What is a Cashless Economy?

During COVID, economists, business owners, and financial analysts discussed the possibility of a cashless economy. Businesses have chosen to go cashless in order to avoid unnecessary physical contact with customers and to promote a faster form of payment, limiting exposure to the highly contagious virus. While individuals prefer this secure and convenient method of payment, it may not have the best economic implications.

 

There are advantages and disadvantages to a society based entirely on a cashless economy. Because of its efficiency and simplicity, it has become the preferred option among millennials and younger generations. However, there are some risks associated with this new type of digital currency.

 

Our relationship with money is constantly changing and has always been. We are gradually transitioning to a cashless society with each generation. This isn't just for credit cards. Over the years, we've used a variety of payment methods and devices to make going cashless easier and more efficient. Money can be transferred quickly and easily using apps like Venmo, PayPal, Zello, and Apple Pay. China, India, and Sweden, for example, have all implemented cashless systems. Each country's outcome is unique, but the overall impression is that a cashless society is a very real possibility in the near future.

 

What is a Cashless Economy? 

 

This economic system is based on credit cards, debit cards, digital wallets, and modes of payment. Cashless economies have a limited number of cash transactions. In this type of economy, electronic money is preferred over transactions involving coins or physical notes.

 

A cashless economy is one in which digital transactions such as net banking, mobile banking, digital wallets, debit cards, and credit card payments replace traditional methods of payment such as cash or coins.

 

The latest buzzword in global finance is "cashless society." Only 15% to 20% of the world's money is currently in the form of currency notes. This is absurd in and of itself. Many central banks and governments around the world, however, have pledged to reduce the cash percentage to zero. This means that the first currency notes could be redeemed for gold. This served as the gold standard. Currency notes could later be redeemed for other currency notes, making it the paper standard. The next standard will be digital media, with digital money being the only currency. Money will no longer be a tangible asset. Instead, it will be purely fictitious, with money only existing in the virtual world.

 

Governments claim that cash is a danger when it falls into the hands of the wrong people. Terrorist activities, counterfeiting, and other illegal activities are all funded by cash. This is accurate. However, this is not the true motivation for instituting a cashless society. To understand the true motivations, we must be a little cynical. 

 

We must assume that the government is only concerned with vested interests and not with the welfare of the common man. As a result, from the standpoint of vested interests, cash in people's hands is bad. This is because cash is untraceable, giving people some degree of freedom. If all money becomes digital and can be taxed by the government, then this freedom will be lost.

 

Types of Cashless Economy: 

 

There are several cashless payment options, which are listed below:

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Types of Cashless Economy

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1. Mobile wallet: 

 

This is essentially a virtual wallet that is accessible via your mobile phone. You can keep cash in your phone and use it to make online or offline payments. Various service providers provide these wallets through mobile apps that must be downloaded to the phone. 

 

You can deposit funds into these wallets via credit/debit card or Net banking. This means you won't have to enter your credit card information every time you pay a bill or make an online purchase using the wallet. You can use these to pay bills and shop online.

 

2.  Plastic Money: 

 

Credit, debit, and prepaid cards are examples of plastic money. The latter can be physical or virtual, and it can be issued by banks or non-banks. These can be purchased and recharged online through Net banking and used to make online or point-of-sale (PoS) purchases, as well as given as gift cards. 

 

Cards are primarily used for three purposes: withdrawing money from ATMs, making online payments, and swiping for purchases or payments at PoS terminals at merchant outlets such as shops, restaurants, and gas stations.

 

3. Net Banking: 

 

Net banking is a method of online transfer of funds from one bank account to another, a credit card, or a third party that does not require the use of a wallet. It is possible to do so using a computer or a mobile phone. Log in to your bank account on the internet and transfer funds using national electronic funds transfer (NEFT), real-time gross settlement (RTGS), or immediate payment service (IMPS), all of which have a low transaction fee.

 

Benefits of a Cashless Economy:

 

Let us look at how cashless societies will benefit vested interests. Keep in mind that these are not benefits for the average person. These are the issues that ordinary people will face. These vested interests benefit from the common man's problems.

