A Case for Less Cash

© Can Stock Photo Inc. / mifidTim Cook, CEO of Apple, has joined a movement the fintech world is quite familiar with: the drive toward a cashless society. Speaking to the Nikkei Asian Review, Cook noted:

We would like to be a catalyst for taking cash out of the system. We don’t think the consumer particularly likes cash.

Could we soon see the end of cash? Powerful players — Apple and the card networks, to name the most prominent — would like to make it so. But it’s not at all clear this would be to the consumer’s benefit. Certainly it would limit his choices.

A recent piece by Nathan Heller in The New Yorker recounts a visit to (nearly) cashless Sweden, and America’s prospects for traveling the same road. Heller writes that young people in America, as Cook commented, don’t care much for cash:

A survey of about a thousand U.S. adults, in 2014, found that more than half of those younger than thirty preferred cards to cash even for transactions of less than five dollars. When I run a transaction through my credit card, I get fraud protection, airline miles, and a digital record that I can export into budgeting software and spreadsheets. When I use cash, I get nothing: the transaction disappears. A generation that already orders cabs and music on screens needs no introduction to the joys of a cashless life.

This cashless world is intended to eliminate illegal activity such as drug-dealing that runs on cash’s invisible rails. This is an argument frequently advanced by Dave Birch, director of innovation at U.K.-based Consult Hyperion. In a 2015 piece in The Guardian, Birch further points out that currency in circulation is growing faster than GDP, and that the corresponding “tax gap” is paid for by the cash-dependent poor in the form of ATM fees and penalties avoided by those who use digital payments.

Cash users (including the many “cash-only” restaurants in new York and San Francisco) may avoid reporting transactions and paying tax. In the case of illegal transactions, this is certainly the case. So why keep cash around?

One reason is that, particularly in the U.S., people rely on the informal cash economy and don’t have access to other payment rails (or choose not to.) Even in utopian Sweden, Heller found people, panhandlers prominent among them, without access to bank accounts or digital currency. In the U.S. that problem may be magnified a hundredfold.

D’ontra Hughes, CEO of the cash access app Spare (an INV Fintech company, the sister accelerator to this site) argues that cash usage is actually on the rise globally. “The dependency on digital tools has indeed grown,” he said, but added, “Over the past few years we have seen an increase in the usage of cash domestically and internationally. History will undoubtedly lead to more tools to move digital currencies, but people will always feel more secure when they can physically interact with their cash.”

Blockchain engineer Elaine Ou read Heller’s piece and is not buying it. The cashless world is a “creepy fantasy,” she wrote last week, and one that changes money from something you own to something you have access to, and threatens to disenfranchise already marginalized people. One can argue that Ou’s money access model is a system of ownership millennials are comfortable with — they pay for access to digital services like Hulu or Spotify but not for the absurdly antiquarian CDs or DVDs.

In a digital economy, Heller points out, money flows directly from bank account to bank account — it is always accounted for and is never anywhere else. Cash can be hidden, lost, stolen — and all outside the banking system. Ou says this is to the benefit of consumers. Here she is on bank accounts:

Money belongs to its current holder. It doesn’t matter if a banknote was lost or stolen at some point in the past. Money is current; that’s why it’s called currency! A bank deposit, however, grants custody of money to the bank. An account balance is not actually money, but a claim on money.

This lack of ownership was famously brought into stark relief when Amazon retracted a copy of George Orwell’s 1984 (really) from Kindle devices that had bought it because of copyright issues. A physical book could not be taken from consumers at the whim of a corporation, so what does “owning” books on Kindle or smartphone mean, and is it the same with money?

Ou points out that digital ownership of money (which is the same as saying total bank custodianship of money) is often used as a weapon against political outsiders:

This means that politically unpopular organizations could easily be deprived of economic access. Past attempts to curb money laundering have already inadvertently cut off financial services for legitimate individuals, businesses, and charities. The removal of paper currency would undoubtedly leave similar collateral damage.

Removing large bills from circulation has been shown to reduce cash usage for illicit activities, but does not deprive cash-dependent citizens from paying bills. So perhaps the mantra should be not cashless, but simply “less cash.”

The informal economy does indeed mean lost tax revenues, but it may be delivering value that makes it worthwhile to areas of society where digital has failed to penetrate, in the form of lawns mowed, kids babysat, and burritos delivered. Would it be better if everyone had a bank account and everything was transferred digitally, logged and taxed? Maybe, but we are a long way from getting there, and it will not happen without a fight.

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