Why Becoming A Cashless Society Is A Terrible Idea

there are many ways to pay for things credit cards wire transfers frequent flyer points sticks of gum crypto currencies checks if they're still a thing and of course cold hard cash physical cash is one of the easiest ways to instantly and reliably conduct commerce perhaps that's because it's tangible and by and large universally understood as a medium of exchange this is important to understand because the success of any economy is predicated on commerce therefore the need for making transactions as simple as handing over a note is paramount to the success of any nation now this is certainly not news it has been well documented that the ease of transactions within a nation is as big of a determinant of economic success as access to natural resources like oil or natural gas or even a well-educated population fortunately modern financial systems have made spending money extremely easy and a lot of that is by design although amongst all of this cash is still a staple of regular transactions so what would happen if we got rid of it and this is not some obscure hypothetical in fact for a while now society has been pulling back on the use of cash in a very big way just think when was the last time that you paid cash for anything for some of you perhaps it's all the time but for most the ease of tapping a credit card or then mowing some money makes these paper rectangles all but obsolete the decline of cash is not all due to technology however many countries have enacted laws making it much more difficult to use paper currency the australian government for example is expected to make cash transactions of more than ten thousand dollars illegal and the disappearance of cash isn't only affecting my fellow aussies all governments are naturally suspicious of large physical cash deals say you live in america and instead of purchasing your million dollar house with a 30-year mortgage you instead go into the bank with a briefcase full of cash sure it would technically be perfectly legal for you to make such a purchase with paper currency but you better be prepared for a whole lot of questions and probably face an audit so would going completely cashless really be that bad do governments really want to get rid of cash and in our current world of negative interest rates would getting rid of cash hurt people that just want to hold on to their money rather than having to pay a bank a negative interest rate for the privilege of doing so this episode of economics explained was made possible by our fans on patreon if you would like to gain early access to these videos before they're uploaded to youtube as well as participate in our exclusive q a sessions which are now hosted every saturday at 9 00 a.m eastern standard time please consider supporting our channel on patreon.com economics explained for those of you who don't remember the last time you paid cash for anything it's logical to think that a cashless society is just the natural result of technological progression after all we no longer use gold coins or goats to trade with one another so if technology makes it better and easier to do everything electronically then what's the harm in embracing change cash is great but from a consumer's perspective there are far more compelling options consider credit cards for example if your cash gets lost or stolen or destroyed it is gone on the other hand if you lose your credit card you just order another one if it gets stolen you reverse the fraudulent charges and you get all of this while benefiting from the ability to earn rewards like cash back on purchases or frequent flyer points what's more there's no need to be there in person to hand over a credit card like there is with say cash which is particularly important in this day and age after all you can't send physical cash to patreon.com economics explained of course credit cards do have their drawbacks if used irresponsibly and not paid off in full every month they carry extremely high interest rates often well over 30 percent depending on the provider and even for those people that do pay them off in full every month cards may be hurting their finances in a less obvious way a 2018 paper published by the bank of international settlements found that there was a strong correlation between someone's credit card limits and that person's marginal propensity to consume in plain english this means that people are more likely to spend more of their money if they have a big credit card or even worse lots of credit cards but putting debt aside for the moment what are some of the other problems with using a credit card well it's actually right there in the name when you buy anything with a credit card you are paying with credit in other words a promise a promise to the credit card company that you will pay back the sum that was loaned to you on time or if not on time than with interest cash or credit are terms that are often used interchangeably but in reality credit is quite different from cash functionally this is very important in the banking world because free flowing access to credit boosts consumption in the short term normally at the expense of growth in the long term so as for the cashless economy debate credit cards may not necessarily be a perfect substitution fortunately we have debit cards which can only let cardholders access the money that they already have while still offering a lot of the same functionality of credit cards without high interest rates or a destabilizing impact on consumer spending in the debt cycle this hybrid approach if you will combines the best of both worlds the ease and functionality of a card with the reliability of cash problem solved right well not so fast because as it turns out there is one major thorn in the side of all of these services merchant fees so far we've only considered a cashless economy from the perspective of a consumer but of course the supplier is also a very important part of this equation card providers like visa and mastercard