MercoPress. South Atlantic News Agency

Central banks reviewing “phasing out cash” because of IT failures, hacking and alienation

Regulators are weighing IT failures, systemic hacking risks, and the fact that more vulnerable members of society would be alienated in a cashless world

Europe’s central bankers are warning that a gradual phase-out of cash in many countries poses a serious threat to the financial system, as relying too heavily on digital payment systems exposes them to catastrophic failures in the event of cyber attacks.

 Regulators are also weighing in to say that IT failures, systemic hacking risks — and the fact that more vulnerable members of society would be alienated in a cashless world — all argue in favor of keeping a robust system in place — ie., cash.

A November study by the European Central Bank showed that while almost 80% of all payments are still done in cash in the eurozone, countries like Estonia, the Netherlands and Finland already use electronic payments for about half of all transactions. Cash payments in Sweden now only account for about 13% of payments in stores, according to a study by Swedish central bank Riksbank. More than half of all bank branches no longer handle cash, according to a report from the Swedish Retail and Wholesale Council.

“The digitalized system, it is easy for someone in Russia, China, whatever to just shut it off,” Björn Eriksson, the head of a pro-cash lobby group Cash Uprising and former head of crime-fighting agency Interpol. “[Cash] you can hide in your car, or your stove, or whatever.”

He added: “I can see a growing concern in my country about what is going to happen when someone decides to switch them off. What are the activities you can do to keep society moving?”

“Increasingly, central banks insist that cash will also play a role. We do not foresee a totally cashless society,” said Ewald Nowotny, governor of the Austrian National Bank, at a recent conference in Brussels. “If there is for instance an energy blackout, cash is the only surviving way of payment.”

A senior official at the Dutch central bank echoed the sentiment.

“We’re under attack every day. If you don’t have your shields up, you notice activity straight away,” said Petra Hielkema, director of payments at the Dutch Central Bank, who watches over cybersecurity policy.

Small cybersecurity crises have nudged central bankers to work on backup systems and roll out cyber stress tests. Cash looms large in most contingency plans.

“Cash provides trust,” said Hielkema. Beyond cybersecurity concerns, critics of the cashless society have pointed out that vulnerable groups such as elderly and disabled people rely on cash more than others. “We see a lot of people who really need it,” she said.

An outage of visa services in June— caused by a system failure — gave a small taste of the risk, said Kevin Curran, a professor of cybersecurity at Ulster University in Londonderry, Northern Ireland. Customers across the EU were left unable to pay for goods and services, and the situation revealed “there really is no backup,” Curran said.

“When the trolley came around on the train and the card payment wasn’t working, the only people who could eat were those with cash,” he said.

The move away from cash is driven partly by commercial interests, as businesses go card-only for efficiency and in response to consumer demands. Commercial banks are also shutting down branches in favor of digital services.

Some governments encourage a shift toward digital services because they see it as a way to address money-laundering and tax evasion, and also to boost competition in financial services. Others argue that digital payments protect consumers from being robbed or losing money, as well as sparing them the hassle of constantly carrying a wallet.

In a report published in March, the U.K. Treasury considered how the government could further support digital payments. Already, new regulations bar charges for using cards or digital payment while allowing fintech firms to provide instant payment services to customers without a bank intermediary. A drive to tackle crime has also led the European Central Bank to discontinue production and issuance of €500 bank notes in 2016 — despite a heavy reliance on cash in Germany, where cash accounts for more than half of transactions in stores and debit cards take up another 25.5%. Mobile payments don’t even make up to 1 percent.

But officials say some cash in the economy must be preserved. The U.K. Treasury said they still want to “explore how to ensure cash remains accessible and secure for those who need to use it.” In Sweden, a court ruling insisted public entities must continue to accept cash, though earlier this year, the Swedish government shot down a plea from the central bank to require banks to handle cash.