The future of cash: Will the United States ever become a cashless economy?

The future of cash has become an ongoing debate, but mostly among economists. For the average person, it’s a moot point—since we have access to a variety of forms of payment, there’s no conflict.

I suspect most of us like it that way. But there’s no question there are forces at play that may ultimately result in a cashless society.

Any discussion of the topic is really speculation. Cash has been in circulation for several human lifetimes. If you’re a betting person, you probably wouldn’t bet on it disappearing any time soon. But let’s look at the possibilities in either direction. (We’re going to leave cryptocurrencies out of this discussion, since it’s unclear where that’s headed right now.)

If you stand back and view the situation from afar, it seems clear that cash’s days are numbered. Here are some of the primary reasons why…

The rise of electronic payment methods

Not only are there credit and debit cards, but there are also bank transfers, direct deposit, and online payments. What’s more, there are systems like Zelle that enable you to transfer money instantaneously to individuals, by either an email or text.

It’s simply too convenient to make payments electronically, particularly with the Internet, as well as the fact that merchants and vendors can now be hundreds or thousands of miles away.

In a real way, electronic payments just travel better than cash.

A 2015 study by the Federal Reserve reveals steady growth in non-cash payment methods:

U.S. noncash payments, including debit card, credit card, ACH, and check payments, are estimated to have totaled over 144 billion with a value of almost $178 trillion in 2015, up almost 21 billion payments or about $17 trillion since 2012. Total noncash payments increased at an annual rate of 5.3% by number or 3.4% by value from 2012 to 2015.

It might just be a question of time before all payments are electronic.

The fight against crime

There are a couple of potential issues here. The first is that heavy use of cash has been commonly associated with crime, particularly drug-related crimes. The invisibility of cash is more effective for the criminal element. The elimination of cash may seriously impair criminal activity.

The other issue is theft. Today, a lot of people are afraid to carry cash, particularly large amounts. While debit and credit cards can be canceled and replaced if stolen, once cash disappears, it’s gone forever. Carrying too much cash could even make you a target.

Job eliminations in banks and credit unions

There’s little doubt the elimination of cash would enable banks, credit unions, and other financial institutions to reduce staff. After all, it takes more people to handle the business of cash transactions.

Electronic payment methods, by contrast, are completely digital. Far fewer people are needed to manage the process.

Though many believe a cashless society is inevitable, there are a few significant reasons why that may not be the case.

Cash remains the primary medium of exchange among the poor

Despite the popularity of electronic payment methods among middle income and wealthy households, the poor remain disproportionately dependent on cash.

A survey by the FDIC in 2015 revealed that 7% of US households, or about nine million households, had no banking relationship; these households are referred to as “unbanked”. The same survey reported an additional 19.9%—or 24.5 million households—are classified as “underbanked”. That means the household had a checking or savings account, but obtained financial products and services outside the banking system.

The problem for many of the poor is bank fees. This can be compounded by low or unsteady income and deposits, resulting in non-sufficient funds (NSF) fees and even account closures by banks.

But apart from banks, a study by the Pew Research Center found 11% of Americans don’t use the Internet. The percentage is even higher among the elderly and those who live in rural areas. Eliminating cash could potentially exclude this segment of the population from participating fully in the economy.

Cash is the best remedy for identity theft

One study indicated that 6.64% of consumers were victims of identity theft in 2017. That’s about one in every 16 people.

Identity theft is one of the fastest growing crimes in America. Naturally, it’s closely connected with the increasing use of electronic payment methods, as well as the storage of financial data online.

In certain financial transactions, perhaps even with certain businesses, the best protection against identity theft is the pay by cash.

Cash has the advantage of leaving no paper trail. While it’s true that might reduce the possibility of recovering on a defective or unsatisfactory product or service, cash virtually eliminates the possibility of identity theft because no information is left with the vendor or merchant.

But, we recognize that most people don’t use cash, so if you want to use credit and debit cards, consider signing up for Trans Union’s Credit Monitoring service, that will alert you to any false credit taken out in your name.

Privacy

The need or desire for privacy is a variable depending on individual preference. But there’s no doubt cash affords more privacy than electronic payment methods. The degree to which people value privacy will no doubt have an impact on the future of cash.

It’s one thing to primarily use electronic payment methods, but still having the option for privacy with cash. It’s another matter entirely when the cash option is off the table.

Tradition

This may sound incidental, but there are certain traditions in financial and economic activity. For example, while you may be perfectly comfortable making routine and major purchases through electronic payment methods, you may prefer to make small charges—say under $10 or $20—in cash.

Not only will that eliminate bookkeeping and tracking (who wants to get an NSF charge on a four-dollar coffee purchase?), but you may also want to remove the possibility of identity theft on very small charges.

As electronic payment methods become more widespread, the move away from cash is building steam. In the global scheme of things, the US is well placed among countries going cashless.

A 2017 report by the site ForexBonuses.org has put out the following infographic showing the top 10 most cashless countries. The US is in the middle of the list at number five. Here’s the full list:

1. Canada
2. Sweden
3. UK
4. France
5. USA
6. China
7. Australia
8. Germany
9. Japan
10. Russia

With the increase in the number and dollar value of transactions happening by electronic payment methods, the share of cash transactions is steadily declining. It may be that at some point in the future, cash is eliminated by government decree.

But that’s not necessarily a risk-free move by governments.

Barter is the oldest means of exchange in human existence. Since there was no centralized money system, people traded goods and services. Gold, silver, copper, and other metals eventually became a form of universally accepted money that can be exchanged for most goods and services. But it wasn’t a designation that made metals into money, but rather the value that those metals represented in and of themselves. They were more an extension of barter than the creation of an actual monetary system.

Currency, like the dollar, eventually replaced barter. It also made it much easier for governments to collect taxes. And that’s the risk to governments.

A full-on cashless society may cause a return to barter. This may start among the poor, and among those who are simply uncomfortable going completely cashless. It’s something governments are undoubtedly weighing out very carefully, and why cash hasn’t been declared illegal thus far.

Ultimately, cash may in fact disappear. But it’s mostly a question of where and when. While it may disappear in some countries, it might remain in others. And if it ultimately happens in 50 or 100 or more years, it won’t matter much to anyone who’s alive today.

In the meantime, take advantage of the best that cash and electronic payment methods have to offer. For my money, having both options is the best of all worlds.