make a good portion of their revenue from merchant fees which is a small fee that is charged to the business or merchant on all credit and debit card transactions made to the business and by small we're usually talking around one to two percent which depending on a variety of factors might not actually be small at all for viewers in the united states this merchant fee can be as high as 2.9 percent with an added fee of 30 cents on every single transaction that can be particularly expensive especially for products with low price tags for example say you run a small bakery and sell a cup of coffee for five dollars the 30 cent fee that is charged to your lovely bakery is actually slightly more than double the 2.9 merchant fee or 14 and a half cents so all in the total fee charge to your modest bakery for processing a mere cup of coffee is 44 and a half cents or put another way almost nine percent of the entire purchase price keep in mind that bakery still needs to consider the cost of goods that they are selling plus all of their other expenses like store rent staff wages and utilities as a result businesses pass this merchant fee along to consumers through higher prices in a way this is a credit card company saying to one of its users don't worry it's okay here's a piece of plastic that you can use to borrow money from us interest-free for 30 days 55 days and to incentivize you to do so we will actually reward you with airline points or other cool stuff and don't worry about how we're going to make money because we're actually just going to pass this expense along to the merchant who is in turn going to pass it along to everyone this is a negative externality where otherwise innocent and uninvolved consumers who just want to pay with fair income cash are forced to pay more to cover the expenses of those who are paying on their cards thought of another way this is effectively socializing the cost of credit card rewards points through higher prices at the checkout for everyone if a nation was to uniformly adopt a cash-free economy these merchant fees would not only be more pervasive but also more expensive as these companies would control an oligopoly on exchange so if credit cards and debit cards create their own societal problems due to high transaction fees then perhaps other technologies are the solution and if you've been to china in the past year or so which i hope you haven't you probably agree that technology might be the solution that's because in china making payments digitally has become a cultural norm qr codes are literally everywhere and that's largely due to china's ever ubiquitous smartphone apps wechat and alipay which dominate the payment industry on a scale that is truly unprecedented to put it in perspective credit card payments in the us totaled 4.1 trillion dollars in 2019 whereas in china mobile payments totaled a mind-boggling 41 trillion us dollars or more than 10 times that of the us to give you a real world example of just how widespread mobile payments are in china street performers and even homeless beggars accept wechat pay now obviously china has a larger population than the us which naturally leads to more transactions but even still this should not detract from the scale of this massive digital economic ecosystem magnitude aside these platforms break down many of the barriers that would ordinarily hold back a cashless economy for starters transaction fees are for the most part non-existent and setting up infrastructure for accepting payments doesn't require going through the hoops and hurdles of setting up bulky payment terminals instead it simply means downloading an app to go back to our previous example of running a small bakery we saw that all the payment merchant fees were effectively nine percent of a sale of a purchase price of a five dollar cup of coffee if our hypothetical bakery was located in beijing and we were using wechat the merchant fee would instead be zero dollars adding that 8.9 back to the business all while being a lot easier to set up and get going of course the next question is how do mobile payment companies like wechat pay without any merchant fee income actually generate money to fund this service and that is where things can get a little bit dicey the first strategy is the most benign and that is by tying wechat pay into the entire 10 cent ecosystem it makes it really easy for consumers to make payments on other 10 owned properties like games such as fortnite or cash of clans media music streaming services or anything else that 10 cent owns which is basically everything but of course it's not a secret that the chinese communist party maintains strict controls over data collection and usage even in a company like 10 cent which is supposedly non-state owned in china if foregoing merchant fee income is the cost of acquiring vast amounts of individualized data pertaining to how their people are spending all of their newfound wealth then that's a cost that they are more than willing to pay of course this may sound scary and that's because the chinese government is scary but it all highlights perhaps the biggest problem with a cashless society it gives too much power to the providers wechat pay is unlikely to ever take off in the western world and that's because most nations have a perfectly justified suspicion of giving too much information to companies located in china just look at the recent drama with tick tock but a cashless economy regardless of which government oversees such a society would ultimately be at the mercy of payment providers money is designed to dictate what is produced in society by letting people vote with their wallets for products and services that they want more of or don't want more of cash as in one of those paper rectangles are one of the only truly anonymous ways of casting this transactional vote everything else be it a credit card a wire transfer a buy now pay later app or even wechat is handled by a private institution a private institution with a profit motive now some of