From Dollars to Digits: Navigating the Shadows of a Cashless Society

Introduction: How Did We Get to a Cashless Society?

The landscape of financial transactions has undergone a profound transformation that steers developed societies towards a future less reliant on cash. This shift was orchestrated by a confluence of technological advancements and changing preferences amongst newer generations. The increased demand for digitized currency, fueled by the convenience of online banking and e-commerce has continuously been a driving force behind this evolution, especially in a post-pandemic society.

In a single generation, cash has experienced a sharp decline in its prominence as a payment method, raising concerns about its future. The transition towards a cashless society, beneath a facade of benefits, is marked by negative consequences, including disproportionate impacts on low-income individuals, financial illiteracy, and a heavy reliance on alternative payment methods such as credit. These consequences exacerbate economic disparities and accessibility for certain segments of the population.

These effects are witnessed firsthand within cash-centric industries such as the ATM industry, which is rapidly shrinking in the USA due to the lack of cash transactions, which have dropped to just 14% of total transactions from 42% prior to the pandemic.

Amid this declining utilization of cash, many banks have resorted to reducing the number of ATMs they control, with the total ATMs in the USA dropping by over 20,000 in 2022. The decline in accessibility of ATMs has had far-reaching implications, particularly within rural and low-income areas. As these physical cash access points dwindle, the impact is felt disproportionately in communities that heavily rely on cash as a means of transactions. 

The decrease in cash usage is mainly driven by the middle and upper-class population that have instead moved to alternate mediums such as DeFi and online banking models. The advent of Decentralized Finance (DeFi) allows the population to perform financial transactions without relying on a medium such as a bank. Although potentially reducing costs and increasing anonymity, the platform raises questions about fraud and illicit activities. Credit and debit cards, on the contrary, are considered a safer medium compared to DeFi. They have played a central role in propelling society towards a cashless future, driven by the trifecta of convenience, speed, and security they offer. The transaction value of these mediums of payment is projected to increase by 11.8% between 2023 and 2027.

Beyond mere convenience, banks have regularly focused on promoting the use of credit cards by offering rewards such as points, due to the potential of earning higher fees from increased APRs for certain parts of the population.

A majority of consumers are increasingly finding greater use of digital channels of transactions such as DeFi and online banking. Each channel has risks accompanying its benefits. DeFi allows the population to have more ownership of their assets and creates more accessibility compared to traditional financial systems.

However, risks such as the volatile cryptocurrency environment and regulatory uncertainties nurturing illicit activities conducted through this medium are much less discernible by the average consumer. Additionally, Online Banking, through the use of credit and debit cards, provides a convenient and secure method of conducting transactions, leading to 84% of U.S adults owning a credit card. These also pose risks for segments of the population who have not been educated about the mechanics of interest rates and overdraft fees, which banks tend to capitalize on.

Section I: The Psychology of Cash and Cashless Transactions

Understanding the psychology behind the various cashless transaction mediums provides crucial insight into consumer behaviour. With their tangible nature, cash transactions evoke unique psychological responses compared to cashless alternatives such as credit, cryptocurrency, and the recently popular Buy Now, Pay Later (BNPL) arrangements. A study by the National Library of Medicine found that non-cash payments not only reduce the “pain of paying”, but also evoke a “pleasure of paying”, potentially increasing the tendency to make impulsive purchases. Cash payments on the other hand trigger a heightened awareness of risk factors associated with purchase decisions, leading consumers to scrutinise product quality and evaluate health risks more attentively.

Amidst the transition to cashless payment methods, a crucial question emerges: Are people sufficiently educated about non-cash mediums such as credit or BNPL? A 2022 survey conducted by ISPSOS revealed that one in three American adults is financially illiterate.

