This article is an edited extract from ‘The Cash Paradox … managing money in emergencies’ , a forthcoming book by James Shepherd-Barron.
If nothing else, the Covid-19 pandemic appears to have moved us one step closer to the digital utopia – or dystopia, depending on your point of view – of the so-called ‘cashless society’.
Or has it? Ethiopia certainly thinks so. In a recent article, co-authored by the Ethiopian Minister of Finance and the Managing Director of the UN-facilitated Better Than Cash Alliance, a compelling case was made for Ethiopia’s stated intention of moving the country to this digital Nirvana: Electronic digital payments stimulate growth, they said; they are more accountable; they increase tax revenue; they decrease the risk of disease transmission; and they empower women. Other, less tangible, benefits were cited too, to do with speed, cost, safety and transparency.
Scratch beneath the surface of these supposed benefits, however, and a rather less idealistic and more inconvenient reality emerges: Greater inclusion of the poor into the formal economy does not necessarily lead to less poverty any more than digital payments improve health security. Why? Because the ‘cashless society’ requires consumers to pay for something that was formerly free; taxation does not necessarily mean greater revenue for reinvestment in public goods such as health care; and the privatisation of money afforded by digitisation leads to a raft of unintended (or intended) consequences for social protection.
Meanwhile, there are a couple of additional ‘inconvenient truths’ which appear to point to the continuing relevance of cash to society at large: First, nearly half the world’s adult population did not make a single digital transaction last year, most of them, as the article alludes to, because, in the absence of a functioning electronic payments infrastructure, they couldn’t; and second, although the number of cash transactions has fallen during the coronavirus pandemic, cash in circulation globally has increased, not decreased, in both value and volume, a trend which accelerated during the pandemic as it always does in times of crisis and uncertainty.
Electronic payment systems require a universal, complex and robust infrastructure to make them work. Not only is this expensive to establish and maintain relative to the cost of cash, but it’s not so easy in a world where electricity is in short supply, internet connectivity sporadic, ownership of smartphones and payment terminals low, competition fragmented, and phone apps hackable. This probably explains why, despite the growing number of people with bank accounts around the world, the volume of electronic payments has remained static.
The article acknowledged this very practical constraint by admitting that adoption could only expand once the infrastructure is in place so that “people can also spend funds digitally.” It also highlighted that “digitising tax payments could deliver an additional US $300 billion every year for emerging economies.” Missing from this remarkable (and apparently highly exaggerated) claim is any mention of the fact that the vast majority of these taxes are paid by the urban poor while private companies avoid paying their fair share of taxes in-country through off-shoring and other forms of legal loophole. Nor is any mention made of seigniorage, the loss of revenue from which reduces an important source of income into national treasuries which is only partially offset by the increase in sales and income-tax revenue afforded by digital payments.
For authoritarian-minded governments like Turkey and the Philippines and those emerging from conflict like Libya and Ethiopia, digital payment systems are a tempting way to extend control over the people. Establish a state-backed electronic payment system and you can collect data on everything a citizen has bought; their movements; their browsing habits; and with whom they have been associating. It’s not too much of a stretch to say that cashless payment systems are not immune to being used as a form of mass surveillance, rendered legitimate because they ‘enable women.’ It is easy in Western democracies, where governments are relatively benign, to make light of such fears over state control and loss of privacy but a regulated anonymous payment instrument is fundamental to the proper functioning of accountable democratic discourse. It also limits extortion by keeping fees within reasonable bounds.
In theory, digital transfers via mobile wallets should be a major boon for those without access to basic financial services, starting with a bank account. But evidence is emerging that things are not as simple as they seem. Easy access to digital credit via mobile phones is showing an alarming tendency in poorer parts of the world for users to overborrow. This is not just enormously costly for the individual – such instruments have annual interest rates measured in hundreds of percent – but defaulting on repayments leads to a downgraded credit rating, ultimately leading to the very opposite of what the anti-cash lobby and pro-poor development agencies seek, namely formal economic engagement. Fintech apps on mobile phones, in other words, seem to foster financial exclusion just as fast as they foster financial inclusion.
At the same time, far from promoting financial independence and introducing consumers to new forms of risk management, for many people digital transfers are doing exactly the opposite by making them dependent on agents simply to convert their own money back into the only medium of exchange their local market is currently capable of accepting … cash.
The future of cash is often portrayed as a somewhat unnatural binary competition between cash and digital payments and, more specifically during the C-19 pandemic, between cash and contactless. But this is simplistic and misleading. In emerging economies, physical and digital currency will have to co-exist as they do in high-income societies, with neither being able to fully function without the other.
At the end of the day, the case for keeping cash is really rather simple and boils down to a few fundamental questions: For whose benefit is the cashless society? Do Ethiopians want their government to have complete and absolute control over every financial transaction they make; or for selected private companies to make money off them every time they buy or sell something? Do they want to put themselves at the mercy of electronic payment systems which can and do fail? Do they want people to spend more than they have? Or would they prefer to retain the financial resilience, privacy, freedom from exploitation, and protection from poor governance which cash offers them?
I would argue that answers to questions like these should only be formulated after more comprehensive risk analysis and deeper due diligence has been done. Yes, digital payment platforms offer a range of benefits for governments, private sector service providers, and the global poor. But there are unintended consequences and opportunity costs involved which need to be better understood before cashless payments are adopted wholesale.
Of central concern is not the technology as such but of how social transformation in a broader, demand-driven political economy is to be managed given the social, political, legal and economic frameworks that govern the space within which digital payments operate.
Even before the coronavirus crisis gathered momentum, a lot of governments in low-income, cash-based economies were waking up to the real danger posed by inadequate access to cash for their citizens in the face of depleting infrastructure and the proliferation of digital payments alternatives that left many vulnerable groups financially excluded. Central banks quickly had to reconsider the adequacy of their infrastructure and follow the Swedish government in re-examining how to ensure access to cash could be guaranteed in a post-Covid world.
In such uncertain times, I am left wondering if the abolition of cash and its replacement with digital equivalents is a private sector solution in search of a public sector problem Ethiopian society didn’t know it had?
© James Shepherd-Barron
James Shepherd-Barron is an independent Disaster Management Consultant and humanitarian adviser to CashEssentials
13 July 2020
 CNBC on 5 June 2020
 World Bank Findex database, 2017 (most recent data)
 By mid-May the European Central Bank reported an increase of €41.2 billion in Europe’s cash supply, not far short of the increase seen during the financial crisis of 2008. Central banks the world over scrambled to meet demand, with many reporting cash-in-circulation at all-time highs.
 Ross Clark: The War Against Cash; Harriman House
 Profit made by a government from issuing currency, especially the difference between the face value and actual production costs.
 In low-income societies, where two-thirds (64%) of the population have neither bank nor mobile money accounts (Source: Findex), the ‘digital money divide’ leaves little option but to transact in cash.
 In 2019, the Swedish government reversed its decision to become a fully cashless economy by 2025