Monday, July 8, 2024
How does the shift toward cashless transactions in the United States compare to other countries around the world?
Globally, cash fell -8 percent in 2023, and is expected to decline at -6 percent CAGR through 2027. The United States is behind many other countries but is very much in the race toward a cashless society.
Reflecting global trend, cash usage in the United States is declining, though it is far from disappearing. The Federal Reserve suggests that cash usage hit its lowest point during the pandemic's peak. Despite growing interest in digital payment alternatives, 79 percent of U.S. adults still carry cash daily especially for small transaction amounts, and many U.S. states mandate that stores must accept cash.
What specific factors have contributed to the sharp acceleration in the adoption of cashless transactions in recent years?
The 2020 pandemic has been a major catalyst for the sharp acceleration in the adoption of cashless transactions. Health concerns over virus transmission through cash encouraged both consumers and businesses to adopt contactless payment methods. In fact, during Visa’s latest earnings announcement Visa mentioned that almost 50 percent of credit/debit transactions in the Unites States were contactless, which is significant growth from just a few percent points in 2019.
The increase in ecommerce driven by lockdowns boosted the use of digital payment methods such as mobile wallets. The adoption of instant payment systems has further made cashless transactions faster and more appealing (Pix was launched in Brazil in 2020). The pandemic induced a lasting change in consumer habits, making people more comfortable with and reliant on digital payments. In what ways does a cashless economy enhance tax compliance and reduce financial crime and fraud?
There are many government, central banking and industry-level studies that have shown the overall cost benefits of electronic payment systems over cash.
Cashless economies have much higher rates of income tax compliance due to the increased transparency and traceability of transactions. The United States loses more than $1 trillion a year in tax revenue due to tax avoidance practices, including activity in the untaxed cash economy.
Furthermore, the reduced reliance on cash leads to much lower rates of financial crime and fraud as electronic transactions leave audit trails that can be monitored. This transparency also leads to lower banking system costs related to processing of cash, regulation, and supervision in the banking system.
As more and more businesses and consumers adopt digital payments, the costs associated with cash use are only increasing, further incentivizing the shift towards a cashless economy.
What are some of the primary concerns or arguments against transitioning to a fully digital economy, and how can they be addressed?
Globally, several countries are now on the verge of being functionally cashless, but it raises primary concerns. One issue is the risk of financial exclusion, especially for those who lack access to the necessary infrastructure for digital payments.
In markets like the United States, a significant part of the population struggles with access to identity documentation to open bank accounts. For countries like Australia and New Zealand, where the ability to use cash is still considered a basic human right, this presents a functional problem for government and banking. In Sweden, the central bank calls for legislation to protect cash because “Payments must work for everyone,” the bank stated.
Improving the availability of identity infrastructure is essential to ensure that everyone can access digital banking services, along with mobile penetration, general digital inclusion efforts, and affordability of internet access.
How do lower banking system costs related to cash processing translate into benefits for consumers and businesses?
For consumers, these reduced costs can lead to lower fees for banking services associated with maintaining accounts, withdrawing funds, and processing transactions. This makes banking more affordable, particularly for low-income individuals who are often burdened by high banking fees. Banks are also more likely to invest in improving their digital banking services to provide consumers with accessible financial products.
Businesses also benefit from lower transaction fees related to cash processing. Digital transactions streamline accounting processes and reduce the risks and costs associated with cash theft and fraud. Businesses can experience faster transaction times, which improves cash flow and operational efficiency.
What measures can be taken to ensure that the move toward a cashless society is inclusive and accessible for all segments of the population?
Improving the availability of identity infrastructure is essential to ensure that everyone can access digital banking services, along with mobile penetration, general digital inclusion efforts, and affordability of internet access. Banks should also adapt by offering more accounts with limited functionality, that are affordable and transparent. Traditionally, banks in economies like the United States, Australia, and the UK have viewed lower-income households as less attractive due to lower profit margins, often pushing the responsibility onto policymakers.
Mobile wallets represent a significant improvement in financial access, making basic banking services more affordable and accessible. A great example of this is in Mexico where the Bank of Mexico has introduced CoDi - a digital payment method which enables financial inclusion for any consumer with a smartphone to make a digital payment at no cost.
Note: The following resources were used in researching this Q&A:
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