Starting with the barter economy, the tangible component for the processing of transactions between human beings has been the standard for thousands of years. Even when divisible objects were used as expressions of prices (cowrie shells, cattle, salt, metals etc.), the culture of physical experience continued. The introduction of coins without significant metal value, paper money, and cheques started to reduce the tactile element.
The existence of banks that execute orders given in writing, and today mostly digitally, to transfer money from one account to the other resulted in more and more abstraction. In recent years, we have moved towards triggering even everyday small transactions only with signatures or combinations of numbers. Increasingly, we proceed with a short electronic contact between our card or a phone and a reader. Transactions that are only set in motion by the provision of biometric data may soon become prevalent. All this means that evolving electronics will continue to melt the physical ingredients of payments like butter in a hot pan.
Technology accelerates abstraction
Payment transactions require reliability, speed and low transaction costs. The robust legacy systems, which have been built up over decades and are protected by regulatory authorities, are delivering that, but there is still much room for improvement. Numerous interdependencies of old and new systems make it difficult to incorporate something new into well-functioning old systems.
Under these conditions, it is easier for outsiders, who initially operate without dependence on existing systems, to innovate. They begin their work at the doorstep of existing systems, not within them.
Many newcomers from outside the established banking industry were able to focus their development work strictly on practical needs. They have not reinvented the wheel, but have instead come up with many valuable innovations to meet the needs of consumers:
Real-time electronic transfers (national or international), initiated from a mobile phone or by card, are executed instantly. Other services include immediate notifications of completion, analyses of spending behaviour, swift currency exchange, easy securities transactions, balance notifications, budget statements, crystal clear savings plans, and even programmes to introduce children to the use of money. These packages are valuable innovations. The consumer pays very little for them.
The Second Payment Services Directive of 2016 (“PSD2”) acknowledges the value of the new payment services providers’ contribution and paves the way to a more open architecture by giving third party providers access to information which used to be held exclusively by banking institutions.
Traditional financial services providers were initially sceptical of the hype surrounding the new offers, especially from "young people". Now they no longer think these are sandbox games and they give in to the trend. The new entrants have gained the respect of the established top dogs and are entering into partnerships with them, in particular with credit card companies.
The result is that the move away from cash seems irreversible, even in those countries that had a traditional preference for it.
The Covid pandemic has accelerated this tendency because non-physical payment is expected to reduce the risk of infection.
Abstraction impacts behaviour
Through Behavioural Economics, we learn more and more that economic behaviour is not solely controlled by mental accounting. Emotions, cultural standards, ethics, habits and the history of human development play an essential role. It is not necessary to identify the reasons for a particular form of behaviour. It is sufficient to identify and statistically evaluate regularities.
The replacement of physical money in the form of coins and notes by electronic bookings has a significant impact on spending behaviour.
Uncle Scrooge loved to bathe in gold coins, and he was thrifty. A Behavioural Economist would confirm this combination as slightly exaggerated, but in line with human nature. The use of physical money makes people act more sparingly, and the use of abstract money triggers higher spending.
In fairness, we should acknowledge that the transparency provided by the new technologies outlined above will somewhat level the differences between handling cash and abstract money. Nevertheless, we should be aware that physical payment prompts greater prudence/thriftiness.
Culture, public interest, civil rights
There are areas of life where culture demands physical payments:
- A beggar who needs help expects cash.
- The collection of money in a religious context maintains its proper dignity only through coins and banknotes.
- Our children’s piggy banks must take on weight so that the impulse to save can develop. The best way to convince children is and will always be through physical experience.
The protection of the self-determined highly private sphere of life is one of the civil liberties protected by constitutions. We wish to decide for ourselves where Big Brother may look over our shoulder and where not. In some very personal areas of life, we do not want it to be technically possible to track our spending. Cash does not leave a trace.
There are indeed areas of life in which the state authorities need to have insight. However, the conflict that tends to exist between legitimate civil liberties and the state's duty to prevent criminal activity is not the topic of this article.
The state also has an interest in optimising collection procedures in order to capture more taxes. If the tax authorities really can see all money flows and can analyse them in detail in the future with the help of Artificial Intelligence, more money will be channelled into the public coffers. This would bring us close to George Orwell's “Big Brother” regime.
The citizens of states that have never experienced a real dictatorship in their history, such as the Scandinavians, have no fears in this area. Their neighbours further south have good reasons to be more sensitive.
At this point I would like to draw the interim conclusion that the arguments for the complete abolition of physical cash are understandable but not compelling.
All systems, even the best Swiss watches, can stop. The critical question is not whether this will happen, but when.
And if the unlikely happens, is there an immediate replacement system? Or would a very quick repair possible?
Not long ago, all virologists were aware of the great damage a pandemic could cause. Yet the statistical probability was judged by the decision-makers (not the experts) to be so low that it was difficult to allocate resources to deal with the risk.
In modern societies the functioning of almost everything depends on an adequate and uninterrupted supply of electricity. When this is interrupted because of faults at power stations, damage to electric transmission, cascading failure, severe weather or strong solar storms, emergency generators are switched on in some essential areas (e.g. hospitals). There are well thought-out analyses which describe what happens to an affected society.
At this point, we are only interested in payment transactions: if no more electricity flows, we can no longer pay anything. When we go to supermarkets, the cash registers do not work. No single system that deals with money and needs electricity will work. The POS systems will not recognise any card and will not react to those nor to mobile phones whose batteries are still sufficiently charged.
A few people believe that they should prepare for such situations. They collect gold and silver coins to be able to obtain food when the technology fails. These people will most likely not get food because the vendors' systems cannot process Double Eagle or Krugerrand coins. The vendors will also not be able to check whether the coins are genuine.
If a power cut were to last for several days, modern civilisation, which treats electronic payment as the standard, would return to barter in a few days to obtain food. Many people would also revert to uncivilised behaviour when they are hungry and cannot pay.
Marc Elsberg's novel "Blackout" is not only thrilling. It is also based on a careful and realistic analysis of the implications of prolonged blackouts. He comes to the very clear conclusion that we can only get enough to eat if we have enough cash in small denominations with us. Shops will work slowly, but they will sell food for cash. If you don't have cash, you are in dire straits.
In reality, however, there is an increasing number of cases of deliberate interference by experts, which are supposed to last for long periods of time. Smart attackers can anticipate the actions of repairers and make it more difficult for them to get the systems working again.
An effective cyberattack on power grids or power plants with the aim of paralysing societies over long periods of time requires a great deal of technical expertise. Among the crazy and fanatical people of this world there are enough specialists who are capable of carrying out such attacks. Whatever drives them to such actions, they are a reality. And these people have already begun to flex their muscles.
Solar flares and coronal mass ejections (“CMEs”) have brought electricity grids to a standstill in the past. “If they're directed at Earth, such flares and associated CMEs can create long lasting radiation storms that can harm satellites, communications systems, and even ground-based technologies and power grids.”
The implication of a grid standstill, possibly over days, will be a standstill of electronic payments.
Low-tech protection against high-tech risks
If we admit, against our inclination, that our modern networked world is easily vulnerable and can become quite uncomfortable in a short period of time, we should insist on a simple protection and always keep enough cash in small denominations. We should vote with our wallets and oppose all initiatives aimed at abolishing physical money. We should pay in cash as often as possible to keep the physical system alive.