Efficiency without Compulsion: Economic Trade-offs in the Transition to a Cashless Society

Abstract

The fast pace of the diffusion of digital payments has brought down transaction costs, widened the reach of markets practically and made exchange faster and easier. But the benefits for welfare in a cashless economy cannot be reduced to an average transaction efficiency. This paper creates a conceptual framework for assessing the cash to digital payment transition, combining transaction cost economics, behavioural economics, financial-inclusion issues, platform competition, privacy and payment-system resilience. The main difference is between “digitalisation” and “cashlessness” by force. While digital payments can improve welfare by reducing exchange frictions and enabling specialisation, cash can also provide welfare-enhancing behavioural frictions, which cash elimination can remove, as well as reducing consumer exclusion for those facing digital barriers, exacerbating reliance on data-rich intermediaries and decreasing redundancy in crises or infrastructure failures. This theoretical framework is related to recent developments in the payment system by drawing on recent institutional evidence from the World Bank, OECD, Federal Reserve Financial Services, and the European Central Bank. The paper proposes that a policy of payment pluralism is needed: digital-first innovation with ongoing availability of cash and robust offline solutions. When the distribution of consumers’ capabilities and systemic tail risks are not trivial, preserving choice does not have to be merely a social concession, it can be an efficiency-enhancing institutional design.