Business Unusual

The first country to use paper money in Europe now wants to get rid of it

Challenges to traditional ways of doing things generally come from disruptive start-ups, but the demise of hard currency may be thanks to Sweden's central bank.

A brief history

Money is one of human kind's earliest inventions to simply trade which originally was only via barter. Money is an easy to use store of value that allowed wealth to be created and tributes and taxes to be paid. From large rocks to shells; money took many forms but metal coins and paper notes became the standard and has been the principal way the world economy operated for the last 2000 years.

What is the alternative?

The challenge to money's future came with the rise of online transactions.

Wire transfers have existed since electrical connections allowed for the boom in telecommunications, but online retail for individuals took off in the late 90s.

PayPal, the electronic payment option which launched in 1998, was one of the original winners (SA's Elon Musk made his wealth from its success).

As those selling and buying online grew so too did the number of options for paying with banks and the credit card companies actively looking to make spending online easier. The debit card opened electronic transactions to billions that did not qualify for credit and the rise of mobile exploded the access to online transactions.

Using cards, apps or crypto-currencies like Bitcoin all allow you to transfer a store of value in exchange for a product or service without cash.

And as digital and products and services continue to rise so will the volume of cashless payments.

Another option is to go back to bartering. The Community Exchange is a network of services that can be bartered for and the bartering creates a unit that, while not currency, can be used to to exchange for other services. There are 52 listed on the network in South Africa.

The Pros and Cons

  • No cash means no cash registers (and so no banking), it also means less ATMs and less chance of being robbed for your money.

  • Cards and apps are more convenient when buying online and, provided costs are low, it even works for small payments.

  • You effectively have all of your money with you should you come across a great deal or an emergency rather than just the money you are carrying.

  • Economies that are completely cash based suffer from a drag as moving money and physical payments slow down the pace of transactions.

  • Money is not cheap and notes have to be replaced often which is a cost to the economy.

  • Money can be counterfeited which drives up the cost of printing and the cost of checking.

  • Having all your cash with you is also a negative though as studies have found that we are more likely to spend more electronically than you would handing over a pile of notes.

  • Not being physically robbed does not mean you will not be targeted online, you could potentially lose everything in your bank account not just your wallet.

  • Transactions can be traced and some would prefer banks and institutions don't know where and what they spend their money on.

  • While online access and power are relatively stable, a power cut or emergency might leave you cut off from your funds.

  • As more people switch to electronic transactions, there is a concern that the network speeds and processing power needed to run it efficiently might take strain. A share purchase that is delayed by even seconds could have a significant negative impact.

  • Holding funds in low inflation economies will have little benefit while holding debt is made easier and with low interest rates "cheap".

  • Banks and governments can change the the rate of interest for holding your money. If the rate is negative you lose money. Physical money would not reduce even if the value does. In many countries the increase in cash holding is coming from people storing cash worried about an emergency affecting the banking sector. (It is not like there has not been an issue in the past.)

What might speed up the shift

Sweden and Denmark are leading the charge to get rid of cash as their citizens are both active online and have access to electronic funds. Cash registers are no longer a legal requirement for retailers in Denmark allowing business to bypass the need to accept and bank physical money.

But another Danish proposal calls for the central bank to hold all the funds that are held by bank account holders. The plan is to better manage the economy with a focus on avoiding the boom and bust cycles.

When the economy is slowing, the central bank reduces the interest for holding the currency and in effect reduces the value of the currency, to avoid the loss, the theory holds that people will spend the money on items that had been planning to buy later. Likewise businesses would not want to hold the funds and would then either invest in more stock in growing the business. Should the economy need to be slowed down, incentives for saving would be increased, moving people to put off spending on things that are not essential.

Technology is the enabler here but the ultimate factor that determines how quickly we become cashless - if we ever become cashless - would be a societal and behavioural one.

Given that the timeline could be as much as 50 years, there is one other factor that might see us needing to go cashless - space travel. A moon and mars base would be unlikely to lug money into space and means of payment for companies mining resources in space would hardly expect to send physical money back to their Earth headquarters.

While we may not have seen our definitive future digital currency, we can say the current paper and coin version will not survive.

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