Effects of a Cashless Australian Society - Assignment Example

Cashless Society Name Institution Course Date Question 1 Introduction Physical elimination of cash from the economy is increasingly being undertaken in major parts of the world as the drive towards a cashless society intensifies. From a pure technological perspective, it is feasible to have a cashless society. However, it is unlikely to have a future where there is no form of cash transaction (Doyle 2001, p. 158). In the last decade, the use of cash for carrying out various payment transactions has decreased considerably. Online payments and use of credit cards continues to be favoured because of its convenience. Indeed, change in any way is often slow to materialise unless that change is distinctively advantageous over the status quo. Effects of a Cashless Australian Society Positive Effects Australia continues to push for a cashless society and this raises the question why it endeavours to adopt a cashless system. One would ask if this is a trap or a just time-saver or is it a help or hindrance. Moreover, does convenience, security, versatility trounced over people’s privacy. The number of people that agrees continues to increase. In order to understand the need or the push towards a cashless society, its advantages should be analysed. A number of reasons have been put forward to justify the need to operate in a cashless economy. Greater security is one advantage of no cash transaction (Hitchcock, 2013, p. 62). It has been reported that identity theft increased during and after global financial crisis in 2008. Identity theft inconvenienced victims as it can take several years to rectify the situation due to some uncooperative banks, credit companies and in some cases legal authorities. In the 20th century, especially 1970s, the relative need for cash in the economy was nearly twice as high as the current need. Robert Samuelson (2007), Washington Post economic columnists notes that “We have crossed a cultural as well as an economic threshold when plastic and money are synonymous and the crime of choice is identity theft, not bank robbery”. The current surge of identity theft will be significantly decreased or eliminated by developing and implementing a cashless system that is based on some form of individual biometric data to verify their identities. A cashless Australian society positively affects the fight against international crime especially terrorism. Cash cannot be traced but digital money is traceable (Hitchcock 2013, p. 62). This assists in cutting financial lifeline of terrorists. Therefore, the financial power of terror cells all over the world is significantly reduced. Terrorist activities will decrease because terrorists will not have enough money to recruit members, plan and execute terrorism in Australia or any part of the world. Terrorism is a crime. Other types of criminal activities are also eliminated or reduced by adopting a digital monetary system. These include muggings, robberies in convenience and liquor stores as well as bank heists. It does not make sense for a petty criminal to force someone to transfer money to his card because it is easy to trace to the perpetrator and more importantly, this transaction would be electronically recorded. Illegal drug trade and cartels would reduce. Users and traffickers of banned substances will no longer slide under the watch of law enforcement agencies. In general, drug trade that depends on cash would be eliminated. Convenience is a welcomed impact that is brought by digital monetary system. Anxiety caused to retailers caused by constant checking credit worthiness of customers, identification cards, bounced cheques and checking movement of customers at a cash register are eliminated. Through a cashless system, a customer just gathers all his purchases and walk out as his purchases are automatically debited. Although there are numerous positive effects of Australia becoming a cashless society, there are some negative effects. It is a faster method than queing at point of sales to pay for goods and services. Indeed, with a cashless system, the number of people that can be served is three times than it could have been possible if they using cash (Ejiofor & Rasaki 2012, p. 10). By improving the speed of service, the number of employees that are needed at off peak times are significantly reduced. Negative Effects Although numerous positive effects are realised if Australia becomes a cashless economy, there are some risks and potential negative effects that comes with digital monetary system. Increase in hacking activities that target credit cards of customers comes with cashless society. The attacks to the payment systems become more sophisticated as criminals continually target opportunities that are easy to exploit. As a result, identity theft, unauthorised access, and more breaches to the systems increased. Advantages of Cashless Economy: To Government Cashless society means that the main method of carrying out purchases and transactions is through electronic means. Suspicious activities can be easily detected and monitored by the government as people conduct their transactions through electronic means (Morley, 2016). By transacting electronically, permanent paper trail is created for all transactions that are carried out by citizens. In theory and in principle, digital monetary system records and stores all the transactions that an individual makes in his lifetime. Paper currency facilitates anonymous transactions (Rogoff 2014, p. 04). Potential criminal or fraudulent activities that assist some individuals or corporations avoid paying taxes or obeying laws and regulations are concealed from the government through cash transaction. In fact, money laundering and tax evasion are easily done when using cash since it is more difficult to trace these transactions (Nilekani 2015). Government can easily search for evidence regarding financial fraud by analysing decades of financial transactions of potential criminals. Electronic payment reduces friction in the economy (Nilekani 2015). This is because unlike cash transactions, electronic purchases are easier to trace, faster and to some extent simpler. Additionally, friction is reduced through mechanisms of money balances (Mieseigha & Ogbodo 2013, p. 12). Government can save a lot of money by adopting a cashless economy. In a period of one year alone, the savings that can be accrued by transitioning to a cashless society is sufficient