Sweden is tipped to become the first national economy to operate entirely without cash. Digital payment has become endemic to the country, with only 11% of transactions taking place via cash last year. This is not the only place where electronic payment has become commonplace. The surge in the number of debit/credit card and mobile app transactions has brought into question the need to handle coins and paper notes of currency in the UK.
The question is whether cash is still a modern necessity, or whether it has been overtaken as the primary preferred payment method.
Transport for London (TFL) was one of the first major transport providers to stop taking cash payments in 2014, instead offering (at the time) Oyster cards and (more recently) contactless debit or mobile payments. This shift has majorly reduced transport waiting time, as travellers now execute the transaction instantly before taking their seat. This initiative is estimated to save the firm £24m a year. This is due to the reduction in the costs of storing and transporting cash.
Apple partnered with many financial institutions to develop ‘Apple Pay’, allowing the purchase of goods or services with a wireless connection. As a result shoppers can now manage their funds and make payments in-store using the same app for the first time.
The technology already has a 66% adoption rate amongst iPhone 6 users – only 18 months after its launch. This indicates a growing appetite for mobile payment and also represents an increase in convenience for consumers, as they are given the option to select debit, credit or loyalty cards using Apple Pay.
The immediate reduction in cash-handling costs is an advantage of switching to digital payment. These costs largely arise from the storage and transport of money. Security firms such as G4S currently go to stores to collect the cash, before returning to a cash centre where cash can finally be credited to the retailer’s account.
Conversely, debit cards and mobile apps can credit the account immediately. This increase in velocity in the market as a result of faster payment can lead to macroeconomic growth. By reducing the time taken to transfer money, firms have more opportunities to facilitate investment.
There is also a behavioural aspect to consider. The Payment Council forecasted that consumers will become more likely to facilitate a spontaneous transaction via debit card than cash. They estimate that the usage of cash to facilitate ‘one-off’ payments will decrease from 69% in 2011, to around 41% in 2021.
This composition is forecasted to be rebalanced in favour of mobile apps, debit and credit cards. They also suggest that consumers are becoming more likely to make a purchase if they can pay by card or smartphone. This is primarily due to the convenience of not having to find an ATM to withdraw money from, or rummage through a wallet for cash. This increased propensity to spend acts to increase the liquidity of the market. This has obvious macroeconomic benefits, as an economy that is more likely to spend is more likely to grow.
There are security concerns over the emergence of electronic payment. Similarly to stolen cash, the contactless card allows thieves to make a series of payments with stolen debit/credit cards up to a daily limit set by a bank. Even where cards are non-contactless and pin-protected, fraudsters can make payments online given that they have enough information on the victim to complete an online transaction.
In order to combat this, firms are required to adhere to the Payment Card Industry (PCI) Data Security Standard. The more worrying issue as criminals evolve is the growth of app-hacking. There is danger of more tech-savvy criminals hacking into payment apps in order to execute fraudulent mobile transactions without the knowledge of the owner.
An estimated 68% of fraudulent online bank transfers were declared unrecoverable in 2014. This is a pressing issue because the assailant can make a number of mobile purchases over a prolonged period of time, potentially with the victim not realising that the theft has taken place until they check their transaction statement. It is clear that work has to be done in order to improve the security and verification of details before online payment.
Businesses have identified the benefits of encouraging their customers to pay without cash. The advantages to both consumers and the companies pioneering this initiative have forced entire nations to consider the possibility of going cashless. Economists estimate that by 2025 Sweden could be the first country enact this – a daunting transition, particularly regarding security concerns, but this could signify a shift in the global outlook on electronic payment. The UK could be next to follow.
The UK payment council noted that only 48% of transactions were executed with notes and coins in the UK last year. For the first time digital payment overtook the use of cash. As the quickest and most efficient payment method, I would suggest that this trend is due to continue.