Digital finance: shift towards ‘cashless society’ raises legal and policy questions

Simon Fuller, IBA Managing Editor

Debit card payments overtook cash payments for the first time in the United Kingdom in June 2018, according to figures from the UK banking and financial services sector. It follows a similar trend in Sweden, where 60 per cent of consumer transactions are now made through non-cash methods, as highlighted last year by foreign exchange research.

A number of other countries, notably Canada, France, China and Australia, are also increasingly adopting non-cash payments and technology – leading some experts to predict that ‘cashless societies’ may exist as soon as 2022.

‘Although cash still reigns supreme in the vast majority of countries, it may be sidelined sooner rather than later’, Benoît Cœuré, a member of the European Central Bank’s Executive Board, told the Central Bank Payments Conference in Singapore in June 2018.

Many governments and businesses worldwide are moving towards a cashless future through policies and initiatives that limit cash usage and encourage the majority of transactions to be made via electronic payments. Such a shift offers benefits for consumers, including greater convenience and security, while enabling banks and financial service providers to profit.

But there’s also a growing focus on the wider implications of going cashless, and the far-reaching legal and policy issues that could arise.

In Thailand, for example, electronic payments are being advanced through the government’s National e-Payment Master Plan, launched in 2016. The PromptPay initiative, part of the plan that enables inter-bank fund transfers using mobile phones, and mobile QR-code payments are both gaining in popularity, says Dhiraphol Suwanprateep, a partner at Baker McKenzie in Bangkok.

But this trend is not reflected across the entire country. ‘In more rural areas of Thailand, people are not yet as familiar with PromptPay and QR-code payments, and there are fewer local businesses accepting such payment methods. There’s been less impact on the use of cash in these areas,’ says Suwanprateep.

In Europe, Poland is one of the countries at the forefront of e-payments. The Cashless Poland Foundation, an initiative set up in 2017, provides small and medium-sized retail businesses with point-of-sale terminals and subsidises them to take low-value card payments, which otherwise might not be cost-effective.

Although cash still reigns supreme in the vast majority of countries, it may be sidelined sooner rather than later

Benoît Cœuré
Executive Board of the European Central Bank

There are also potential risks of moving to a cashless culture, as India discovered in 2016. In November that year, Prime Minister Narendra Modi’s government removed high-value currency notes from circulation, affecting 86 per cent of cash in the country. ‘Demonetisation’ was intended to curb crime by targeting illegal cash, but it triggered a liquidity crisis, leading to huge queues as people sought to withdraw money from bank ATMs.

On a more optimistic note, Sherill Pal, a senior associate at J. Sagar Associates in Bangalore, says the demonetisation policy ‘unwittingly provided the impetus required for banks and other such players to market and promote usage of alternate payment mechanisms’.

As in Thailand, the experience in India has also highlighted the extent to which urban areas are more familiar with cashless services than rural communities. Pal explains that the Indian government is seeking to address this, using the latest technology to provide banking services to remote parts of the country.

Ewa Butkiewicz, Co-Chair of the IBA’s Banking Law Committee and a legal adviser at Wardynski & Partners in Warsaw, says the prospect of the ‘cashless society’ raises a number of legal and policy questions. In particular, she points to the fact that when most transactions are online, a huge amount of data becomes available about an individual’s finances and habits.

‘It’s important to produce safeguards, and ask what can providers do with this data? How can the government access this data? To look at the powers of authorities to access data, to track criminal activities, for instance. You have to balance privacy with commercial and public concerns,’ she says.

Protecting the vast amounts of financial data will become increasingly important. It also prompts questions about responsibility and liability in the case of a cyber-attack – for example, if an online bank account is hacked. ‘How much liability should the individual have and how much should the payment service provider have?’ asks Butkiewicz. ‘Currently, there’s more obligation on the provider [in terms of liability], which seems right. But individuals should still be responsible and have some liability.’

Concerns about privacy and ‘Big Data’ could lead to resistance against cashless societies. Consumer habits could, too. Some research suggests that non-cash payments promote greater individual spending and increase personal debt. In addition, says Pal, ‘there will always be a section of the society which believes their money is safer where they can see it’.

Benoît Cœuré of the European Central Bank also noted that ‘if cash were to disappear, trust in the currency – a key public good – would be dependent on the creditworthiness of private entities’.

Perhaps because of these concerns, cash is far from dead. A global report by security company G4S, published in April 2018, found that across all continents, cash in circulation relative to GDP increased from 8.1 per cent in 2011 to 9.6 per cent in 2018.

Frederick Davis, Co-Chair of the IBA’s Business Crime Committee and of counsel at Debevoise & Plimpton, thinks the move towards cashless – and the extensive data collection that comes with it – will be opposed by privacy groups and prompt further national or regional legislation in this area. He also expects an upsurge in ‘esoteric forms of currency that offer more anonymity, which may in turn lead to new forms of regulation of them’.