to cover the entire cost of adopting an electronic system. In addition, losses due to circulation of counterfeit money are reduced (Cornish 2010). In fact, the government will eliminate counterfeiting of currency in the economy. Government spend huge amount of money on printing, distributing and managing money all over the country. These costs will be significantly reduced by adopting a cashless society. Instead, the government can use the money saved from managing cash to improve important sectors of the economy such as health, education and infrastructure. To Financial Sector Financial sector hugely benefits from a cashless Australian economy. It extends their customer base (Ejiofor & Rasaki 2012, p. 10). People are forced to acquire the services of financial sector if they are to make payments for various transactions in a cashless economy since electronic payment is the dominant method of payment. As the number of customers increase, the cash flow of financial sector will be boosted. Large amount of administrative costs are removed as there is no need for invoices, cheques and handling of cash. Therefore, profits are increased and can be used in expanding or improving service delivery in order to gain competitive advantage. Indeed, cashless society improves competitive advantage of a business entity since a firm can offer all the payments options in an economy than other competitors. Disadvantages to Citizens Electronic payment system will increase surveillance on citizens by the government. Freedom and privacy of citizens to conduct their transactions anonymously are likely to be infringed further as government possess transaction history of every individual. To some citizens, holding cash or physical money represents one of the few ways they can exercise their freedom. Morley (2016) asserts that cash represents freedom. It represents freedom to carrying out transactions and businesses on their own and without notifying other people. This ‘freedom’ is taken away from citizens by a cashless society. Cashless economy will mark the end of freedom and privacy to Australians. By controlling an individual financial transactions, to a great extent equals to total control of that person. Opinion/Conclusion/Recommendations A cashless society is the one that transactions are predominantly done by electronic means. It provides a lot of benefits to the general economy of a country, government, financial sector and the citizens. However, there are potential negative effects of shifting from a cash-based economy to a cashless economy. Cyber attacks and identity theft increase as criminals become more sophisticated in a cashless society. Privacy of citizens is reduced as government surveillance on its citizens is empowered. Electronic transactions can be easily traced by the government hence jeopardising privacy of many people who like their transactions to remain anonymous. In my opinion, moving to a pure cashless society is move to Australia or any other country for that matter. The benefits accrued by a cashless society seem not sufficient to outweigh the negative effects and disadvantages to citizens. Indeed, the government appear to be the major winner since it possesses yet another ‘weapon’ where it can use to conduct its surveillance on citizens and intrude on their privacy. Although the government can easily find evidence to prosecute individuals who commit financial fraud and tax evasion in a cashless society, there is no enough evidence to suggest that sophisticated techniques cannot be created by criminals to beat the system and carry out multiple criminal activities. Moreover, hacking and identity theft would increase in a cashless economy. The way forward is to encourage slow adoption of digital monetary system where citizens are not forced to abandon using cash in favour of electronic means. Cash and electronic payment systems should be used at the same time and phase out paper currency when checks and balances have been put in place to ensure that its benefits significantly outweighs risks, harmful effects and disadvantages. Indeed, transactions payments should be a mixture of cash and electronic methods. Genuine concerns of the citizens should be first addressed before Australia becomes a cashless society. Question 2 Role of Reserve Bank of Australia The stability of the overall banking system is important to economic development of any country. In some countries such as United States, its central bank- Federal Reserve acts as a lender of last resort. The Federal Reserve bails out banks that run short of cash by lending to those people who cannot find loans anywhere else. In this case, stability of the banking system is maintained. However, in Australia, RBA does not specifically act as a lender of last resort (Gans et al., 2011, p. 687). Instead, RBA provides liquidity to the entire banking system or in some cases, to a specific bank. It monitors liquidity in the Australian banking system and assists banks that are having trouble with cash issues or any other problems. For instance, RBA has facilitated several mergers and acquisitions of troubled banks by other financial institutions. The central bank of Australia is RBA. it is a government institution responsible for stabilizing the currency. RBA achieves this objective fixing the cash rate that meets an inflation target that has been agreed upon. The national currency that is in circulation all over the country is issued by RBA. Moreover, RBA provides the government of Australia and its agencies with the required banking services. It also offer banking services to some international central banks and official institutions (RBA 2016). In addition, the management of foreign exchange reserves and Australian gold is the responsibility of RBA. Financial globalization has been embraced in Australia. Government policies have been tailored towards supporting floating currency and structural reforms in the capital markets. Since 2006, the economy of Australia has been operating at near full employment (Hossain 2015, p. 77). Expansionary and fiscal policies have been regularly developed by the reserve bank of Australia (RBA) to deal with economic crises that have been facing the country. Indeed, the main role of RBA is monetary policy (Reserve Bank of Australia 2016). From time to time, RBA carry out national monetary policy. In fact, it determines the monetary policy. It entails management of liquidity conditions in the economy. In this regard, liquidity