Cashless or Less Cash
Circulating less cash might help Denmark’s economy, but will
not eliminate the informal market
By Nehal El-Sherif
Besides studying in Denmark’s second city Aarhus, Mathias
works from time to time helping friends renovate apartments. It allows him to
earn some money, which he usually spends quickly. Doing that kind of work –
which Danes call ‘sort arbejde’ or black work – Mathias gets paid in cash, and
consequently does not pay taxes on it.
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| MobilePay application |
"It might limit the immediate possibility of sort
arbejde, but I think people will find some way to do work which will be
disguised as something else in terms of payment," said Mathias, who
preferred not to give his last name.
In May, international media heavily reported that Denmark is
moving towards becoming a cashless economy, after the government proposed a law
that would allow shops to have the right to deny taking cash payments. The law,
if passed, would go into effect early 2016. Few years ago, Sweden already
allowed some places, including buses, not to accept cash.
Many see this proposed law as a huge step towards a
cash-free society. Therefore, it would be expected that such scheme limits the
black economy. However, people like Mathias do not agree. Some officials see it
as a step to improve security in Denmark as well as ease the transaction and
payment process for retailers.
More security, less costs for retailers
If the law is passed, clothing shops, gas stations and
restaurants will not be forced to accept cash. The proposal is part of an
initiative proposed by the Ministry of Finance, which includes a list of
measures that aim at providing better conditions for companies and result in
easing the payment procedures, reducing costs and increasing productivity. All
of this should lead to a boost in the companies’ growth and the bigger economy,
eventually.
The proposal is supported by the Danish Chamber of Commerce,
which agrees that giving shops the option to refuse cash will have positive
effects on retailers and the economy.
"I think it is a good idea for two reasons. First, for
smaller businesses, which are thinking about implementing new instruments and
new innovative ways of paying, to reap the benefit of such instruments,"
said Sofie Findling, a Consultant at the Danish Chamber of Commerce.
Besides the innovation perspective, Findling stresses on the
security element. "Especially to shops that are open late at night, I
think this proposal might secure employees in specific areas of the retailing
industry," she added.
According to Statistics Denmark, a website affiliated with
the government, there were 4,120 cases of burglary targeting shops and
companies across the country in the first Quarter of 2015, while there were
more than 8,000 cases of Household burglary for the same period.
Mathias, who studies history and political science,
acknowledged that the idea of limiting the use of cash would increase security
in the country.
"I recognize the idea for places like gas stations,
which are more prone to theft. So, if criminals know that there will not be
money there, then crime rates would be lower," he said.
Another advantage for this scheme would be decreasing the
cost of banknotes and coins, according to the Chamber of Commerce.
"We know that cash is relatively expensive to handle.
If we benchmark cash against electronic payment, cash payments are more
expensive, so there are some economic benefits to the proposal as well,"
said Findling.
In 2012, Denmark’s National Bank released a report about the
costs of the different types of payments in the country that took place in
2009. It said the banks' costs related to payment services totaled almost DKK
4.4 billion in 2009, with about half of the costs being attributed to cash
payment schemes.
"Cash handling is more labor-intensive than other
payment services, which is the reason for the banks' considerable costs related
to cash," read the report. "Deposits and withdrawals involve the
highest costs and are also considered to be most labor-intensive."
For retailers, costs of cash and card payments at point of
sale totaled around DKK 2.4 billion and DKK 1.6 billion respectively. More than
half of the costs of cash payments were related to the time spent on internal
procedures, which include payroll costs for cashiers as well as the counting
and packaging of cash.
If the proposed law is passed, shops would still incur costs for card payment, but at least it will save them the price of dealing with cash.
So in the end, besides printing less banknotes and coins,
this scheme would lead to a decline in the costs attributed to finalizing the
cash transactions at banks and in shops.
Easy to implement
It would not be hard to implement this law in Denmark, a
country where cash dealings were estimated at 25 percent of all payments by
2012, a decline from 80 percent in 1990, according to the National Bank. The
use of paper-based payments decreased because it was taken over by the national
debit card, Dankort, which slowly became the principal payment instrument since
its launch in 1983. The card is the most frequently used payment method in
retail stores, accounting for more than 60 per cent of turnover.
These numbers reflect views given by Mathias, who says he
uses electronic cards in almost all his purchases. "I use my credit card a
lot more than I use cash and that is not a problem for me," he said.
Thomas, a 31-year-old who lives in Aarhus, echoed what
Mathias said. "Normally I pay with card, I always have it on me and
between friends, I use MobilePay or also in a market," said Thomas, as he
flashed his Dankort card from his wallet.
More than 2 million Danes are already using MobilePay,
accounting for over third of the population. The fact that sending and
receiving money is free of charge could also be seen as a reason behind its
success.
Danske Bank launched this application in the country two
years ago and clients of other banks can also use it. More shops have been
introducing the option to purchase items using MobilePay, allowing customers to
scan their phone over a small machine to count the products they have, before
approving the payment of the total amount with only a swipe by their finger.
Thomas also agrees that the law would make it safer for
small shops. "But for the general population, I don’t think it is good,
because then you will be forced to have your credit card with you all the time
and some people don’t do this."
When he goes to flea markets, Thomas prefers to pay with
cash because he does not feel it would be very safe to use his Dankort, and if
he were out of cash, he would opt for paying with MobilePay.
Problems facing the scheme
While this law may seem favorable for some people, it would
take a long time to have it spread across the country.
Findling of the Chamber of Commerce believes that as long as
there are customers and retailers who prefer cash, then Denmark will not make
the transition towards a cash-free country in the near future.
