For many young Swedes, a banknote is nothing more than a relic. Many can go months without seeing one, but why would they, when there’s Swish, a mobile app that lets you pay at any store, instantly, and send money who do you want? Meanwhile, in China, the birthplace of paper money, Alipay and WeChat Pay have completely conquered the payment market: it’s as simple as displaying a QR code on your mobile screen, on the same application as you use to talk to your family or to shop. in line. How can a banknote compete with these applications?
It’s been 72 years since the first payment card, Diners Club, appeared, and since then the payment system has evolved so much that the central bank of China has been testing the digital yuan in several cities for some time, with the non-the such a distant intention to reduce cash payments to a minimum, or even to eliminate paper money altogether. The European Central Bank is also studying the creation of a digital euro, although it would “complement” rather than replace cash: “A digital euro would give you additional choice on how to pay and make it more easy to do, contributing to accessibility. and inclusion,” explains the institution.
For all types of governments, the idea of having a record of all their citizens’ transactions is a dream come true. For the most authoritarian and intrusive, being able to know what their citizens are doing with their money, in real time, would mean a tidal wave of data, and the possibility of tracking “unwanted” payments or transactions. Even for liberal states, which rely on private enterprise and protect the confidentiality of every transaction, recording transactions would, at the very least, help prevent undeclared payments and tax evasion. And then there is also the possibility of making one-time stimulus payments to citizens by sending money to their wallets, without the problems that the United States or Brazil, to give two examples, have had in locating the beneficiaries of their recovery programs during the Covid-19 pandemic.
But would such a change really facilitate the financial inclusion of the poorest? There are reasons to think so, but there are also obvious risks associated with such a change.
What about the elderly and disadvantaged?
The idea of using digital cash is entirely plausible. Of course, if there is one financial instrument that has spread around the world, it is payment cards: according to the 2020 OECD survey, 70% of people in various developed and developing countries owned a form of payment card, a figure that reached 81% in member countries of the organization. But this figure also indicates a clear reality: a large number of people do not want or cannot access these systems, even in developed countries, where the vast majority of the population has stable access to the Internet and a bank account. . As we saw recently in Spain with the “I’m old, not stupid” movement, seniors have great difficulty in adapting to new mechanisms. According to a recent study published by Statista, in 2019 only 8.3% of over-65s in the United States – one of the world’s biggest tech powerhouses – used mobile banking primarily to manage their savings. It is only among those under 35 that we find a majority (62%) of digital users.
But there are two other groups who also have problems accessing these services: the inhabitants of areas without a stable Internet connection and the most disadvantaged, precisely those who cannot afford to pay to maintain a mobile connection or provide data to open a bank account. And it is precisely these two groups that are very important in developing countries.
India has developed a system to keep track of its more than 1.38 billion people, called Aadhaar, which uses biometric data – iris data, for example – and demographic information to identify each person. . With this system, a person can be linked to a bank account and grants can be transferred directly to people at risk of poverty or who meet certain demographic requirements. The difference here is that Aadhaar is not a direct payment system, but simply an identification system. But this combination can help those at risk of poverty: Brazil’s Bolsa Familia program mails cards with program money to the female head of household, so she can go to a bank to withdraw the money. A system that ties each person to an account would make the process easier, as new cards wouldn’t have to be sent out every month.
But the Indian government itself has provided an illustration of the risks of indiscriminate cash elimination: in 2016, Prime Minister Narendra Modi announced the demonetization of the two most widely used note denominations, to force citizens to exchange them for new tickets or to pay with cards. .
The aim was to uncover “black money” allegedly hidden by criminal groups, to encourage the use of cards and other means of payment and to reduce the number of counterfeit notes. The result, according to Gabriel Chodorow-Reich et al. (2019), was a two-point drop in GDP, a similar contraction in credit, and little to no evidence of success in other areas except incentivizing the use of digital payments. Was it worth the cost?
A response to some of the barriers mentioned has been the development of an “analog” financial system that attempts to copy some of the characteristics of digital, but without the need for widespread internet access.
In Africa, for example, payment and remittance systems have been developed using non-smart mobile phones, such as M-Pesa, Airtel or mKesh, allowing remittances and payments to be made by SMS, with a network of cash withdrawal points. and managed balances. According to a 2021 report by the Bill and Melinda Gates Foundation, these systems increase consumption and financial resilience, improve the employability of their users, and replace informal savings.
In another group of countries, there is the problem of currencies hit by galloping inflation, such as the two beacons of hyperinflation, Zimbabwe and Venezuela, or those such as Argentina, where inflation is rarely below 10 % per year. In these countries, the disappearance or scarcity of cash is common for two reasons: central banks are unable to cope with the need to print money and create larger notes as prices rise, and citizens want to use local currency as little as possible, often leading to de facto dollarization. Such financial systems are under enormous pressure: governments do not formally accept the currency that citizens want to use, and the currency that the government accepts is a hot potato that people want to pass on to someone else as soon as as possible.
In these cases, digital cash is essential, as carrying wads of worthless banknotes is a huge inconvenience, and the speed at which money moves means that banknotes are damaged and need to be replaced at an impossible rate. It’s much easier for everyone to have POS terminals to make payments. The problem is that what people really want is to be paid in dollars: these notes are welcome everywhere. The total elimination of cash payments, in such cases, would harm the economy by preventing people from using their preferred currency. You don’t have to look far to see the Venezuelan government’s failure to introduce a cryptocurrency, the petro, to try to replace (or roll back) the hyper-inflated bolivar and render the reviled dollar useless. .
Are cryptocurrencies the future?
But if there is an instrument that seems destined to replace cash – or so say its supporters – it is cryptocurrencies, which, in theory, should allow immediate and free payments, without the risk of inflation or control by some thirds. These characteristics, however, are rather questionable: Bitcoin can only process about seven transactions per second, compared to the 65,000 that Visa can process. The enormous volatility of its value, without an institution to manage and support it, causes significant price fluctuations. And the system is based on an incentive structure requiring the payment of transaction fees, which are usually higher than those charged by banks.
All that aside, the problem is that its use is extraordinarily complex and combines all the obstacles already mentioned. There is still a huge percentage of the population that does not use mobile banking as their primary means of access, but with cryptocurrencies, it is the only means. The system requires a permanent Internet connection and modern technology. And, unlike other currencies, there is no one to safeguard their value, monitor the conduct of participants, or offer redress when citizens are the victims of theft or loss.
A forgotten password could mean the loss of a person’s savings, an unaffordable risk for the vast majority of citizens.
Added to this is the extraordinary complexity of savings and investment mechanisms, the so-called Decentralized Finance or DeFi. Given that the average score in financial literacy in OECD countries, according to its 2020 study, is 62 out of 100, and most citizens rarely buy products more complex than a regular loan or a deposit at In the long term, it is difficult to imagine a wave of investments in managed smart contracts with stablecoins.
In an ideal world, governments, education systems and other stakeholders would do everything possible to educate people financially and facilitate their access to all kinds of payment and savings mechanisms. Unfortunately, differences in human and economic development make this goal impossible. As seen in Africa, financial innovations, no matter how analogous, are helping to boost economic growth and household well-being. The best way forward, in this case, is to go where the people are and offer them improvements and solutions adapted to their context. Attempts to implement top-down mechanisms, such as the digital single payment, that leave out a significant percentage of the world’s population will only result in poverty and exclusion. Virtual money already coexists perfectly with physical money. But paper banknotes still have a lot of uses.
This article has been translated from Spanish.