Circulating less cash might help Denmark’s economy, but will not eliminate the informal market.
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.
Reading reports that Denmark is moving towards being a cashless economy, Mathias is not worried that he will not be able to do this work, nor is he worried about the next generations. The 27-year-old student expects that people will find a way or another to go through it.
"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?
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.