Cash may soon become a thing of the past as more countries are drifting toward a cashless economy model. While this might be a disadvantage for traditionalists who like to stash their money beneath their mattress, there are some advantages for merchants who rely on both cash and digital transactions—and online merchants are especially at an advantage. But what is a cashless economy? And how might it change the way we do business into the future?
The Definition of a Cashless Economy
A cashless economy is an economic situation in which financial transactions are completed without the need for cash or physical money. In simpler terms, a cashless economy is one in which no banknotes or coins are utilised for any form of financial or economic transaction or purchase. Instead, all transactions are electronic, using credit or debit card solutions or cashless payment services like PayPal, Zelle, Venmo, and Apple Pay.
This trend is just part of a broader cultural shift that we’re seeing worldwide. For example, about one-fifth of Brits admit to never carrying cash, and the same is true for roughly four in 10 Americans. On the European continent, some countries are drifting toward a largely cashless existence.
Are There Currently Any Cashless Economies?
As of this writing, there are no purely cashless societies. However, some countries are getting close. Sweden is likely to become the first truly cashless society, as cash circulation has been steadily declining since 2007. Today, the vast majority of Swedish transactions are digital, and cash circulation in the country has fallen below 1% of the total gross national product.
Other countries that are slowly adopting a cashless model include China (which relies heavily on digital wallet services like Tencent’s WeChat Pay and Alipay), Norway, Finland, New Zealand, and the United Kingdom. In each of these countries, cash transactions are at a historic low and may soon cross a threshold whereby it’s no longer economically feasible to print cash to keep in circulation. Cashless transactions are becoming the norm.
When Does an Economy Become Cashless?
In order for an economy to become truly cashless, all transactions must be made without the use of physical money. When cash payments fall below a certain percentage of total transactions (7%, according to one estimate from Jonas Hedman of the Copenhagen Business School), it becomes more expensive to manage the cash flow than the profit on cash sales.
In this scenario, it makes more sense to eliminate cash from the equation and invest entirely in digital transactions. And that’s exactly what we’re seeing in countries like Sweden and elsewhere in Scandinavia and parts of Asia.
What Would a Cashless Economy Mean for Merchants?
A cashless economy would offer some huge advantages to merchants who depend on online payments. One of the most obvious benefits is increased efficiency—for the merchant but also for the customer. The fully cashless system eliminates the need for cash printing, storing, and transporting, which reduces costs.
A widespread cashless economy—in a large market such as the European Union—could also mean lower transaction fees for merchants. Because the infrastructure would cost less, so would the cost of processing transactions. In addition, a cashless model would create increased demand for digital payment services, thereby paving the way for a more competitive market in which merchants have more options to choose from. To remain competitive, merchant providers would be incentivised to offer competitive rates.
There is also the potential for increased sales—particularly in the ecommerce market. As fewer people depend on cash and new digital payment methods are introduced, consumers are more inclined to pay for goods and services in ways that they might previously have resisted. So while an affinity for cash transactions might have caused some to resist buying online (or avoid it altogether), a cashless economy would afford them the convenience and incentive to purchase online more readily.
How to Prepare for a Cashless Economy as a Merchant
It’s estimated that Sweden could adopt a fully cashless model as early as this year, and many other countries aren’t too far behind. It’s extremely important for merchants to be prepared for this dramatic paradigm shift.
The most obvious accommodation should already be clear to most merchants: Make sure you have some type of digital infrastructure in place. At the very least, you should be able to accept debit card and credit card transactions. Ideally, you should also be able to accommodate e-wallet transactions. The “cash only” model is no longer profitable in any developed economy, so make sure that you have digital options available.
For the ecommerce merchant, additional accommodations are also becoming increasingly essential:
- Invest in a dedicated merchant provider that can support online transactions. In other words, don’t rely solely on an aggregate merchant account (like PayPal) that’s cheap but incapable of keeping up with the demands of a full-time business in an increasingly cashless economy. Make sure that you can process digital payments straight to your business bank account without going through a middleman.
- Make sure that you have a full suite of merchant services that accommodates a wide range of global payment solutions—including major credit cards, popular currencies, digital wallet solutions, and alternative payment methods. With more countries going digital, there is a wealth of payment solutions out there, and you need to be able to accommodate all of the major players.
- Make digital security a priority. As the volume of digital transactions increases, so does the volume of cyber-attacks. You need a well-encrypted global payment gateway that’s fully PCI-compliant, and you need a merchant provider that offers fraud detection and round-the-clock security.
The Cashless Economy Is Coming—Are You Ready?
As emerging technologies bring us closer and closer to a truly cashless economy, it has never been more important for merchants to bring their payment systems into the 21st century. Make sure that your merchant services are modern, secure, and versatile, and be prepared for whatever the future has in store.
While some countries are still a long way from adopting a cashless model, the trend is already in full swing. Are you ready?