It can be defined as a situation in which the flow of cash within an economy is non-existent and all transactions have to be through electronic channels such as direct debit, credit and debit cards, electronic clearing, payment systems such as Immediate Payment Service (IMPS)

By on 14-11-2018

ADVANTAGES AND DISADVANTAGES OF CASHLESS ECONOMY

The finance minister, in his budget speech, talked about the idea of making India a cashless society, with the aim of curbing the flow of black money. But what exactly is a cashless economy? It can be defined as a situation in which the flow of cash within an economy is non-existent and all transactions have to be through electronic channels such as direct debit, credit and debit cards, electronic clearing, payment systems such as Immediate Payment Service (IMPS), National Electronic Funds Transfer and Real Time Gross Settlement in India. Major advantages and disadvantages of cashless economy is:

PROS:

• Enhance the tax base, as most / all transactions in the economy could now be traced by the government;
• Substantially constrain the parallel economy, particularly in illicit activities;
• Force people to convert their savings into consumption and/or investment, thereby providing a boost to GDP and employment;
• Foster the adoption of new wireless / cashless technologies.

 CONS:

•  The government loses an important alternative to pay for its debts, namely by printing true-to-the-letter paper money. This is why Greece may have to leave the euro, since its inability or unwillingness to adopt more austerity measures, a precondition to secure more euro loans, will force it to print drachma bills to pay for its debts;
• Paper money costs you nothing to hold and carries no incremental risk (other than physical theft); converting it into bank deposits will cost you fees (and likely earn a negative interest) and expose you to a substantial loss if the bank goes under. After all, you are giving up currency directly backed by the central bank for currency backed by your local bank;
• This could have grave consequences for retirees, many of whom are incapable of transacting using plastic. Not to mention that they will disproportionately bear the costs of having to hold their liquid savings entirely in a (costly) bank account;
• Ditto for very poor people, many of whom don’t have access to the banking system; this will only make them more dependent, in fact exclusively dependent, on government handouts;
• We wonder if the banks would actually like to deal with the administrative hassle of handling millions of very small cash transactions and related customer queries;
• Illegal immigrants would be out of a job very quickly – creating the risk for substantial social unrest;
• If there is an event that disrupts electronic transactions (e.g. extensive power outage, cyberattack, cascading bank failures) people in that economy will not be able to transact and everything will grind to a halt;
• Of course enforcing a government mandate to ban cash transactions must carry penalties. This in turns means more regulations, disclosure requirements and compliance costs, potentially exorbitant fees and even jail time;