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Purchasing Through 0 and 1Examining the benefits and costs of a cashless society in South Korea
Yeo Ye-rim  |  yryeo94@yonsei.ac.kr
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승인 2016.06.16  17:24:17
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CAN YOU imagine a society with no cash at all? It literally means that everything will be paid in electronic payment means, including money bets with friends, pocket money, and claw machines on streets. In fact, such a phenomenon is not far from reality, as South Korea has already taken its first step towards a cashless society. The Bank of Korea (BOK) announced in April that it will achieve a coinless society by 2020 in order to “reduce the inconvenience of carrying and using coins in shops or transportation and to lower the cost of minting coins.” Its plan is to create a noncash system in which buyers who pay in cash receive their change directly through electronic payment cards. For instance, if one pays ₩5,000 in cash for a coffee worth ₩4,500, the ₩500 in change will be deposited directly into the payment card. It seems to be an ideal plan, but whether South Korea can embrace and transition smoothly to a cashless society remains controversial.

 
Already on the road to a cashless society
   The BOK’s official plan to transform South Korea into a coinless society by 2020 is not as abrupt as it might seem, as the use of paper money and coins has been declining every year. According to the BOK’s 2015 report, South Koreans hold an average of ₩74,000 of cash in their wallet, which is ₩3,000 less than that in 2014. For the first time in South Korea, consumers carry out more transactions with their credit cards (39.7%) than with cash (36%). Moreover, according to a survey by the BOK, most people in their twenties, thirties, and forties are typically inclined to use credit cards and mobile phones as payment methods, while those over age sixty still prefer using cash (45.8%) rather than credit cards (31.3%). As the younger generation relies more on electronic payment methods than the older generation, the advent of a cash-free society seems quite plausible.
   The gradual transition toward a cashless society can be attributed to the development of Fintech, which is a convergence of advanced technology and finance. With the ever-increasing desire to carry out faster and easier transactions, there has been an increased use of electronic payments over cash. Accordingly, many information and communications technology (ICT) companies have developed innovative digital payment methods. Since 2014, mobile phone payment systems in South Korea, such as Kakao Pay, Line Pay, SK’s T Pay, and Samsung Pay, have gained popularity for their speed and convenience. Kakao Pay, for example, is a payment app in which the consumer can register all of his or her credit cards and thereafter use them to buy products or transfer money to other accounts simply by entering a single password. According to the BOK, the number of people using online mobile banking has increased by 34.4% since the end of 2014. Moreover, 63.6% of PC users in South Korea are registered for online banking, a 5.9% increase from the previous year. With the advent of such convenient payment methods, more people are making transactions by electronic means rather than by cash.
   The huge cost that arises from cash management is another reason why South Korea is moving towards a cashless society. In 2015, the BOK’s total cost of printing cash was ₩144 billion, an expense that is funded by tax revenue. If all payment methods were carried out electronically, the public then would not incur costs to print, handle, and dispose cash. Even for individuals, carrying heavy cash in their wallets can be a quite a burden. Furthermore, consumers often receive benefits from using credit cards, such as an income tax deduction when using particular credit or debit cards, cash back or card points on daily purchases that can later be used as cash, and discounts. “I prefer using my credit or debit cards when I do shopping,” says Choi Jae-hyun (Jr., UIC, Dept. of Justice & Civil Leadership). “When I go shopping at a particular department store and use particular credit cards to purchase products there, I can get discounts or receive card points in return.”
 
