How long does it take to convert Franklin to Washington? The untold motivation of cashless society advocates

Not a single day passes without my google alert sending an article about the cashless society. Following the frontier by Nordic countries, multiple societies and governments around the world are motivated around the idea. Recently VISA even offered $10,000 incentive to small business, which will go cashless.

On the other hand the amount of cash in circulation increases every day and there are various studies showing Cash is still the King. A 2016 report by Bloomberg shows, even in the developed countries Cash is still by far the most preferred method of transaction:


One of the major advantages (or disadvantages, depending on how you look at it) of cash is that the transactions are non-traceable and does not require a 3rd party, therefore free. Whenever you try to trace, process or verify any payment methodology, there is additional work, hence there are 3rd parties and usually commissions associated with them.

Let's investigate what happens to our money with or without those commissions: The FED recently published estimated lifespans of US Dollar bills. During their lifetime, the banknotes change hands hundreds of times (we don't know exactly how many due to the reason mentioned above) and even after that life ends, they are replaced for a few cents.


On the other hand, let's see what happens, when those transactions occur with a commission from a 3rd party, and for the sake of simplicity let's investigate 2% credit card commission and apply simple compound interest theory:


After the first transaction between the parties in the market, $98 remains in the market and $2 is now owned by the 3rd party. If one of the initial parties use the same medium and do another transaction with what they have, just slightly above $96 remains in the market. After 226 transactions, $99 of the initial $100 in the market is gone to the 3rd party. It takes only about 34 transactions for a company like VISA, or MasterCard to own the half of the value that is in the market.

Of course, if the first party that receives the payment is a corporation, which will not use the same medium for further transactions, the trend might not go as explained above. But would this same line of thought be related to why VISA is offering incentives to small businesses only?

One may argue that these commission rates will go down, but anyone knows that the house always wins, and in a compound interest world, its just a matter of time.

Well, what about free-transaction technologies? Maybe because I am not a Millennial, just an old-fashioned Gen-X, but I for one do not believe a 3rd party or crowdsourcing will do this for free... as we all know there is no free lunch.



DR. Tolga KURT