This is occurring despite a focus in 18 states to integrate “personal financial education” within their curriculums. However, a deeper dive into the content reveals that the focus remains limited to basics such as spending responsibly and building saving habits. Attempts to educate the population on effective usage of digital banking methods must take into account the specific issues that uneducated lendees have faced historically. The historical context, particularly when focusing on the Great Financial Crisis, reveals that banks have often taken advantage of the lack of financial literacy within the population. Predatory lending (defined as imposing unfair or abusive loan terms on a borrower) towards subprime borrowers was criticized for being one of the major factors that led to the 2008 financial crisis.

Larger financial institutions were notorious for using deceptive tactics to offer unfavourable loans that capitalized on the financial literacy of consumers. Predatory lending thrived in specific market conditions: limited competition among lenders, property owners holding substantial equity, and borrowers being poorly informed about risks.

All the aforementioned market conditions are still prevalent in the modern day banking environment.  This unethical practice often targets individuals with poor credit histories and low incomes and is further fueled by the increasing dependence on digital currency which banks are continuously looking to exploit.

Section II: The Impact of a Cashless Society on Diverse Segments

The relentless push towards a cashless society has triggered a cascade of effects on various segments of the population with distinct repercussions emerging especially in the aftermath of the pandemic. The pandemic, while reshaping global realities, also left a permanent mark on the financial situations and customs of the population which many people at the time thought would only be temporary. As people grappled with the economic fallout, there was a discernible trend of an increased debt burden and a surge in delinquency rates post-COVID despite the decrease in the poverty rate attributed mainly to stimulus checks. 

The low-income population, a demographic where 50% of the population segment relies on cash for a majority of purchases, faced distinctive challenges amidst this push toward other mediums of payment.

The shift has, in more cases than one, exacerbated the financial vulnerability of this group. Additionally, the aging population, holding a substantial 83% of U.S. household wealth, found themselves grappling with a new technological focus in banking. Despite 81% of the older generation owning a smartphone, over half have not transacted through a digital medium. This disconnect stems from concerns about security, limited capabilities, and a preference for personal interactions.

Security risks loom large in the wake of an increasingly digital method of payments. As financial transactions move online, the vulnerabilities to cyber threats and fraud multiply. The convenience of digital payments must be harmonized with robust cybersecurity measures to mitigate the risks and ensure financial safety.

Conclusion: Navigating the Cashless Horizon

As societies traverse the evolving landscape of financial transactions, the inexorable shift towards a cashless future is both evident and complex. Since the pandemic, cash transactions make up just 14% of total transactions which can be seen through an uptick in the closures of ATMs, a once ubiquitous symbol of cash accessibility. With one-third of these closures occurring within low-income neighbourhoods, this shift has not occurred uniformly and the repercussions are starkly disparate, impacting rural areas and low-income earners disproportionately. A segment of the population, where almost half the demographic relies on cash for a majority of their transactions.

Understanding the psychological nuances behind cash and cashless transactions unravels the intricate tapestry of consumer behaviour. The appeal of non-cash payments and the heightened risk awareness associated with tangible cash transactions shape how individuals interact with the evolving financial landscape. Historical echoes of predatory lending during the 2008 crisis serve as a stark reminder of the focus on financial literacy within the population. This is slowly being mitigated with the rise of educational boards in the USA increasingly focusing on cultivating strong financial literacy within their students, albeit with a curriculum that could be improved to include more information on digital banking policies. 

The impact of this transition to a cashless society has affected many diverse segments that make up the population. The low-income population faces unique challenges as their main medium of transactions is being phased out quicker than imagined, the older generation grapples with adapting to the digital age and unfamiliar banking environments, and the looming spectre of cybersecurity risks that are intrinsic to a digital banking model. 

Navigating this cashless horizon demands a thoughtful approach that addresses not only the technological advancements, but also the economic, psychological, and societal dimensions, ensuring a future that is inclusive, informed, and secure. While the transition to a cashless society can be alluring, and provides a multitude of benefits when utilized correctly, people must be aware of how this transition will only increase the risks associated with transactions.