Looking forward to economic growth
   Many Northern European countries are already close to becoming cash-free societies. In Sweden, cash transactions only constitute 2% of the Swedish economy. Some public venues no longer accept cash, while many others steer customers toward paying with plastic. For instance, churches now receive donations through card machines. Street vendors at outdoor markets carry mobile card readers. Public buses will not take cash anymore, and even some museums operate cash-free. Only one out of the four largest banks in Sweden offers cash-handling services. The Bank of International Settlement (BIS) says the Swedish National Bank holds 3.6 billion krona (₩516 billion), which is half the amount it held in 2010. “No one uses cash,” said Hannah Ek, a 23 years old student from Sweden, in an article published by The New York Times. “I think our generation can live without it.” Like Hannah, the majority of the people in Sweden have already adapted to living without cash.
   South Korea has taken Sweden as a model. The transition toward a cashless society is expected to bring huge benefits for individuals and for the South Korean economy as a whole. For individuals, going without cash will reduce the inconvenience of carrying coins and paper money by hand. It will also lessen the need to keep household accounts as all electronic transactions will be automatically recorded online or on mobile phones. For instance, Recpic, a new mobile app developed by a startup company Monday Dream, scans receipts automatically and records all the expenses and income of the individual consumers. As Jang Chae-rin (Head, Monday Dream) says, “it is such a burden to collect all my receipts in my household account book and then calculate the total spending. I am too busy to do that. That is why I decided to create Recpic.” In a cashless society, consumers will easily be able to use their mobile phones keep track of spending without the need to count up all their change. This will reduce the time spent recording household transactions.
   Most importantly, cashlessness will allow the recovery of South Korea’s shadow economy that keeps the government from receiving a considerable amount of tax revenue. According to Oh Je-se (Representative, Planning and Financial Committee of the National Assembly), the underground market accounts for 26.3% of its economy. A huge shadow economy means greater distortion of a country’s Gross Domestic Product (GDP) due to a high proportion of unreported spending. It also means easier tax evasion. When goods or services sold in cash are not reported to the government, the government fails to collect the mandatory tax. One could, for instance, sell illegal drugs, hide the cash under the closet, and simply avoid reporting the transaction to the government. However, if all transactions are recorded electronically, the government inspection on illegal activities will be easier, and tax evasion trickier.
   Moreover, the scale of a country’s underground economy is proportional to the amount of cash circulating in society. According to a report by a management consulting firm McKinsey, countries in which the ratio of cash payments is below 50% usually have an underground economy that contributes to 12% of GDP. Meanwhile, countries with 80% of cash payments have an underground economy estimated to amount to approximately 32% of GDP. This means that in general, the less cash circulating in society, the smaller the proportion of the underground economy in relation to GDP. If no cash circulated in society, then it would be harder for black market dealers to conduct under-the-table transactions.
   There are also high hopes that a decline in cash use will boost South Korea’s economy in the long run. According to research done by Moody’s Corporation, a bond credit rating agency, out of 56 countries studied from 2008 to 2012, an increasing use of electronic payment products contributed to an average additional growth in GDP of 0.17% per year. The reason for such growth was that using payment cards brings a more efficient economy, yielding a meaningful boost to annual economic growth through several factors including transaction efficiencies, consumer access to credit, and consumer confidence in the payment system. The convenience and efficiency in using electronic payment methods appers to contribute to a gradual rise in a country’s total spending and income.
   Likewise, Lee Hyo-chan (Head, Research Center of Credit Finance Institute) stated last year at a press conference that a cashless society might increase the effect of monetary policy during an economic recession. In recent years, South Korea has been lowering its interest rates on a yearly basis. It has also shown concern regarding its flagging economy and, despite some controversy, has resorted to quantitative easing, in which the bank increases the national money supply by buying government bonds and securities. However, such a policy comes with a Zero Lower Bound (ZLB) problem. Since banks are unable to lower the interest rate below zero, they must look for other monetary policy to stimulate the economy. Nevertheless, in a cashless society, the zero lower bound problem would be solved for banks. If no cash is circulating in a particular country, then the government and its central bank can more readily implement negative interest rate policies, in which depositors have to pay the bank in order to hold their savings. Negative interest rates, in theory, are intended to induce banks to lend more money and to motivate individuals to spend and invest more, thereby bringing about economic growth.
 
