With the rise of e-commerce, contactless cards, and mobile banking comes the increasing obsolescence of cold, hard cash. As developed economies grapple with the diminishing need for physical currency, cashless structures have proliferated in newly industrialised economies, such as China, Brazil, and India. Developing nations have embraced digital finance: retailers, restaurants, buskers, and even street beggars in China are using quick response (QR) codes to collect payment, while Nigeria’s central bank has rolled out a cash handling fee for cash-based payments to encourage electronic transactions.
It is the age of demonetisation, when transactions are more fluid and the flow of money is more easily monitored by central government agencies. Digital finance has revolutionised the means with which money is issued, controlled, and distributed – the click of a button, the wave of a card, the touch of an iPhone. As developing nations take their first steps with financial technology, these cash-free structures could point them towards social and economic betterment.
The informal economy
An advantage of a cashless economy is that it has the potential to curb exploitation of low-income workers, particularly those employed in the informal sector. Employers will no longer be able to get away with off-the-record, under-the-table payments to vulnerable, unauthorised workers with no social security or welfare entitlements. No longer left entirely at the mercy of their employers, a demonetised economy may help integrate unprotected workers into the formal sector, and restore their financial security.
However, such a move might face resistance from those who fear significant losses of income with the shrinking of such sectors. According to an OECD report, Brazil’s underground economy constitutes about 20 percent of the country’s GDP, while West Africa’s informal sector accounts for 80 percent of employment. A crash in the informal economy could lead to a huge surge in the long-term unemployment rate, as the formal job market becomes saturated with the added labour. While demonetisation might improve transparency in transactions, it may prove socially regressive, as informal workers are pushed out of employment and into poverty.
We also must not dismiss the disproportionate impact such a move has on women, a large proportion of whom are engaged in informal employment in the areas of social care, nursing, and teaching. Data from the International Labour Organisation show that the percentage of women employed in the informal sector in developing countries can range from 2 to 80 percent: with Brazil standing at 20 percent, China at 23 percent, and India at 59 percent. Cashless structures might serve to reinforce patriarchal ones if women in the informal sector are forced out of employment, made to depend financially on their male spouses and relatives. We could be making technological progress with the advance of digital finance, but age-old concepts such as the gender wage gap and the male breadwinner bias may only be reinforced. If a cash-free economy plays a role in perpetuating female disempowerment and gender inequality, then it fails in correcting one of society’s most perennial problems, and a crucial aspect of development.
Cash transfer programmes
This next claim may sound counter-intuitive: cash transfer programmes may be more secure and efficient if they were in fact, cash-free. The process of delivering physical cash handouts is cumbersome and unsystematic, as recipients and government staff are made to wade through an inordinate amount of red tape. Take Kenya’s cash transfer programme for Orphans and Vulnerable Children, which relies on the Postal Corporation of Kenya’s (PCK) 471 branches to distribute cash transfers to recipients. The staff in headquarters in the capital, Nairobi, dispatch the printed list of recipients, by vehicle, to each PCK branch. Beneficiaries are assigned a given day to collect their payments, during which they are made to queue, present proof of identity, and provide a signature or ink fingerprint upon collection of the transfer. This entire process can take up to two weeks. Add the need for the manual processing of data into a digital record of beneficiaries who have, and have not, collected their payments, and the result is a bureaucratic nightmare.
Financial technology has the potential to leapfrog the overly bureaucratic middleman. While not yet fully cash-free, Brazil’s Bolsa Família Programme, launched in 2003, provides cash transfers to households below the poverty line (set at 140 reais, about £30, a month) on the condition that their children are kept in school and sent for regular health checks. The cash transfers are given by preference to a female head of household, who is issued a ‘Citizen Card’: a type of ATM card that enables the family to withdraw cash payments from Caixa Econômica Federal, a government-owned savings bank, from any of their cash points. Such policies which capitalise on financial technology can greatly reduce corruption by cutting out the possibility of a greedy intermediary, who pockets a share of the cash as a commission for themselves. Making the final step towards paying handouts and benefits through mobile or electronic means can also reduce cash-related crime: the implementation of an Electronic Benefit Transfer (EBT) payments system in the US has shown to reduce the total crime rate by 16.6 percent per 100,000 persons in Missouri state. Like the Bolsa Família, the EBT issues a card to each household, however, recipients can use it directly as a debit card to make digital transactions for food items.
Finally, a move towards cash-free digital economies could promote development simply by encouraging poorer households to save. Instead of hiding cash beneath mattresses or using unreliable informal savings clubs, formal banking structures offer a safer place for the poor to store their savings and make sound investments. Research from the World Bank has shown that 28 percent of adults – or 1.2 billion people – in developing countries said they would turn to their savings in the event of an emergency. However, just over half of them admitted to not saving at a financial institution. This presents a real obstacle to development, as one study showed that women with access to savings accounts invested 45 percent more in their businesses, compared to others without access to savings accounts. Another study found that farmers in Malawi who were given commitment savings accounts increased their farming investments by 64 percent.
How might cashless structures facilitate financial inclusion in developing nations? Interestingly, mobile money accounts are popular among the banked in Sub-Saharan Africa: a third of all account holders – 12 percent of the adult population – reported having a mobile money account, compared to two percent of adults worldwide. Such a method of banking has great potential in reaching out to those previously excluded from traditional financial systems, especially the rural and the poor. It also helps that mobile money is cheaper than other cash alternatives – banking methods that do away with the need for physical branches are on average 19 percent cheaper than alternative services.
The Indian government has made significant improvements in financial inclusion by harmonising its biometric identification system with electronic payment programmes. Aadhaar, which was launched in 2009, consists of a 12-digit unique identification number issued to all Indian residents, based on their biometric and demographic information. Apart from requiring an Aadhaar number to open a bank account, the government can also pay public subsidies directly into Aadhaar-linked bank accounts through the Direct Benefit Transfer scheme. As of August 2017, more than 99% percent of adults above 18 years old – or 1.171 billion people – are enrolled in the Aadhaar system. Especially for a country with one of the largest populations in the world, such an innovation succeeds in accounting for its citizens, and integrating those who would have otherwise remained financially excluded.
A cashless future
There is no denying that the future is a cashless one. Low hassle, efficient, and radical, the world is creeping towards a demonetised future, with capital and credit literally at its fingertips. A digitised system has great potential to integrate the poor – especially the previously unbanked and the formerly excluded – into a more inclusive, dynamic market economy. But how far are we willing to go in allowing cashless structures to dictate social outcomes? It is still on developing countries’ governments to make social welfare policy and the cashless economy compatible, to protect the vulnerable and insecure at risk of being left behind. Only then can a digital economy become truly, financially and socially, inclusive.