



If you find yourself in Sweden these days, one of the most ubiquitous signs you will encounter states, “Vi hanterar ej kontanter” (“We don’t accept Cash”).





This sounds rather odd until you realise that the Swedes use plastic cards and mobile apps to zip through almost every transaction in daily life – from buying candy at the corner store, to donating to their local church. Most large banks neither accept cash deposits nor keep cash on hand. Even homeless vendors carry card readers to accept electronic payments.Other Scandinavian countries are similarly disposed. In fact, according to Credit Suisse, the rule of thumb in Scandinavia is: “If you have to pay in cash, something is wrong.”After all, unless you are a drug dealer or otherwise engaged in the black market, cash is cumbersome. It’s always much easier to point and tap than to count out exact change. Plus, from a policy perspective, eliminating cash provides valuable flexibility. Without notes in circulation, central banks can ignore the lower zero bound and explore the true impact of negative interest rates – something that an increasing number of nations are already exploring, albeit with limited success.Negative interest rates mean that the central bank charges commercial banks for holding overnight deposits. In theory – particularly if banks then pass on this cost to depositors – this should make saving less attractive because people are less likely to hold on to deposits if they have to pay banks for the privilege of doing so.In turn, this would provide a boost to the economy by lowering borrowing costs, driving demand for loans and increasing investment. Interestingly, this model would be particularly powerful during recessions, when substantial deflation implies that despite nominal rates being close to zero, real interest rates may be high enough to choke off investment. For example, in Spain, like the rest of the euro zone, main interest rates are at 0.05%. However, given 0.4% deflation, real rates are much higher, at 0.45%. In such situations, its only when nominal rates are negative that real rates become low enough to boost the economy.As an added benefit, negative rates also make local currencies less attractive and in doing so reduce deflation by making imports more expensive and exports more competitive. Accordingly, the recession European Central Bank has already been experimenting with negative rates for a while, as have the central banks in Denmark, Switzerland, Sweden and most recently Japan.However, so far it’s not clear what effect negative rates have had on the economy because in many ways their true impact can only be exploited in a cashless economy. After all, if banks in Pakistan start charging to hold deposits, customers would simply withdraw their deposits and stash them somewhere else. It’s only when cash is no longer an option that negative rates become truly powerful. As added benefits to dumping cash and going entirely digital, tax collection would become very easy while the black market and would be decimated, at least until they figure something else out. All of which sounds like a decent idea. But perhaps it also sounds like something that is not relevant to those living in less tech savvy societies.Yet, a world away from the sophisticated Swedes, a far more enthusiastic movement towards a cashless society is under way. In most parts of Africa, there are now more mobile money accounts than bank accounts. Kenya has made headlines with its mobile phone based M-PESA payments service that is used by by 22 million Kenyans — or more than 70% of the adult population, and is being replicated across the continent. Rwanda has been busy rolling out e-fare payments for public transport while Zimbabwe, where 43% of the GDP already moves through a single mobile banking service, wants to be Africa’s first cashless society by next year.Even in India, where cash remains king, the Governor of their Central Bank has stated that he has “no doubt” that “down the line India will be moving towards a primarily cashless society.” To that end, the Indians have been busy issuing digital biometric identity cards to their residents, using fingerprints and iris scans.The logic behind all these investments is quite straightforward. Due to all the reasons of cost and profitability that have prevented almost 90% of Pakistanis from gaining access to financial services, many developing countries have decided to leapfrog the conventional path to financial access. Instead of following a sluggish trajectory where people first get traditional bank accounts and then graduate to managing more complicated electronic accounts, plastic and mobile apps, these countries – with the help of major telecoms and credit card companies– are moving directly to digital. Plus, cash is expensive. On average, a country spends about 1.5% of its GDP on handling cash and incurring printing, distributing, securing, collecting, and cleaning costs. If that money can be saved while doing something that benefits the economy, then why not?What then about cash? Is it really, as a Bloomberg article recently put it, “increasingly déclassé?” Perhaps it is. However, the efficiency gains of galloping into a cashless society need to be tempered by the significant loss of personal freedom implied in handing over complete financial control, while inserting a vulnerable digital middleman in every transaction. After all, even if you are not a nefarious money launderer, you may want some financial privacy. Which is why, even in nearly cashless Sweden, two-thirds of Swedes still think carrying cash is a basic human right.The writer holds a doctorate from the Harvard Business School, has worked as the head of strategy at a commercial bank and as a management consultant with McKinsey & Co. in New YorkPublished in The Express Tribune, February 15, 2016.