Will technological innovations drive banknotes out of circulation?  

Nironjan Roy   | Published: July 09, 2018 21:47:54 | Updated: July 13, 2018 21:37:07

In the developed world, economic activities have entered a no-cash era because people can easily pass their days without using banknote or currency. Widespread use of debit and credit cards has technically made banknotes almost redundant.

An economic theory of money states that good money drives away bad money out of circulation. Now technology experts have developed strategies that are driving banknotes out of circulation. All sorts of transactions ranging from cherry picking in the remote firm to the coffee-store, from taxi fare to airline ticket purchases can be easily and conveniently done by using credit/debit card, i.e. without the use of cash money. Economy has become so extensively dependent on the use of cards that people can easily live without cash money, but cannot think of passing a moment without credit or debit card.

BANKNOTES LOSING POPULARITY: Once upon a time, cash was the most preferred mode of payment. Although the risks of theft and robbery have always been associated with carrying cash money, yet people used to prefer cash. Now situation is reversing and cash is no more considered a popular mode of payment in the developed world. At the present juncture, credit card is the most preferred method of payment. Business turnover has enormously increased, and the frequency of transaction is so high that cash payment can hardly cope with it. In many situations, cash payment delays the processing of transaction. Accepting banknotes always requires some extra scrutiny in order to avoid forged notes. Moreover, counting of cash and payment of change where necessary also requires additional time. Apart from this, handling cash and depositing thereof to the bank requires extra manpower, for which additional cost is incurred. Finally, enforcement of stringent AML (Anti Money Laundering) Act has made large cash transactions very risky. Consequently, all receiving entities try to avoid accepting cash. All these developments have made cash the most unpopular means of payment.

CREDIT & DEBIT CARDS REPLACING BANKNOTES: On the other hand, credit card has become the most convenient method of payment. Credit card is now widely accepted in settling any type of payment anywhere in the world. However, though both credit and debit cards are substituting cash transactions, yet the use of credit card is more widespread and popular among the people of developed world. Credit card can be indiscriminately used for any authentic transaction, while caution is required while using debit card. One of the mains reasons is that, credit card is always protected against fraud, while debit card is not. If unauthorized use of credit card occurs or any fraudulent transaction using credit card is reported, the credit card issuer immediately reimburses the cardholder and thereafter conducts investigation. Consequently, people do not have to hesitate in using credit card. Therefore, it is the responsibility of the cardholder to review transaction statement carefully and report any unauthorized transaction immediately.

Debit card is a bit different from credit card as the former is tantamount to user's own money processed electronically. So it is the responsibility of the debit cardholder to ensure safe and secure use of the card. Of course, the bank will be liable and will compensate if fraud takes place in the bank's account or premises. However, if unauthorized use occurs or fund is fraudulently withdrawn due to the debit cardholder's negligence, the bank will not be held responsible. Moreover, people have to earn first and deposit in the respective bank account to use debit card. So use of debit card is always restricted by the cardholder's income. On this point credit card has more advantages because it is very easy, convenient and accessible.

CREDIT CARD'S POPULARITY: In addition to bank and financial institutions, almost all corporate entities, retailers and companies have introduced their own credit cards. These companies even offer various promotional tips and rewards in order to maximise their credit card sale. Air-mile points, cash-back, reward points are very attractive promotional tips offered to the customers for encouraging them to use a company's credit card more extensively. For example, every dollar spent by using a credit card can add one point for air-mile, reward or cash back. Points after accumulating up to a certain amount can be redeemed to purchase air-ticket, purchase some selective items, or receive cash-back for spending somewhere else. Foolish people do not bother about paying exorbitantly high rates of interest on credit card balance; instead, they enjoy receiving small benefits from those so-called reward points.

Furthermore, the use of credit card tremendously improves the purchasing power of consumers, as their disposable money increases over a period of time. Since credit card issuing companies adopt push sale strategy, they always make efforts to sell more credit cards and increase the credit limit of existing customers. If a cardholder ensures timely minimum payments and uses credit card very extensively, that customer will be rated with very high credit score; this will eventually increase his/her credit limit. The more the credit card is used, the higher the limit of credit card would be. This is now the usual practice in developed economies.

CREDIT CARD PHASING OUT CASH TRANSACTIONS: The importance of credit card use has soared following the recent shopping practices among consumers. Virtual market is advancing rapidly and gradually replacing the physical shopping malls. Many online shopping companies are very popular and active. Amazon is now the most popular online shopping platform and is widening its reach very aggressively. Because of Amazon's dominant presence in the market, some renowned retails stores have already closed and many others will follow suit very soon. In order to survive in the digital era, almost all existing companies including Walmart have been running their online shopping platform alongside their physical stores. For online shopping, credit cards are invariably required. Without credit cards, online shopping cannot be done. The popularity of online shopping is another important reason for phasing out banknotes. This online shopping spree has successfully spread in the developing world and even in the emerging markets. These technology-based shopping outlets are becoming tremendously popular in China and India.

Keeping pace with the growth of online shopping, the use of credit card is also getting more popular. Observing the rapid development of online shopping platforms, widespread use of credit card as well as electronic payment system, the former governor of Chin's central bank, Zhou Xiaochuan has predicted that the country's physical banknotes may one day cease to exist. Many regulators, particularly the central banks of the developed world, are also tacitly encouraging the use of credit cards and electronic payment systems so as to substantially reduce the use of banknotes. They hold the view that this will help them cut huge costs associated with printing banknotes.

The use of currency emerged as a means of overcoming the limitations of barter transactions, and reached the height of popularity after going through different phases including the gold standard. The banknote, which is believed to have been first introduced in China during the Tang Dynasty (618 to 907 AD), is now losing its popularity. The way the global economy is undergoing changes, the day may not be far off when the banknotes would completely disappear.  

Nironjan Roy CPA, CMA is a banker

based in Toronto, Canada.


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