The hidden cost of cashless transactions to the benefit of banks

A few years ago, Australian Citibank took the surprising decision to make its banking agencies the first cashless banks in the world, stating that its customers didn’t need or want banknotes anymore, and were content with online wallets, such as debit cards and mobile phone payment solutions. “This move to cashless branches reflects Citi’s commitment to digital banking, and we are investing in the channels our customers prefer to use,” said Janine Copelin, head of retail banking at Citi Australia.

Since then, other banks have pushed their agenda in the same direction, with more or less publicity, according to the leeway they could sense from the markets they operated in, along with other economic players which had similar interests. Economist Paul Mason says “Among central bankers, that frown has become a scowl. There is a “war on cash” in the offing — but it has nothing to do with boosting our ease of payment or saving trees.” Visa launched its “cashless challenge” last year, promising thousands of dollars in rewards to shops committing to refuse cash from their customers. But many banks are more discrete: one of the ways to kill cash without seemingly doing so, was to convince authorities that cash was the source of extra costs and was used by criminals and tax evaders.

As a result, the European Union chose to reduce the number of bills it issued, and to limit the freedom of movement with cash, one of its main advantages. Currency News reported earlier this year that “The European Commission (EC) has published a proposal for a European Union Initiative on restrictions in cash payments, via an Inception Impact Assessment released on 23 January. Its aim is to provide stakeholders that could be affected by such changes with the opportunity to provide feedback on the Initiative, including central banks and other cash issuers, law enforcement agencies, tax authorities, businesses and members of the public.” But why is so much effort being put into the suppression of cash?

The reason why cash is hated by so many public and private entities is within its nature: cash transaction, being two-party operations, are private. They operate without a third party, and therefore deny it control. While governments are eager to see cash transactions disappear so they can have a better view of taxable economic operations, banks are just as eager to take a cut in every financial operation they are part of. Cash payments don’t let anyone in on the deal — thus reducing the potential which banks hope to reach, through a cashless economy. In addition, the cash world is in opposition to the banking world : if money is not on a bank account, it is in someone’s pocket, and vice versa. Cash has therefore the possibility of draining the banking world if, say, business and people no longer trusted banks, found them too greedy, or not profitable enough. Freedom activist Nick Giambruno says The banking system is very fragile. There’s not a lot of actual paper cash in banks. It’s mostly digital bytes on a computer. So if people start pulling paper money out of the banks en masse, it won’t take much to bring the whole system down.” This is especially true these days, when interest rates are so low they have even dipped below zero, prompting customers to withdraw their balance from the bank. With the help of governmental reform towards the reduction of cash, banks would be able to lock businesses and people into the banking system, apply fees to basically anything they wanted and make sure every single penny in the economy is accounted for.

Despite claiming that cash operations incur costs of their own, which is true to some extend, a cashless economy would very probably increase the cut which banks take in people’s and businesses’ income. This fact justifies the ongoing lobbying campaign against hard currency, which is nowhere near finished: Ronald-Peter Stöferle, from the Austrian Mises Institute, says: The attacks on physical cash from a phalanx of economists, central bankers, commercial banks, and politicians have not diminished in recent years. On the contrary, in the face of the worldwide increase in terror attacks, particularly in Europe, and ongoing pressure on public budgets, the cash ban issue is increasingly dragged into the spotlight.” But to win this fight, they need a powerful ally.

The same potential increase in profits applies to taxation, which is why governments are helping banks push the agenda. They already work together, through financial crime-fighting programs, anti-laundering programs and other agreements, which effectively give government agencies the ability to use the banking system as an intelligence network over the population and territory. No matter how seemingly innocuous an online transaction may seem, it does in fact yield very precious information as to a bank account owner’s location, movements, contacts, expenses and income, all kept in a ledger.

Editorialist Brett Scott says States having access to your payments data opens up potential for economic censorship.” Though governments are unlikely to spend their days sifting through the heaps of information produced by online payments, to check for any operations unaccounted for, they will possess the information nonetheless. And with potentially full visibility, the feeling of vulnerability in the population’s minds will instinctively bring them to fear their governments more, and accept to pay taxes on absolutely all transactions, not just on the main ones. The increase in bank fees would therefore go along with an increase in taxation, both permitted by the increase in power and monitoring capacities.

Banks will say two things and hush the third. They will say to the citizen that virtual money is safer, more modern, and more convenient, to convince him or her to give up on the idea of banknotes. They will say to governments that cash is used by criminals and tax evaders, to convince them to stop printing banknotes in their central banks. They will hush the fact that suppressing cash from the economic life of citizens will box them into the banking system and leave them at the bank’s mercy (banks will no longer fear customers withdrawing their money in cash). And they will hush the fact that governments will give up on a national symbol which betokens the economic added value of governments, in their citizen’s eyes.