"In general, it is very important to remember that as
along as there are customers who wish to pay with cash, I am convinced that
shops in Denmark will continue to accept cash. So, if there are tourists - and
in general Danes – who would like to keep paying with the banknotes, then we
are not going to see a cashless society in the near future," she said.
Besides tourists, the older generation of Danes might also
prefer to keep using cash. Mathias’ mother is one of these people, who would
feel uneasy if they suddenly found themselves being forced to use electronic
cards for payments.
"While (such scheme) would make a lot of things more
simplistic, it will be harder for a lot of people, like my mom. The way she
spends her money is definitely not through a card, but the cash in her wallet.
For her to go to a store to get a soda or gas and to be only able to pay with a
credit card will not be possible for her. It is actually limiting," he
said.
Around 40 per cent of the adult Danish population rarely
pays in cash and in general citizens now carry less cash in their wallets. A
recent survey by the National Bank found out that those who prefer cash
payments are mostly elderly citizens and people with below-average incomes who
regard cash as a useful budget management tool. Consumers in this group are
more hesitant to adopt new payment methods, such as mobile payment or buying
things online.
"Now, I can’t see this scheme spreading because the
older generation are not used to computers or have the flair for technology as
younger people do. Maybe in 25 years, it could work," said Thomas, who studied
building management in Aarhus and is currently looking for a full-time job.
While the law could help increasing security in the country,
Internet security remains an issue, especially after an accident last year led
to 900,000 social security numbers (CPR) leaked, which was a major security
breach.
The cards payment system broke down several times over the
past years, mostly for very short time and in limited areas; yet, Danes
frequently mention a major collapse of the system around a year ago for few
hours, which left no one being able to buy with cards or to withdraw money.
While the company responsible for such systems, Nets,
described it as a temporary technical problem, such cases would completely
paralyze a cash-free country – or even town.
"I think there are still some issues that need to be
overcome before we actually see this move towards a cashless society, one of
course is the security of data. This issue is already being handled and the
Danish banking industry is very aware of this," said Findling, of the
Chamber of Commerce.
"The other thing is of course anonymity. One thing that
cash payments can do that electronic payments still lack is the possibility for
the payer to be anonymous, and I think this is one of the areas that we really need
to look into if we are looking to become a cashless society. Again, I don’t
think that is going to happen overnight or in the 5, 10, 15 years. But at one
point, if this is where we are heading towards, this is an issue that we need
to look more into," she added.
There is also the fear of Internet fraud. According to the
European Central Bank, total card fraud in the Euro area hit €1.3 billion in
2012, more than 14 percent increase compared to the year before.
Innovative before cashless
Reading reports in different media, people might get the
feeling that a cash-free Denmark is a soon-to-be reality. However, there are
many issues that would hinder this transition in the near future. It would also
be a small step in the government’s hope to eliminate the informal sector of
the business dealings.
The law does not include big chains of supermarkets for
example, although the Chamber of Commerce would have liked to see the proposal
widen its scope to give the option of refusing cash to all kinds of businesses.
"I think the factors that should be in place to develop
and apply this system is that consumers feel safe with electronic payments,
cards or mobile and of course if there is a wish in the retailing system. So,
if these two factors are in order and if the banking infrastructure is working,
I think this would be applicable in any economy," said Findling.
"If I were to say anything about the future I think
there will be more instruments available in the market, which retailers will
start accepting," she added.
Can it affect the black economy?
When literally translated, 'sort arbejde' means black work.
It refers to the black economy, where people work and get paid in non-taxable
business dealings. Such dealings are not reflected in a country's gross
domestic product (GDP). While it somehow is expected to happen in developing countries,
surprisingly the informal sector of the economy is not that small in Denmark.
Many people tend to do jobs and get paid under the table; Mathias and Thomas
are a sample of a larger number of Danes.
A survey in 2009 found that 70 per cent of the Danish
population accepted ‘sort arbejde’ despite the government’s attempts to
eliminate it through a campaign it called "Fair Play" that was
launched in 2004 with some penalties as well as raising awareness strategies.
Thomas and Mathias said this is common in the construction
and housing sectors. "It is illegal," they both acknowledged, but
they also believe it is good for the economy to circulate the money instead of
saving it at the bank; and easier for people to finish jobs that otherwise would
have cost them four times the amount of money.
A relative of Thomas used to be a hairdresser and now she
does not work in a shop but still does her work at home for friends and family.
Thomas said it is good for her and her customers because it is cheaper than going
to a shop. "It does not hurt anybody if you know what I mean," he
said.
Both young men do not think that the new law – if it leads
to a cashless economy – would stop them or the next generations from doing this
sort of nontaxable work. Taking few seconds to think about it, Thomas found the
alternative fairly quickly: MobilePay.
"I am getting cash now, but in MobilePay you can’t
really see what the money is for. If I work, I still can get paid through
MobilePay. If you get a certain amount a lot, then (the authorities) can see
it, but then they have to get police approval to investigate. They simply don’t
know if I am going twice a week to a restaurant and share a bill or to a
birthday and share the price of a present," said Thomas.
Mathias, on the other hand, preferred another form of
payment.
"Let’s say I want to do this work, if I work with
friends I could say I want a new TV and new books, and that’s probably easier.
If I am the employer, I can make a transaction in this case and put it in the
books saying I bought a bike from this person for the amount I owe him. That’s
not illegal. So I think it is still possible even though a cash system would
not be as valid as it is now," said Mathias.
