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Financial Planning update: A cashless society

There has been growing debate about whether the UK will one day become a cashless society and the potential pros and cons of such a change.

Like it or not, cashless technology is on the rise:
  • Some estimate that just 8% of the world’s currency exists as cash.
  • According to the BBC, the number of UK debit card transactions overtook cash for the first time in 2017; and
  • the use of contactless payments in 2018 was 31% higher than in 2017.
Sweden is thought to be the closest to a cashless society.  Fewer than 15% of Swedish retail transactions used cash in 2016. Key services like buses no longer accept cash.  

UK businesses are catching on too. Technology has enabled mobile traders to accept card payments; cash-free pubs are appearing around the country. Tottenham Hotspur’s new stadium is completely cashless. According to The Telegraph, the UK is the country third closest to becoming cashless.

The prospect of going completely cashless remains unimaginable to many, but history shows that money has taken unimaginable leaps before. Simply put, money serves two key purposes: it facilitates trade, and provides a long-term store for wealth. The evolution of money has been a quest to find the easiest way to meet both requirements.

Before cash, people bartered with valuable goods and services. This facilitated trade so long as everyone had things with which to barter, but struggled as a store of wealth; for example, pails of milk can be traded, but they cannot easily be stored for any period.  

The first big change was prompted by an increasing reliance upon precious metals. These provided a non-perishable item for bartering which proved far better for storing wealth, and gradually became a preferred means of payment. For convenience, some started to mould these metals into uniform shapes with symbols to identify the weight and type of the metal. This led to precious coins and bullion.

Whilst coins and bullion are far more convenient for bartering, they are not without problems. Softer metals naturally erode with handling; they are bulky and inconvenient, especially in large quantities.  

This inconvenience was sufficient to cause the next big change, which occurred as some merchants began to accept promises of payment at a more convenient time (IOUs), instead of expecting payment up front.

If you were a well-respected wealthy individual, the recipient of your IOU might persuade other merchants to accept your IOUs in lieu of their payment, as everyone would know and trust that you would be good for the money when the time came. As the trading of IOUs became more commonplace, the practice of encashing IOUs became less common. This proved beneficial for the issuer as they could keep the underlying wealth for longer. Eventually ruling powers came to recognise this benefit and sought to exploit it for themselves. This paved the way for modern bank notes.

Up until now, the bullion and coins had intrinsic values as precious metals, and the IOUs were backed by real assets that could be claimed at any time by the holder of the IOU. Perhaps the most dramatic change came when those tangible values were relinquished.  

The intrinsic value of a modern-day coin is negligible, and bank notes are no longer IOUs for physical assets. The phrase “I promise to pay the bearer on demand” on your bank note is now a relic, rather than a meaningful statement.  

A £1 coin is only valuable because everyone agrees that it is worth £1, which is roughly a loaf of bread, or two pints of milk, or a hand of bananas (and so on and so forth). If enough people cease to accept this then the coin becomes worthless, much like the old £1 coin did in 2017.

Money is a social construct, and can therefore exist in whatever form best suits the society it serves. If cash can relinquish its physical value, then why couldn’t it lose its physical form too? Coins and notes began as a matter of convenience, so why would they not become obsolete if other means prove more convenient still? If people can complete transactions more efficiently and with less effort using their bank card, mobile phone, or even smart watch, then why would they continue to carry notes and coins?

Data in this article has been sourced from the BBC utilising research from UK Finance and Riksbank Sweden, the Telegraph and Forex Bonuses research, and marketwatch.com.