The Financial Express

Becoming a cashless economy

Becoming a cashless economy

Over the years, rapid digitisation of financial services in Bangladesh has created an ambience that the country will soon become a so-called cashless society. Policymakers and some experts have also expressed optimism that the complete digitisation of all financial transactions is only a matter of time. The Covid-19 pandemic, however, becomes both a challenge and an opportunity to expand the digitalisation of the economy. It has already tested the effectiveness of the current advancement in digitisation and exposed the weakness in infrastructure and governance. At the same time, it has also shown that Bangladesh is mostly on the right track to make the economy more digitised despite some limitations. 

In fact, the pandemic has proved that it is possible to go ahead with less cash, if not entirely in a manner that is cashless.  There is a clear distinction between the two. Cashless means zero cash or a very insignificant presence of cash in a society where all the financial transactions take place electronically. People use credit and debit cards, smartphones and other electronic devices for all kinds of financial transactions.  Transaction through notes and coins or cash becomes minimal in a cashless country or society. In reality, there is still no such country globally that is entirely cashless, although some countries have already succeeded to get very close to becoming cashless.

An analysis, prepared by money.co.uk, a virtual platform and financial service provider, showed that Canada is now the world's most cashless society, followed by Hong Kong, Singapore, New Zealand, Japan, Australia, Norway, United Arab Emirates, Switzerland and Finland. To determine the extent of cashless economy, it considers five factors: percentage of population having credit and debit cards, limits of contactless payments, number of available e-wallet operators, and the number of Automated Teller Machines (ATMs) per 100,000 adults.

Despite some limitations, the analysis sheds some light on the global trend of a cashless society. It indicates that countries ahead of being cashless are still a long way from binning the banknotes and exchanging them for e-wallets.  For instance, 83 per cent of the Canadian adult population (15-year and above) own a credit card, which means around 17 per cent of Canadians still prefer cash. In Norway, only about 5 per cent of people use cash for transactions, as 95 per cent of people have at least one debit card there.

Thus, cashless is not the total elimination of cash but making all the transactions vastly digital or electronic. Nevertheless, certain amount of cash transactions will still be there, especially in many developing countries that are lagging behind due to lack of technological advancement as well as  bad governance. The population is also another factor, no doubt. Though China and Japan, two of the most populated countries globally, have turned largely cashless, others like India, Indonesia, Russia, Brazil, Bangladesh and Pakistan are far behind in this regard. Universal access to bank account is another big challenge in these and many other countries.

Thus, cashless may be a misnomer for these countries. Instead, it is less cash that matters. Less cash means limited use of hard cash as a result of increasing digitalisation of economic activities which make people gradually more used to electronic payment systems. 

In Bangladesh, mobile penetration is the key factor speeding up the shift towards an economy that is less cash-based as almost everyone has a mobile phone here. So, moving towards the digitisation of the economy is not an impossible task. Gradual adoption of QR code payment method, considered an easy payment system, would be another step forward in the process. In addition, the mobile financial service (MFS) has contributed significantly to push financial inclusion and bring a large number of unbanked people under the banking network.

Nevertheless, the digitalisation of the economy requires a safe and secure infrastructure of information and communication technology (ICT) as risks of cyber-attacks, online frauds, and technical glitches are also there. To minimise the risk, a big investment is a must. Overall, the state of governance in the country is also an essential factor.  Many poor people did not receive the tiny allowances during the pandemic, transferred through MFS, due to some unscrupulous staff in different state entities. They have taken undue advantage of the financial and digital illiteracy of poor citizens.

The strong presence of informal economic sector is another challenge to digitalising the economy. However, it is also an opportunity to bring a large part of the informal economy under the formal economic system through digitalisation and thus reduce the dependency on cash.

On the path to less cash, what is also necessary is to know and understand the size of the cash economy in the country.  Usually, the amount of currency in circulation (CIC) represents the total volume of cash in an economy though it is not necessarily a perfect estimation. Bangladesh Bank statistics showed that the outstanding amount of total CIC stood at Tk 2.08 trillion at the end of FY20 and Tk 1.70 trillion at the end of FY19.

There are two parts of CIC. One is the currency in banks or cash in hand with banks, and another is currency outside banks or currency with the public. Currency in banks, technically known as 'currency in tills of deposit money banks (DMBs), is also cash as banks maintain notes and coins to pay the depositors and lenders. Currency with the public is the amount of money held by individuals and institutions entirely in cash. In Bangladesh, 92.30 per cent of the CIC was with the public in FY20, while the ratio was 90.55 per cent in FY19. 

In this connection, another dimension needs attention. If compared to the country's Gross Domestic Product (GDP), the proportion of cash would not be very high. The ratio of CIC to nominal GDP or GDP at the current price is a common way to understand the use of cash in a country. The CIC-GDP ratio was 6.72 per cent in FY19 which slightly increased to 7.44 per cent in FY20. The ratio in FY21 couldn't be calculated due to a lack of updated data. The ratio is low compared to many developing countries like China and India. In India, the ratio stood at 14.70 per cent in FY21. Nevertheless, a low ratio of CIC-GDP can't be a matter to be complacent about. Continuous work in a planned manner is a must to become a less-cash society.

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