The problem with cashless societies

Utkarsh Dandanayak

Utkarsh Dandanayak, from Royal Grammar School, Guildford, is a runner-up of the second Bank of England/Financial Times schools blog competition. The competition invited students across the UK to address the question “What is the future of money?”

No one likes parting ways with hard-earned cash. As consumers, this behavioural trait of ours allows us to think twice before engaging in transactions that we may later regret. However, now there is a chance that this trait will be lost, with the introduction of Mastercard, Apple Pay and the like, which digitalise payment processes to provide transactional convenience. What is often forgotten is the subtle but potent side effect — financial abstraction — the fundamental problem with a cashless society.

Financial abstraction is simply a rewording of “out of sight, out of mind”. When we don’t see a physical transfer of money from consumer to vendor (and instead swipe a credit card, for example), it results in a reduction in our perceived value of money. Making money less tangible and thus adding to its abstract nature induces in us a spendthrift attitude.

Disney has invested $1bn in exploiting this habit, with the introduction of “MagicBands” to their theme parks. These allow the wearer to purchase meals and souvenirs from anywhere within Disneyland premises with a wave of their wrist. The result? Per capita spending increased by 8 per cent in the first quarter after their inception due to higher ticket prices and increased food and drink sales.

Financial abstraction can step outside the gates of Disneyland and into consumer markets, the most palpable example being the establishment of mobile payment systems.

A strong upward trend in the usage of mobile payment services is evident. Success is most apparent in China, where the consumer spending boom has allowed “WeChat Pay” (its largest mobile payment provider) to flourish. WeChat had more than 1.09bn users in 2018. Businesses have inevitably followed the money, with countless retailers flocking to offer such payment methods. This story is similar to when credit cards came to the masses 50 years ago.

Between 2012 and 2017, global mobile payment volume grew by 328 per cent and UK consumer debt rose by 30 per cent. Abstraction is at play once more. Our natural pragmatism incentivises the usage of cashless payments, while our conception of money is distorted to become more illusory, increasing one’s propensity to spend indiscriminately, thus inducing debt.

Although debt is fine in moderation, extreme levels mean that “millions are living on the financial precipice, leaving them vulnerable to financial shocks,” explains Mike O’ Connor, the former chief executive of debt charity StepChange.

The problem is exacerbated by the fact that younger generations are using these services extensively. Such abstraction may cause children, who are more likely to see money as limitless, to be prone to future financial mismanagement.

While I do not oppose the use of electronic payment systems, financial education must become a priority in anticipation of the transition to cashless societies. Furthermore, I believe that we should employ the free online financial tools made available to most individuals, including budgeting apps such as Mint, that allow one to track digital spending as well as informing one when certain bills are due.

Only with the use of technology can we mitigate the adverse effect of technology.