Digitizing Money: Cold Turkey or Gradual Weaning?


Imagine a cashless world. It’s difficult, to be sure, since cash is involved in more than 80 percent of all global transactions. Still, the number of non-cash payment options are burgeoning, and several Scandinavian countries – Denmark, Norway and Sweden – are moving toward a cashless society as a matter of economic policy. Last November, India banned the 500 rupee ($7.50) and 1,000 rupee ($15) that comprise 86 percent of all cash in circulation.

So, what happens when a country of 1.3 billion people puts restrictions on cash? Take India as an example. When India’s prime minister issued the ban, massive lines instantly formed at banks as stunned Indians sought to exchange the affected rupee notes for new currency. Daily and weekly bank withdrawal limits were put in place, and long bank and ATM lines formed. The new notes issued were also smaller, so ATMs had to be refitted, which triggered further chaos.

The reason for these actions in India was to expedite a recently-launched demonetization process in the country.

Was it the right way to start the process?  Not from the looks of it.

First, the country’s economy was impacted significantly, says the director of the Centre for Indian Studies, as was its “informal sector,” which includes 93 percent of India’s workforce. Before the ban, the Indian economy was experiencing a 7.3 percent annual growth rate, the highest of any major global economy. But the central bank trimmed its forecast for the current year to 7.1 percent from 7.6 percent and analysts think the growth rate will decline by as much as one percentage point.

Manufacturing was also affected as many Indians pay for big-ticket items – such as cars and jewelry -- with cash, since there are only 25 million credit card users – less than 2 percent of the population – and most of the 660 million debit cards are used simply to get cash from ATMs. Factory activity slowed in December, a rare occurrence, although it rebounded in January. Many businesses had turned to bartering. And the country’s impoverished and homeless, which number in the tens of millions, were in trouble as they depended on cash handouts.

Like ripping off a bandage, the sting of the November events in India did not last long. Nor did demonetization advance much further.

Immediately following the Indian government’s actions, cash flow was low, discounts were being offered for electronic transactions, and some transaction charges were being waived, said an article in the Business Standard.  Three months after the demonetization move, the availability of cash improved and people were going back to cash transactions. By February 2017, 68 percent of Indians were conducting their transactions in cash, according to a LocalCircles survey, Business Standard cited in the article.

In addition, in a village lauded as cashless-enabled, Jhattipur in the Panipat district, the 1,050 households there are far from going cashless, especially as ATMs fill again with the new currency.

Last, only a few Indian retailers have digital payment apps, and many families – especially the poorer ones – continue to use cash for daily needs. As a result, the volume of digital transactions fell 10 percent in January from December, according to Reserve Bank of India data.

Compare India’s experience with that of the Swiss, pioneers of a cashless society, but who still embrace cash as a necessary payment option. While technology and mobile payments exhibit a growing influence in Switzerland, people there continue to show their affinity for cash for auto purchases, utility bill payments and travel. In rural areas, especially, where face-to-face transactions dominate, cash is still preferred. Still, the Swiss also view cash as a safe payment option.

Even the fintech world sees that cash will continue to fulfill certain needs in society. “Cash gives us freedom, is reliable and allows us to manage our personal finances with ease,” said an April 7 article in bobsguide, a fintech industry publication.  “It also helps keep the economy stable, with cash flow enabling management in smaller businesses particularly and allowing them to operate and grow.”

So does shock-and-awe work in the push toward a cashless society?  We say no, and urge governments to let their citizens lead the way, even if it’s not toward the cashless option.  

Tom Pierce
Chief Marketing Officer 

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