these private companies are better than others but they do ultimately have the same power to sway the outcome of these transactional elections what's more is that these payment overlords have the ability to completely deny service to any business or individual they choose for example let's say that credit card providers decide to no longer support the nra and choose to stop processing donations to this institution as private companies they are fully within their right to do this but in a world where cash is a thing of the past this would mean that such an organization would have no alternative way of receiving revenue essentially putting the nra out of business now no matter what your opinion is about the nra and everyone has one it should not be up to mastercard to make this call what's more is that money in the system is at the mercy of the system at the beginning of this video we mentioned that the australian government has announced plans to make it illegal for businesses to accept more than ten thousand dollars in cash the primary reason for this was that would limit money laundering and other naughty activities which in fairness is actually a valid point for having a cashless economy the problem is that a lot of people are seeing this is the first step to a widespread limitation on the use of cash now pretty much nobody in australia is paying ten thousand dollars in cash for anything but that's actually beyond the point it's more so about the freedom to be able to do it if you so please if for example negative interest rates were widely adopted in response to i don't know the largest economic decline in recorded history then it might actually cost people money to keep cash in a bank account making a mattress the more fiscally conservative depository institution if there were legal limitations on cash then people might just have to suck it up and pay for the privilege of having money what's more is that long term this might not even be a win for the government and if such a large change was to happen then it is going to be driven by those who have their finger on the printer a cashless society would devastate the black market as well as the whole shadow economy that we've already explored more in depth on a recent video this would obviously be a win for the government but not necessarily for the reasons that you would expect firstly going cashless may help slow down serious criminal activities but it will also stop more benign crimes things like cash and hand work on the weekends or even paying people under the table would all be virtually impossible helping to increase government tax revenue easing the burden on those who actually do pay their taxes fairly as for the more serious stuff though when there is a will there is a way and if people want to trade illicitly or get paid under the table they will find alternatives like crypto currencies or even gold the robustness of the underground market aside this would also mean giving up senior edge which is a fancy word for describing the profit that a government makes by printing money a standard 100 u.s bank note costs about 20 cents to produce according to the us federal reserve bank that means every time the money printer goes bro and a physical note is printed the government is profiting 99.8 in 2018 the us government profited 80 billion dollars just by printing physical cash which on the scale of the us budget is admittedly pretty insignificant but nonetheless why would you give it up if there's no benefit to do so which as we've seen so far there may or may not be now a question for all of you to fight to the death about in the comment section below a sheet of paper or more specifically a sheet of cotton might only be worth a few cents before it goes through the money printers at the federal reserve but when it gets spat out the other side it will have a face value of thousands of dollars so is this genuine value adding manufacturing the march towards a future where paper cash has become extinct is something that has people genuinely concerned for valid reasons we have gone from a society that trades in gold to trading in notes backed by gold to trading in notes backed by nothing to trading in digits backed by notes backed by nothing there were concerns and drawbacks to every step of this process but it is possible that the ease and convenience of a purely digital financial landscape will outweigh the burdens for now at least it seems like the great economist biggie smalls was wrong and mo money less problems is the status quo even if going completely cashless is only a hypothetical for now it's still important for a society consider these valid concerns not only because it may be more than a hypothetical in the not too distant future but because it reveals a lot about the financial mechanics of the world that we live in hope you enjoyed the video if you did please consider liking and subscribing this video was made possible by our patrons over on patreon if you want to have your say about what country or topic we explore next please consider supporting the channel like these awesome people did thanks guys bye

Channel: Economics Explained

Views: 822,932

Keywords: cashless society, is it possible to get rid of cash, the economics of cashless, cashless economy, the economics of a cashless society, why getting rid of cash is a bad idea, cashless society, cashless society pros and cons, can we really go cashless, can a nation go cashless, does a country need physical currency, do we need physical currency, do we need coins, why becoming a cashless society is a terrible idea, cashless society explained, economics explained

Id: 7XtafuTCWQ0

Length: 16min 30sec (990 seconds)

Published: Thu Aug 20 2020

Reddit Comments

[u/spacetimecliff]

No. Just got back from New Orleans, and there are lots of cash only shops there. Besides the amount of people hustling just to get by, several legit businesses were cash only. And in times after a power outage like from a hurricane, these places need cash payment.