By Maria LaMagna
If you can’t imagine a cash-free world, you aren’t alone — despite the prevalence of credit and debit cards and the rise of mobile payments, more than 80% of all transactions worldwide still happen in cash.
And yet the global attachment to cash may not be helping many countries’ economies. Because cash is expensive to store and transport, a switch to digital transactions would ultimately pay off for many countries, according to recent research from Harvard Business Review and experts from Tufts University.
To determine which countries would benefit the most from switching to a digital payment system, the researchers considered the cost of cash from four perspectives: those of consumers, businesses, banks and governments, said Bhaskar Chakravorti, the senior associate dean of international business and finance at Tufts University’s Fletcher School of Law and Diplomacy, who was one of the study’s researchers.
For consumers, those costs included ATM fees and the cost of traveling to an ATM or bank branch where they could withdraw cash and the possibility that people can lose cash.
For businesses, costs included storing cash and keeping it secure, and transporting it in armored vehicles to banks when necessary.
For banks, there are logistical costs, including restocking ATMs and storing and transporting money – especially in countries in the developing world with more security and infrastructure challenges, according to the report.
And for governments, there are costs including printing money and the “tax gap,” or the amount of money the government never collects because of unreported or under-reported cash transactions.
The report concludes that the countries that “have the greatest potential for unlocking value” by migrating to a cashless society are the U.S., Netherlands, Japan, Germany, France, Belgium, Spain, Czech Republic, China and Brazil.
And while China has made more progress than the U.S. in transitioning its citizens to mobile wallets, it also imposes high costs on them for using cash, according to the report: “Both the U.S. and China would do well to adopt policies in partnership with market actors to nudge their already digitally ready societies towards digital money and unlock massive savings – in time and money – in the process.”
Still, there’s a long way to go before going totally cashless is a realistic option in many countries — and the transition could be costly in itself because countries would need the right infrastructure to support a cashless economy.
“Changing ingrained habits is not something that is easily overcome,” said Mark Ranta, the head of digital banking solutions at ACI Worldwide , a payment systems company, in an email. “Having physical cash and handing it over to someone is a real experience and one many people use for budgets or to keep their spending habits in check.”
And while digital transactions can be a more transparent way of doing business because they are all tracked, said Swee-may Ngeow, a managing director at consulting firm Accenture’s Payment Services division, not everyone would view that as a positive, Ranta said; there are many people who use cash specifically for its anonymity.
Another major hurdle? Unlike cash transactions, which happen instantly, many digital banking transactions take hours or longer to go through, said Ramesh Siromani, a partner in the financial institutions practice of A.T. Kearney, a global strategy and management consulting firm, who has previously worked with global banks on processing their cash. For countries to be cash-free, that delay would have to be eliminated, he said.
Plus, digital banking requires individuals to have equipment (most likely a smartphone) to make the transaction, oftentimes a credit or debit card for making payments at retailers and some type of bank account.
About 54% of those in emerging and developing countries said they used the internet at least occasionally or owned a smartphone in 2015, compared to 87% of those who did in advanced economies, according to the Pew Research Center, a Washington, D.C.-based think tank.
(Pew found those numbers by doing phone or in-person interviews with 1,000 or more people in each country surveyed. Here are more details on their methodology).
There are approximately 2 billion adults without bank accounts worldwide, according to the World Bank; still, the number of adults with bank accounts is increasing. About 20% more people had a bank account in 2014 than 2011.
In the U.S., 8% of adults that the Federal Reserve recently surveyed have no checking, savings or money market account.
Many who don’t have bank accounts either don’t qualify or find them too expensive, Ngeow said. Some savings accounts, for example, require minimum deposits and charge a fee when customers don’t meet the minimum.
“Cash is the last free alternative,” Ngeow said.
There are also problems and risks that could arise in a cashless society. In financial systems that are volatile, consumers may feel more comfortable having cash on hand than having their money stored digitally in bank accounts. Plus, credit-card companies take a cut of transactions made on their cards (MasterCard helped fund the HBR and Tufts research).
There has already been some pushback from Europeans who want to continue to use cash in countries where governments have put limits on cash transactions.
And there are cybersecurity concerns; hackers have repeatedly broken into retailers’ payment systems as well as into central banks in Bangladesh and Ecuador, stealing millions.
The future of money
Chakravorti said he doesn’t think security concerns will ultimately prevent the switch to digital.
“Everything we do in the context of the digital economy … we’re making a tradeoff between having our private information revealed, exposed or stolen in some way, and in exchange for that being able to shop online or have products delivered to my doorstep, or have the variety the internet offers,” he said.
Still, he said in a world where an estimated 85% of global transactions are happening in cash, “We have a long way to go.”
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