 

1. Taxation:

 

Under the current system, the government cannot levy an excessive amount of tax. This is due to the fact that people have the means to avoid paying these taxes. As a result, taxes must be rationalized. However, given the enormous amount of debt that all governments around the world are facing, it is a foregone conclusion that taxes will have to be raised in some form or another if these economies are to remain afloat. 

 

If all money in the world is digital, it all comes from the same place: banks. This makes it possible, simple, and extremely convenient to tax earnings at the point of origin. It will begin as a moderate tax that the people will support.

 

2. More practical:

 

Consumers can now spend money more easily than ever before thanks to contactless and mobile payments. Going cashless eliminates the need for shoppers to find an ATM and withdraw cash, or go to their bank's nearest branch and wait in line, or worry about having enough change to make a small purchase - all of which can put them off completely.

 

3. Negative Interest Rates:

 

For a long time, Western economies have kept interest rates close to zero. This implies that the next step would be to enter negative territory. This would also imply that people who keep cash in banks would lose a portion of it. This is the inverse of earning money through interest. Negative interest rates are almost certainly on the way. They can, however, only be levied if all money is digital. People who do not have digital money can simply withdraw it to avoid this tax.

 

4. International Payment Made Simpler:

 

For many people who travel internationally, exchanging currency is a tedious task. For them, cashless payment is a much more convenient option. There is no need to be concerned about exchange rates; all that is required is a mobile device with a bank account linked to it.

 

Disadvantages of a Cashless Economy: 

 

Some of the disadvantages of a cashless economy are:

 

1. Low Literacy Rate: 

 

One of the leading causes of numerous existing problems is a low literacy rate. Creating a cashless economy in India or a digitally literate India is not an easy task. Many areas do not yet have electricity or running water. So computers and the internet are a long way off. 

 

The majority of the population lives in rural areas, which lack these necessities. People in these impoverished areas rely solely on cash. If they must rely on someone for online activities, they may be duped.

 

2. Device Availability is Limited:

 

Another issue with the adoption of digital modes of transaction in India is the affordability, availability, and efficiency of devices that support online transactions, such as computers, smartphones, and point-of-sale devices. 

 

Only 15% of the Indian population has access to the internet. With such a small number of people having access to the internet, digitization cannot be made universal, at least not in a short period of time.

 

3. Economic Disparity: 

 

If the traditional payment method is completely replaced by a cashless system, it is likely that purchasing smartphones or devices will become necessary. In a country like India, where many citizens struggle to meet their basic needs, purchasing a smartphone is unquestionably a luxury that the poor cannot afford. If cashless transactions become the norm, inequality will emerge in society because not everyone can afford it.

 

4. Identification Fraud:

 

One of the major disadvantages of the Indian subcontinent's cashless economy is the risk of identity fraud. The rate of online fraud is increasing with each passing day, increasing the risks of hacking. Not everyone is an expert in technology or is well-versed in all of its applications. Many people may end up dissipating their personal identity in an online forum of creepy lurkers while attempting to make digital transactions.

 

Finale Note:

 

In India, a cashless economy is one in which the flow of cash within an economy is non-existent and all transactions must be conducted via electronic channels such as direct debit, credit cards, debit cards, electronic clearing, and payment systems such as Immediate Payment Service (IMPS), National Electronic Funds Transfer (NEFT), and Real-Time Gross Settlement (RTGS).

 

India must learn from other developing countries that have reduced their reliance on cash while bringing more people into the folds of the formal banking system. Kenya is a well-documented success story, with mobile money spreading much faster and deeper than in India. Kenyan households with access to mobile money were better able to manage negative economic shocks (such as job loss, livestock death, or harvest problems) than those without access to mobile money.

 

When transactions in an economy are aided by the use of credit cards, debit cards, and prepaid payment instruments rather than money notes, coins, or any other physical form of money, the economy is referred to as cashless.

 

The cashless economy in India has been boosted by the Indian government's Digital India initiative. This is a flagship program aimed at transforming India into a digitally empowered society and knowledge economy.