This blog is the second of a 2-part series on cash. Through data-driven analyses and anecdotes, the blogs try to develop objective perspectives on cash in contemporary times. The 1st part focuses on the importance of cash/cash flows, the 2nd part focuses on the digital transformation of cash. Read the first part here
Sometime last year, I visited Shanghai (FYI, this was way before COVID-19!). I was quite excited to explore the skyline…I even had a playlist ready on Spotify! I also made the most of the opportunity to catch up with friends from my alma mater and we decided that the best way to appreciate the skyline was to relish its view from the best vantage points (read rooftop bars). However, as soon as we hopped from the first rooftop itself, something indelible struck my mind alas, it was nothing about the skyline but a bemused casual remark from one of my friends on seeing a bank note: “Wow, Manu! What is that? We don’t use cash anymore”. Cash is king I thought…I mean even literally!
“Wow, Manu! What is that? We don’t use cash anymore”
Digital juggernaut of cash
There began my curiosity to explore the evolving journey of digital transformation of cash. Why? Well, cash is king in any form digital or not but the way it evolves is going to have profound implications on commerce — what will the global benchmark be? Is it going to be ubiquitous worldwide? And, above all, who shall control it?
To be fair, evolution of hard cash has been happening for a while now starting with electronic payments, mobile payments and even cryptocurrencies to some extent. Therefore, an eventual shift to a cashless society is inevitable…but the sheer fact that numerous sections of the society are dependent on physical cash mean such a shift is not going to happen any time soon!
Nevertheless, what is also true is that we are only in our baby steps towards that journey. Some countries like Sweden and China have a head start. Added to that, what is also true is that all it takes is decisive leapfrogging to cover the ground like China did with mobile payments, even without having an omnipresent card infrastructure. In India too, there has been such a leapfrogging for many sections of the population. Demonetization, unfortunate or not, did meant that there has been a phenomenal uptick in mobile payments. Nevertheless, despite growing significance, smart phone penetration, digital divide, etc limit mobile payments. Now, without going into detail about country-specific situation, read on to uncover an overview of where digital transformation of cash stands from a users’ perspective
Old is gold, no?
Physical cash has its limitations and hence the search for the king of kings. Limitations like the need to carry it around, need to keep safely or even the lack of interoperability (okay, that’s still not exactly solved).
As a result, electronic payments came into foray. Surprisingly though origins of such payments can be traced back to as early as 1871! What truly led to its global acceptance is increasing access to internet connectivity and penetration. Electronic payment is any kind of non-cash payment that doesn’t involve paper check — debit cards, credit cards, bank payments, mobile payments, etc. Cards are by far the most popular means and today, cards allow a convenience that was hard to believe 3 decades back!
Cards to cells
Nonetheless, to have cards, debit or credit, one has to have access to banking facilities and robust, secure card payments infrastructure. Despite growing mobile phone penetration, bank account ownership did not improve as much, especially in emerging economies like India. But, why bother when you have a parallel demand upsurge in cell phones coupled with robust internet penetration? Then came the leapfrogging of mobile payment, predominantly led by digital wallets. While this definitely is convenient, there is an inherent limitation of being dependent on adding money to digital wallets. However, few tweaks on the demand and supply side could undo the hassle. And, viola! There came the true digital journey of cash through mobile phones in all its glory! In fact, India’s digital-payments system, UPI, has won praise worldwide with even Google urging US Federal Reserve to endorse a similar model in the US! Connect your bank account with mobile number and transact seamlessly. While this is super convenient for many sections of the society, the raison d’être… forget that, the access itself is limited to many sections!
Digitization by force
Surprising as it may seem, even beggars in some parts of the world accept payments via QR codes! Now, this might very well be an exaggeration but in parts of the world where mobile payment ecosystem is advanced, there is sort of an enforcement of mobile payments. I mean be it taxis, supermarkets or even street vendors, they all prefer the hassle-free mobile payment as opposed to hard cash. Since there are government directives in place to accept physical cash, they do not reject it either but you are truly in luck if you walk out with the legit change! Therefore, mobile payments do necessarily replace cash, as cash is still necessary for a common lot in most countries.
Therefore, mobile payments do necessarily replace cash as cash is still necessary for a common lot in most countries
Crpytic cash
Satoshi Nakamoto (no point Googling; nobody knows) was not satisfied with the foresight of such developments. Back in 2008, nobody had actually solved the problem of double-spending in digital P2P networks. There came the foundation of not only distributed ledger technology but also cryptocurrencies. More on blockchain and its evolution in my next blog likely titled “Unblock My Chain”! Getting back, Bitcoin envisaged a radical rethink in our financial systems today: “What if every system recorded every transaction every single time?” However, Bitcoin was weighed down by its own lofty ambitions and as a result, a number of alternate cryptocurrencies have come into being. Fast forward to 2020, with different consensus mechanisms, permissioned ledgers, etc. many cryptocurrencies today do address the pitfalls of Bitcoin. Answering an earlier question, cryptocurrencies do hold the bar when it comes to the need for interoperability worldwide! Nonetheless, long story short, with no underlying value and limited support from incumbents, the future of cryto is in jeopardy.
Know the king of kings?
Despite a brief history of time in the world of cash, the search for king of kings is partially elusive. However, the closest probable cometh — a digital currency! Unlike cryptocurrencies, real world currencies (fiat money) back digital currencies. As you may already guessed, the country in contention for this case study is China although closely followed by the USA (public vs private though). As discussed before, China leapfrogged to mobile payments out of necessity led by private Chinese tech giants, WeChat and Alibaba. Nevertheless, China’s central bank is also officially joining the party with its ambitious plans for yuan pegged digital currency — it will be a 1st ever for any country. And, guess what? It is unlikely to feature blockchain’s anonymity. As Princeton university historian, Harold James, points out: “We’re right at the edge of a kind of gigantic technical change.” In the USA, Facebook’s Libra is evolving (not initially designed so) into a similar conceptualization with the grandest of all plans but is facing monumental regulatory hurdles to say the least. Unlike e-RMB though, a basket of currencies is likely to back Libra.
However, the closest probable cometh — a digital currency!
Such a digital currency with an underlying value pegged to the real world definitely has the potential to make financial transactions, cheaper, easier, and efficient although it will also negate many of the touted advantages of a real cryptocurrencies like anonymity, political agnosticism, global interoperability, etc. Circling back, this is going to have profound implications in the world of commerce. Therefore, perhaps the answer for who the king of kings is conceptually there albeit not practically… Even if it is there practically, will a cashless society ever exist? Maybe, a better question is should a cashless society ever exist? Surprising how this perspective evolved quickly. There I rest my case!