Our gallop towards a cashless society comes at an intriguing time for the global economy.
Negative interest rates — once the stuff of purely theoretical economics — are inching their way into the mainstream.
Since 2014, the Swiss, Swedish, Danish, Japanese and European central banks have all adopted negative rates, in varying ways but to the same end. Retail banks must pay to park their cash.
The headquarters of the European Central Bank — which already has negative interest rates — in Frankfurt, Germany.
In Britain, Royal Bank of Scotland and offshoot NatWest last week warned that if the cash rate were to fall, they might charge interest on deposits from business customers. Consumers, of course, are next in line.
The interest rate arc across the developed world over the past generation suggests that this is our fate: be it two years or 20, negative interest rates beckon for Australia too.
The fact that we have one of the highest cash rates in the developed world is academic. By any measure of history, 1.75 per cent — 1.5 per cent if the Reserve Bank moves today — is wafer thin.
To its credit, our central bank has broached the idea that it may loosely adopt a 1 per cent “floor”.
At this point, it would unleash radical measures already taken in other stagnating economies — a digital money-printing program, for example, to depress the Australian dollar and rekindle inflation.
But this would almost certainly be staving off the inevitable. Where the world’s central banking cohort goes, we will surely, ultimately, follow.
There is, though, one insurmountable barrier to a cash rate that is deeply negative for a sustained period.
That barrier is cash.
Tap trap: How cashless costs you
A central bank by all means can adopt a negative rate, charging retail banks to hold their surplus funds on deposit.
But in doing so, it is goading them to set aside those funds in the form of notes and coins and to lock them away, avoiding an unnecessary charge.
Likewise, a retail bank saddled with a negative cash rate could attempt to pass it on to savers.
But in their hordes, customers would up and leave, withdrawing their cash and locking it up at home.
Unless they no longer could.
Unless there were no longer notes and coins to withdraw, and they were confined to a digital ecosystem, free to move their money between banks but not away from them.
They might, of course, look to the fringe world of cryptocurrencies and stores of wealth in the black market. Or they might try their luck in gold or other asset classes.
But in “cash”, they would have no choice other than paying the bank for the privilege of minding their money, watching their funds eroded for having the gall to save rather than spend.
The death knell is sounding for ATMs.
Never mind concerns about privacy or the dark art of personalised marketing. As we career towards a cashless society, this is the great danger.
There is a legitimate argument that a negative rate lever would, economically speaking, be helpful.
In empowering our central bank to push interest rates below zero, we would, after all, be adding to its arsenal.
The problem is that this would further entrench an inflation-targeting program of dubious merit in the 21st century.
Over the past generation, our financial system has become dramatically skewed to the short-term interests of banks and governments.
Each relies on a growing debt pile across households and businesses, not to mention the public sector, to respectively fuel their earnings and the economy.
We have cut interest rates time and again in the name of bolstering the economy because benign inflation levels allow it, and now because deflationary pressures demand it.
And each time, we have rewarded borrowers at the expense of savers — most troublingly our retirees, and young adults saving for a home loan deposit as the housing market moves further from their grasp.
When we step into the brave new world of negative interest rates, this imbalance will become more and more pronounced.
But we can only do so decisively once cash is off the table.
Will we tolerate this?
Arguably, we’ve already given our consent. And we keep giving it, 543 million times every month when we tap, swipe and click to pay.
Let us hope we are doing it with our eyes open. It may be convenient, but it will come at a steep price.
Peter Taylor is the Herald Sun business editor.