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Saturday, 17 September 2016

The emphasis of government policies, officials and pundits on the promotion of electronic, non-cash money has a clear drawback: people can lose grip on their spending pattern and current cash position. So abolishing all cash-money is not the right way to fight corruption, large-scale crime and terrorism

Perhaps everybody knows the feeling. You are in a shop with your purchases, walking to the cashdesk where the point-of-sale terminal is. And then you wonder:"Will I have enough money on my current account to pay my purchases or not?!" 

The feelings of embarrassment when the terminal responds: “You have reached your spending limit for this period. Please try to pay differently”, and you have to tell the cashier that you can’t pay for your purchases, are enough to thoroughly ruin your day... Or even longer when you have to wait a few days before your paycheck / salary transfer comes in.

Another precarious situation is when you spent money that you had reserved for other things – the rent, the electricity bill, the holiday or the mortgage repayment – because you were unaware of how much money you already spent from your bank account that month and you didn’t have online, real time insights in your current account at the time that you needed it most.

A third risk of having a non-cash money system is that one off-invoices and bills are being sent and collected exclusively through digital services (internet banking and email), so without a version on paper. That is very convenient for companies and the (local) government bureaus as it strongly reduces their mail and banking expenses, but not for people who always relied on the mailman for bringing their bills and invoices: elderly folks and computer haters / digital illiterates.

All these situations are the inevitable result of the fact that you nowadays pay electronically mostlyvia internet banking and point of sale terminals – at least in The Netherlands – and not in hard cash or through paper transaction forms anymore. Cash, that you collected at your bank, where you also dropped your money transaction forms, or ATM once a week.

In those earlier times it was easy: you collected enough cash for a few days or a week and when it finally ran out, it was simply gone: you knew exactly how much you spent that week. You did your all your regular payments (i.e. mortgage, rent, electricity, doctor's bills and all else) via transaction forms or cash payments too. Except for an early credit card, it was impossible to spend more money than you carried, except for regular shops where they knew your name and your face and they trusted you to pay your dues in time.

These days many people totally lose track of their spendings, as they don’t check out their bank account every day and don’t carry cash anymore, but use their bankcard for everything. And for some, mostly older people, internet banking is a hurdle that they hardly can take. Only at the moment that they discover that there was too much month in their salary or benefit payment, the alarm bells ring: often in a supermarket or a shop, or when their invoice payments start to bounce.

The latter was the subject of an article in De Telegraaf: the largest daily paper in The Netherlands:

Increasing numbers of Dutch people have a hard time to maintain grip on their spendings, due to the mounting digitization of payment services.

As a consequence these consuments lose track and give up on it. Consequence: they fail in applying for benefit / allowance money for which they are entitled and also run a risk of getting into financial trouble.

From the annual report of Humanitas, a large volunteers organization in The Netherlands, it became clear that last year 13.832 people came in for help with their home administration, a 13% increase year on year. Budget information bureau Nibud also speaks of a growing problem, hitting youngsters as well as elderly people.

According to Humanitas this is a consequence of the growing complexity of financial services in The Netherlands. “Many elders have minimal computer skills. Due to the digitization of financial services and the termination of paper invoices and accompanying information by many institutions and authorities, they lost track of what money comes in and gets out”, according to a spokespreson of the organization.

But also many youngsters are clueless about their finances and the digitization of payment services, according to Nibud: ”Many of them don’t know how to apply for allowances and benefits at the governmental digital portals. Or they have problems with ticking the right boxes, when it comes to the electronic application for for instance their study benefit”, according to a spokesperson for the organization.

The consequences are quite clear, according to Roeland van Geuns, lecturer Poverty and Participation at the vocational college ‘Hogeschool van Amsterdam’. “In many cases such people don’t receive and use public benefits for which they are fully entitled, due to lacking digital skills. They don’t apply for a healthcare benefit, as they didn’t even know they were entitled to. And when they do know, they are still clueless upon how to apply for it anyway.”

This particular article was focusing on the problems of people who don’t know how to wrangle their computer and use internet banking. But as I tried to explain in the first part of the article, this problem of disconnection between people and their financial situation is broader.

This is particularly worrisome and important, as more and more pundits and government officials advocate a strong reduction in the global amount of paper cash (Euros and Dollars), in order to hamper and counterattack the large circuits of black, criminal money that are crossing the world nowadays. Money that is used for the funding of crime and terrorist attacks or for the bribery of government officials around the globe.

One of those pundits, Kenneth Rogoff, advocated a moratorium on the usage of large banknotes: €100, €200 and €500 or their dollar and yen pendants, in an op-ed in Het Financieele Dagblad:

The $100 bill is accounting for 80% of the staggering cash amount of $4,200 per capita in the United States. In Japan, the ¥10,000 (roughly $100) is responsible for roughly 90% of the Japanese cash amount. The cash possession per capita is almost $7000 overthere. All this money is enabling growth of the underground economy; not the official one.

I don’t advocate a cashless society, as this will neither be feasible nor desirable for the time being. Nevertheless, a cashless society would be fairer and more secure. With the increasing usage of bank cards, electronic money transfers and mobile payments, the usage of cash in the legal economy has decreased, especially for middle and large-scale payment transactions. Research learned that only a small percentage of the large banknotes is held and used for payments by common people and SME companies.

Cash makes crimes, corruption and terrorism easier, as it is anonymous, and large bills are especially problematic as they are so easy to carry and hide. A million dollar in $100 bills fits in a small attache briefcase and a million in $500 dollar bills even fits in a lady’s purse.

Fair enough: there are other ways to bribe an official or to evade taxes or to carry out other forms of financial crime. But most of them have very high transaction costs (for instance uncut, unpolished diamonds) or carry a more than average risk for disclosure (bank transfers and credit card payments).

Admitted, Rogoff builds a strong case for the cashless society, but as he pointed out himself, it is not feasible and desirable for everybody yet, especially the elderly.

And there is one big drawback to electronic money alone, that cannot be mitigated easily. What happens with your non-cash money when the bank, where it resides, turns out to be not safe. That happened to my wife, who had a bank account at the Russian Sberbank in the Nineties of last century:

However, this is not the only thing that is haunting this former Soviet statebank. In 1997, when the Russian ruble collapsed, countless Russians (among whom my wife) lost the lion share of their life savings, stashed at the Sberbank: sometimes for thousands of dollars per person in savings.

All these people received the crisp message from their local Sberbank: “We’re sorry, your money is gone! It has vanished! Next customer, please!”

It will probably still take a few decades, before Sberbank loses this image of a bank which lost billions in embezzled money, as a consequencey of massive fraud and corruption. As it is like John Goldsmith stated in his wonderful book “Bullion”: “money does not vaporize, it just gets another owner”.

This example shows in a sourish way, that eventually the only party that knows that you own a certain amount of electronic money, is the bank that keeps it for you. When this bank (especially in less safe countries with a much weaker central bank and/or central administration) is gone, so is your money. This is an undeniable risk of electronic money that is not true for cash money, in particular when it is stashed in a safe or deposit box that can be reached at all times.

So please be careful before you declare cash money a thing of the past, by totally moving all money transactions on behalf of the goverment and (SME) companies to cyberspace. For many people cash money is still a tangible tool for taking control of their expenses and keeping their financial health in order. It is also a tangible proof that they really own their money: money that cannot be simply taken away by a plummeting bank or a cash-strapped government in a thorougly corrupted country. 

Corruption – the killer of honesty, the economy and national stability in countries all over the world – must be dealt with fiercely, but that is a (supra-)national government job. Not a thing that one can simply blame on the sheer existence of cash money. That would be too easy for the people in charge.

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