Preventing an Orwellian society
   South Korea’s gradual move towards a cashless society will bring several logistical challenges. One of them concerns the economy in relation to the black market. While the process of reducing, if not entirely eliminating the underground economy brings a long-term gain in tax revenue, it might cause a negative temporary effect on the economy, as the total incomes and spending of the underground dealers will likely fall. This could cause the total national economic output to shrink temporarily into recession. Also, rising electronic payments may fuel household debts. According to Hankyoreh, the average household debt in South Korea is over ₩43 million. Carrying credit cards can be seen as holding long-term loans. If more consumers carry credit cards with balance, the household debt will rise, deeply hurting the economy.
   However, the biggest problem of going without cash comes with the immense power that the government and central banks will hold. With no cash circulating in society, all transactions will be carried out electronically through smart phones and credit or debit cards. All income and expenditures will be recorded, one by one, in data monitored by the government. On the one hand, this allows for easier tax collection and and aids in tracking down illegal activities. However, going cash-free also opens the door for the invasion of privacy. Rick Ungar (Senior Political Contributor, Forbes) describes such a situation as “the path of ultimate and complete government control of humanity.” According to a survey by the BOK, 70.9% of people hesitating to switch to online banking responded that concern about the invasion of privacy kept them away. As explained by Kim Yong-jin (Prof., Dept. of Econ.), “there are people who simply do not want their transactions to be known to the government. If the government starts monitoring all digital transactions, privacy would not be an option anymore.” Without specific measures to limit the government’s surveillance of consumers’ bank accounts and transactions, the entire population would be vulnerable to the intrusion of privacy.
   In order to navigate a successful path towards a cashless society, South Korea must anticipate the challenges. In Sweden, the government has led technological efforts to create a smooth transition to a cashless society. For instance, the Swedish National Bank, Riksbank, and the Swedish financial clearinghouse, Bankgirot, have collaborated to create a national payment app called Swish, which allows the transfer of money to any recipient’s account. The creation of such a convenient app is part of the government’s effort to encourage consumers to use electronic payment systems rather than cash.
   South Korea must similarly create a relevant platform for a future cashless society. The first possible step is to prevent an era of Big Brother*. There must be legal restrictions to the government’s surveillance over individual transactions, for instance, by banning government inspection on any transactions under a specific amount of Won. Also, to prevent cybercrime, the South Korean government must increase investment on the development of security technology in online banking. According to research by an international software security group, Kasperskey Lab, South Korea ranks second in the list of countries most attacked by the so-called Trojan virus in mobile banking. Also, it costs around ₩37.3 billion as damage from voice phishing during the first quarter of 2016. In Sweden, the Swedish Justice Ministry reported that the total annual number of electronic fraud cases in Sweden soared to 140,000 in 2014, twice the number from that of a decade ago. With more people using electronic payment systems and new computer viruses continuing to emerge, more security is needed to protect online banking accounts. To prevent further cybercrime, it is necessary to increase investment into the cybersecurity industry in South Korea.
   Most important, there should be a platform for more discussion on the most fruitful ways to achieve a cash-free society. According to Lee Hyo-chan, in order to speed up and smooth the way for a transition to a cashless society, a conference should take place in which the BOK, the banking industry, and everyday citizens and business owners participate. In such a conference, all related parties could discuss how to improve electronic payment methods and resolve any disagreements on how to allocate responsibilities and share social costs. As Professor Kim Yong-jin explains, “these members must focus on calculating the net benefits of each economic policy geared towards a cashless society. If the benefits of a policy outweigh the costs, the policy should then be adopted.”
*                 *                 *
   Many northern European countries ─ such as Denmark, France, and Sweden ─ are already running essentially as cashless societies. These countries serve as excellent models for South Korea by studying how they are overcoming the accompanying challenges. The most important factor to keep in mind is that progress only works when the government earns the trust of the majority of citizens. South Korea’s first step toward a cashless society will require the government to demonstrate clearly and convincingly that the change will improve the quality of life here and also allow people to feel safe without cash.
 
*Big Brother: A fictional character mentioned in George Orwell’s novel, *1984*, Big Brother is the leader of a totalitarian state called Oceania, where the government has complete control over the citizens’ lives.
 
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