A cashless economy is a system where payments are made by electronic means rather than using cash or check to pay for goods or services. In an economy that is “cashless”, a person would pay with plastic methods like credit cards, debit cards, or smart cards. This type of transaction electronically moves money from one account to another rather than using the traditional forms of exchanging printed currency or checks.
Woodfords Model of Cashless Economy
There has been much debate over Woodford’s model of a cashless economy by many experts in the field of economics. Most experts believe that although some of the ideas brought forth make sense, the model is still incomplete because, in real-world economics, central banks can affect nominal interest rates. In Woodford’s model, he assumes that this does not relate to the real-world economy. Woodford’s argument is that banks have committed themselves to straightforward objectives to control inflation but price stability creates a basis for economic performance. The basic questions brought about by Woodford’s theory are: Should central banks control interest rates? As of now, banks follow a rules-based approach through interest rate targeting which is the preferred policy option.
The most relative concepts of Woodford’s model are a pure credit economy, the natural rate of interest, cumulative process, and rules for monetary policy. In Woodford’s model, markets are perfectly competitive, prices adjust continuously to clear markets, and there exist markets in which state-contingent securities of any kind may be traded. In this case, no one would have to hold money and all payments could be handled by transfers or other assets. Basically, all base money would be held in and transferred between bank accounts. In Woodford’s cashless economy, he analyzes the need for “money to hold” according to household demands by holding stocks of assets by which the bank can still profit by generating flows of credit. In this setting, there would need to be perfect competition and complete financial markets making nominal assets that substitute for money. According to the rules of this system, the bank would become the price-taker, not the price-maker. Unfortunately, there is no such thing as a perfect or complete market, so Woodford allows for central banks the power to vary their price, however, in this scenario it takes away from the purpose of the model in that it is no longer free of monetary friction. Woodford’s model of a cashless economy is a concept that may not have an opportunity to be implemented by the central bank system because shortcomings may halt the process of converting to a pure credit economy. Woodford will admit that his model does have its own set of problems. The only way his price-setting theory could work is if the environment is in low inflation; it is impossible for the system to work if inflation is accelerating.
Experts seem to differ in opinion about a conversion like Woodford’s and are not sure if the issues associated are more semantics but the general consensus is that while the model is a step towards a cashless economy; there are many wholes in the system as well.
Pros and Cons of a Cashless Economy
It almost seemed impossible 20 years ago that the currency that we use for our everyday activities and purchases would be replaced by electronic funds creating a cashless economy. Credit cards use to be the new thing on the market in the 80’s but as times have advanced and people have embraced the idea, it’s a thing of the past and part of our economic growth system. The big idea behind credit cards and direct deposit was to keep money out of people’s hands and into the banks. Even though cash transitions are not in decline, cashless purchases are steadily increasing and surpassing cash purchases made. It seems to have accomplished its goal because at least one person or household has at least one credit card, if not more. Furthermore, smart cards are squeezing their way into the economy as well. But, with any shift of change especially affecting the economy, there is always a negative and positive side to things.
There are many positive ideas about moving toward a cashless economy. The first idea is that in a world without cash, payment is made by using electronic means merely to change the numbers on people’s bank statements. Banks prefer this because it’s a less expensive way to shift value between people. In many circumstances, handling cash can be troublesome, risky, and inconvenient. Surprisingly, we have no figures for the number and value of cash transactions, though we have excellent data for non-cash transactions. Another positive aspect is that when we talk about employers being paid, electronic funds always seem to be the better way and fastest to get paid. Employees are opting to get their paycheck direct deposited in their bank account rather than receiving the traditional paper check which is almost extinct. Checks are still the most popular way people pay their bills but now there are faster and more convenient ways to do it with the internet, smart cards, and over the phone. They would eventually replace all other existing cards such as credit cards, ATM cards, debit cards, etc. Another benefit would be the fact that smart cards remember every transition that was made eliminating the need to save receipts for proof of payment. Third, smart cards would mean less cash handling for merchants. Currently, it costs businesses and banks about $60 billion each year to handle cash and coin. Consider that cash gets counted at least five times between you, the merchant, and the bank. Fourth, it would mean less fraud for banks. Smart cards would virtually eliminate the need for banks to set aside money to cover fraud loss. Fifth, it eases the burden of the government. Collecting taxes from citizens could become much easier if taxes were collected from the cards.
Even though smart cards seem to be the best thing that will hit the economic market, it has disadvantages to the consumer, and merchant. To begin with, being that everything will be transferred to the card there is a need to know what is going on behind the scenes. In other words, when we handle cash or pay for purchases with cash we know exactly how much we paid and how much we have left. But, with the smart card, a transaction is non-personal, and with that comes usage fees. Another area of concern is the idea of consumer privacy. What information is actually kept private and the information that is being stored, what is it being used for? If your smart card is not properly programmed and secured, a merchant could access your health records, driving record, or any other information on the card. Furthermore, will consumers accept the new card or reject them? Will the smart card require an upfront fee to purchase and fees thereafter? Plus, will the card be accepted anywhere? Just like credit cards and ATM’s, there will always be malfunction problems and transaction problems that will need to be addressed. And when we talk about purchases and buying things online from merchants, we have to keep in mind that the merchants will have to update their machines to accept the cards and may have to pay a fee for the convenience of using them as well.
So while we count up the advantages and disadvantages of the card the consumer, merchants, banks, and government need to consider all of the components the smart card has to offer. America seems to be shifting into a “microwave” market meaning that they want it right now and don’t want to wait. Even the childhood game, Monopoly has gone cashless. Sometimes cashless isn’t the best thing, following the old sayings that “if it’s not broken don’t fix it.” Will the smart card be the ultimate downfall or turning point of the economy? The years to come will only tell, but cash is still here to stay for a while.
Electronic Methods of Payment
One method of electronic payments is the debit card. A debit card is a bank-issued plastic card that is directly linked to a bank account. When you use a debit card, money is deducted from your bank account right away. This card is beneficial because it allows the user to pay immediately and not pay any interest amount on the purchase because they are using money that is available immediately. Benefits of a debit card include the fact the user pays no interest and its convenience. Negative things about a debit card could be the high bank fees at some institutions and the possible increase of being vulnerable to identity theft of a card linked directly to a bank account.
Another method of electronic payment is the credit card. Credit cards can be issued by banks, other financial institutions, retailers, and oil companies. There are two different kinds of credit cards and those are credit cards and charge cards. Credit cards allow a line of credit and the user to pay a minimum amount each month and charge cards require the user to pay the full amount charged each month. The benefits of a credit card include the ability to pay immediately and convenience. The negative effects would be the oftentimes high interest charged for using the credit card.
The third method of electronic payment is the smart card. A smart card is a plastic card the size of a credit card that has a microchip loaded with data. A smart card can be loaded for many different applications including dialing a connection to a mobile phone, establishing identity, using at parking meters, giving data at hospitals to avoid filling out forms or purchase online at electronic stores. Smart cards are currently being used primarily in Europe but are expected to become a larger use of electronic payment as technology continues to advance.