The Problems With Physical Currencies
Despite the limitations that the physical currencies brings with themselves, they are still being used on a large scale around the world.
The idea of ditching notes and coins has been round the corner for quite some time. But this idea is not a simple one. People have been using large denomination bills and coins for ages now. To phase them out altogether would require a good deal of justification.
The arguments put forth for the use of physical currency are many:
- In a survey led by Tufts University in the USA, it was found that the cost of using physical currencies every year is $200 billion, and these are inclusive of the cost of transporting, collecting, sorting, distributing money and ATM fees.
- It was also found that an American, on average, wastes five and a half hours every year at the ATM, depositing and withdrawing money. Multiply that with the population of the country – and you have about 1.6 billion hours wasted every year!
The Issues With Money
- Durability: One of the primary concerns with physical currency is its durability. It can be easily destroyed, and hence will remain of no value after a period of time. Even though coins last longer, the life of paper money is far less. For instance, a dollar bill has a lifespan of only six years.
- Restricted acceptability: Paper currencies are issued and used within domestic countries only. This limits their use as they cannot be used for transactions outside their home nation.
- The danger of over-issue and demonetization: Physical currencies as they are issued at the will of their governments. This may lead to disturbances in foreign exchange rates, government contracts, inflation etc. On the other hand – if the government decides to demonetize the physical currency, then citizens are left with nothing but worthless bills of paper in their hands.
- Lack of confidence in its value: The value of paper money is backed by public confidence. If the value of money fluctuates and public confidence in the currency fades, it could lead to national turmoil and chaos. Something like this happened in Germany, in the Weimar Republic where inflation ran very high. In such cases, transactions start occurring in kind much like the barter system and the currency practically becomes useless.
- Instability: Another major issue with physical currency is the instability in its value. This restricts the use of physical currency to only monetary exchanges unlike metal reserves, whose value more or less remains constant over time.
- Paper currency is dirty: Bills are full of germs and are freely circulated around. A team of researchers in Ohio conducted a check on the cash circulated in a supermarket and found out that 87% of the bills used contained harmful bacteria and only 6% were relatively clean.
Fun fact: Did you know – nearly every single US Dollar note has a tiny amount of cocaine on it?
- Centralised control of money: The currency in an country is completely under the control of central government of that respective country. Due to this, its fate lies completely in the hands of government. As cited in the previous article, in the 2008 global recession time, federal banks tried to revive the economy by increasing the amount of circulating money. People got upset with this action of the government as the they said that the institutions who were responsible for this situation were at an advantage.
Switching to alternative payment methods
Many have long predicted the movement of money away from cash to some non-traditional methods.
- The World Economic Forum (WEF) released a report in 2015 the Future of Financial Services, stating that the payment industry is undergoing a new change, which will cause a major impact on both the providers and customers.
- Multiple alternative modes of payment could include the use of debit cards, credit cards, prepaid cards, direct bank transfers, mobile payments, use of cryptocurrencies, online banking, e-payments etc.
- A large number of people, especially in developing countries, continue to depend on cash for many reasons – the lack of a cashless payments infrastructure being one of them. Governments and companies will need to help deliver high speed broadband and educate the masses on cashless payments if we are to accelerate this transition to cashless systems.
Shifting to other alternative forms of payment implies that we will increasingly become more data-driven. Data will be stored safely in the hands of the government and data providers. This system will help establish loyalty and trust in the payment systems for both the providers and customers.
Moving towards alternative modes of payment also implies that there will be a change in the relationship between merchants, customers, and payment service providers. Both merchants and customers will have an option to choose from a number of financial institutions, digital wallets and other payment modes. This is the need cryptocurrencies are rushing to fulfill.
Whether or not we are prepared for this change, the reality of the situation is that physical currencies are slowly becoming obsolete. Statistically speaking, non-traditional modes of payment have risen about 14% between 2008 and 2012 whereas cash transactions, only by 1.75%.
When the transition will be complete, is only a matter of time.