High internet use and state support help countries ditch cash

ON JULY 27TH, outside Brooklyn’s hipper-than-thou Smorgasburg street-food market, a dozen hungry visitors stand idle amid the barbecue fumes. Rather than queuing for food, they are waiting at a cash machine. Yet inside the market, vendors are trying to wean their customers off cash. Gourmets who use Apple Pay, a mobile-payment service, receive hefty discounts on their purchases. “Apple pays us the difference,” one trader explains.

Most transactions around the world are still conducted in cash. However, its share is falling rapidly, from 89% in 2013 to 77% today. Despite the attention paid to mobile banking in emerging markets, it is rich countries, with high financial inclusion and small informal economies, that have led the trend. Within the rich world, more-digitised societies tend to make fewer cash payments. In Nordic countries like Norway and Denmark, where 97% of people use the internet, around four out of five transactions were already cashless by 2016, according to a recent review chaired by Huw van Steenis of the Bank of England. In contrast, internet penetration in Italy is just 61%, and 85% of transactions there were still handled in cash in 2016.

Beyond this broad pattern, decisions by both individual firms and governments have large effects. At the company level, installing infrastructure for contactless payments bears fast fruit. AT Kearney, a consultancy, finds that in rich countries the number of transactions per card has risen by 20-30% within three years of contactless technology becoming widespread. Banks can accelerate the process by building fast, low-cost systems that enable direct transfers between accounts, such as iDEAL in the Netherlands or Swish in Sweden. America has ditched banknotes faster than its modest 75% internet-penetration rate would suggest because it is the domestic market of many large firms promoting digitisation, such as card networks (Visa, MasterCard), tech giants (Apple, Google) and payment apps (PayPal, Venmo).

Public policy also makes a difference. Some cities, such as London and Amsterdam, have banned on-board cash payments on public buses. Estonia—the birthplace of Skype, an internet-telephony app—has been a leader in digitising public services, such as filing taxes and voting. Its residents are comfortable using new technology and sharing data, and often snub cash. Japan, in contrast, uses more cash than its internet usage would indicate. Historically, it had a sleepy credit-card monopoly entrenched by regulation, which discouraged foreign firms from investing.

So far, cash has proved stubbornly difficult to stamp out completely. Even in Sweden, a front-runner, one in four transactions involves it. But a tipping-point may loom. Handling cash is expensive. Studies estimate its overall cost to society at 0.5% of GDP. As more payments become digital, this burden will fall on ever fewer stores, shoppers and banks. If cash-withdrawal fees rise to $10 a time, even technophobes and older shoppers may start paying for those truffle fries with their phones. ■

Sources: Bank of England; World Bank