conditions denote the price and availability of funds to be spent in the economy (Gans et al., 2011, p. 687). According to the charter of RBA, the aims of monetary policy are to maintain full employment, play a role in stabilisation of the currency and contribute to the economic prosperity of Australian people. Its monetary policy target is often revised to meet its target of keeping inflation to about 2-3 per cent over time. RBA uses various information indicators such as official cash rate, exchange rate, borrower’s interest rate and economic productivity and capacity in reviewing monetary policy settings (Gans et al., 2011, p. 75). Officially, no rule is followed by RBA in setting the cash rate. However, it clearly makes its intention known to the markets that it is ready and flexible to change the cash rate to the point that is necessary to achieve the inflation target. RBA is unambiguous regarding its inflation target and it is not transparent on the issue of whether and the manner it responds to the changes in the country’s employment outlook (Gans et al., 2011, p. 75). Blanchard and Sheen (2007) suggest that the interest rate rule of RBA of including only an inflation target is plausible but it is not consistent with the monetary policy objectives outlined in the Reserve Bank Act of 1959. It includes optimization of employment and welfare as well as currency stability. In practice, the role played by output gap is ambiguous and it is difficult to measure. Recently, RBA chose not to alter the current level of cash rate. In meeting this objective, RBA considered a number of factors. Decline in commodity prices is one of the factors RBA took into account in setting the cash rate. In the recent past, there has been a general increase in commodity prices. Therefore, the terms of trade of Australia have been much lower as compared to the last few years. Inflation rate is low in the country. It has been confirmed that the growth in labour costs will continue to remain subdued. For this reason and the restrain nature of inflation in other parts of the world, the rate of inflation in Australia is likely to stay low. Given this information, RBA decided to against altering the cash rate. In the recent years, investment in the mining sector has been very good. In 2015, GDP growth started to increase as labour market strengthened. Moreover, lending to businesses soared despite reduction in mining investments. There is also enough information to suggest that non-mining parts of the Australia economy will strengthened hence improving the overall business outlook. However, the capital expenditure survey that has been carried out recently shows that both mining and non-mining firms plan to reduce their investments in the financial period 2016-17 (Baker 2016). This may be due to negative interest rates experienced in some parts of the world and could increase the value of Australian dollar hence potentially halting any success towards recovery from dwindling mining boom. In regard to the above conditions, RBA was of the opinion that the monetary policy to be adopted should be accommodative. The low interest rates in the market support the demand while the supervisory measures it has put in place ensure that the risks in the housing market are contained. Furthermore, RBA judged that the economy will continue to grow as inflation is also to the target. As a result, RBA set the monetary policy at the current rate as it deemed appropriate. Australian Prudential Regulation Authority (APRA) is responsible for supervising the financial sector in Australia. It puts in place mechanisms and measures in order to protect the interest of Australian depositors, insurance policyholders and superannuation fund members. Its functions include maintenance of financial market integrity, protection of consumers in the Australian financial system and disclosures and conduct of businesses. It supervises banks, credit unions and building societies. Moreover, supervision of insurance and reinsurance companies is also the role of APRA. It work closely with RBA to ensure that there is a coordinated approach in resolving issues concerning the stability of Australia’s financial system. It establishes prudential standards that are factored in by RBA in setting monetary policy. The supervisory measures that APRA sets and RBA considered in maintain the cash rate at 2 per cent include setting out the minimum risk and capital management requirements. References Baker, P, ‘Relaxed RBA plays wait and see on economy’, Australian Financial Review, [Online] Available: http://www.afr.com/markets/relaxed-rba-plays-wait-and-see-on-economy-20160229-gn704p. Blanchard, O.J., & Sheen, J. (2007). Macroeconomics, Sydney: Pearson-Education. Cornish S (2010), The Evolution of Central Banking in Australia, Reserve Bank of Australia, Sydney. Doyle, S. (2001). Information systems for you. Cheltenham: Stanley Thornes. Ejiofor, V. E., & Rasaki, J. O. (2012). Realising the benefits and challenges of cashless economy in Nigeria: IT perspective. International Journal of Advances in Computer Science and Technology 1(1), 1-13. Gans, J., King, S., Stonecash, R., & Mankiw G. (2011). Principles of economics. South Melbourne, Vic: Cengage Learning. Hitchcock, M. (2013). The end of money. Oregon, Harvest House Publishers. Hossain, A. A. (2015). The evolution of central banking and monetary policy in the Asia-Pacific. Cheltenham, UK: Edward Elgar Publishing. Mieseigha, E.G & Ogbodo, U.Y, 2013, An Empirical Analysis of the Benefits of Cashless Economy on Nigeria's Economic Development, Research Journal of Finance & Accounting, 4(17), 11-16. Morley, R, 2016, ‘Why is Germany Eliminating Paper Money’, Trumpet Weekly, [Online] Available: https://www.thetrumpet.com/article/13567.2.0.0/why-is-germany-eliminating-paper-money Nilekani, N, 2015, ‘Why India should be banking on a cashless economy’, Mail Online, [Online] Available: http://www.dailymail.co.uk/indiahome/indianews/article-3300738/Why-India-banking-cashless-economy.html Reserve Bank of Australia, 2016, ‘About the RBA’, [Online] Available: http://www.rba.gov.au/about-rba/. Rogoff, K. S. (2014). Costs and benefits to phasing out paper currency. Presented at NBER Macroeconomics Annual Conference, April 11, 2014, Chicago, University of Chicago Press. Samuelson, R.J, 2007, ‘A Quiet Revolution in Money’, Washington Post, [Online] Available: http://www.washingtonpost.com/wpdyn/content/article/2007/06/20/AR2007062001867.html Read More