How a Cashless Society Harms the Unbanked and Underbanked

A cashless society relies on digital transactions, eliminating physical currency and using electronic payments like cards, mobile apps, and online transfers. While offering convenience for many, such a shift poses considerable challenges for individuals identified as “unbanked” or “underbanked.” The unbanked lack a checking or savings account at a traditional bank, relying on cash or alternative financial services. The underbanked have a bank account but often use non-bank financial products like money orders, check-cashing services, or payday loans, due to limited access to affordable traditional banking. Approximately 4.5% of U.S. households were unbanked in 2021, with an additional 13% being underbanked, indicating a substantial portion of the population that heavily depends on cash for daily needs.

Exclusion from Essential Services

A cashless economy directly restricts unbanked and underbanked individuals from accessing fundamental goods and services. Many businesses, including fast-casual restaurants and some public transportation systems, are increasingly becoming cashless, requiring digital payments. This trend means that individuals relying solely on cash may find themselves unable to purchase food, pay for transport, or settle utility bills, effectively excluding them from daily economic participation.

The inability to pay with cash can also affect smaller, everyday purchases, such as buying from street vendors or tipping service providers, making simple transactions impossible. Moreover, receiving wages or government benefits can become problematic without a traditional bank account for direct deposit. This necessitates the use of alternative, often more costly, methods to convert payments into usable funds.

Accessing online-only services, which are becoming more prevalent for bill payments and subscriptions, also presents a significant hurdle. These services typically require bank accounts or cards, leaving those without traditional banking relationships unable to participate. The absence of a physical payment option can create significant practical difficulties, forcing individuals to navigate a system not designed for their financial circumstances.

For instance, paying rent or other recurring bills often requires electronic transfers or money orders, both of which can be inaccessible or expensive for the unbanked. The shift away from cash also impacts the ability to manage small, immediate expenses, which cash traditionally facilitates with ease and anonymity. The consequence is a reduced capacity for these individuals to meet basic needs and engage fully in society.

Increased Financial Burden

The absence of traditional banking access in a cashless environment often compels unbanked and underbanked individuals to use more expensive financial alternatives. Check-cashing services charge fees that can range from a flat amount, such as $4 to $8 for checks up to $1,000, or a percentage of the check’s value, typically 1% to 5%. This means a portion of their earnings is consistently lost simply to access their own money.

Prepaid debit cards, another common alternative, frequently come with various fees, including activation fees, monthly maintenance fees (around $5-$10 per month), and transaction fees for purchases or ATM withdrawals. These charges can quickly deplete limited financial resources, making it harder to save or manage money effectively.

Payday loans represent an especially costly option, often utilized when immediate funds are needed. These short-term loans typically have extremely high annual interest rates, often ranging from 300% to 500%, disguised as fees. Borrowers can easily fall into a cycle of debt, paying more in fees than the original loan amount due to rollovers or new loans to cover previous ones.

Such reliance on these alternative financial services significantly erodes the financial stability of unbanked and underbanked populations. The cumulative effect of these fees and high interest rates makes it challenging for individuals to build savings, escape debt, or improve their financial standing. This system effectively penalizes them for not being part of the mainstream financial system, creating a persistent economic disadvantage.

Data and Privacy Implications

A cashless society means that nearly every financial transaction leaves a digital footprint, raising significant privacy concerns. When all purchases, payments, and receipts of funds are recorded electronically, a detailed profile of an individual’s spending habits, preferences, and location can be compiled.

This digital trail can be accessed by authorized parties like financial institutions, vendors, and government authorities. The lack of anonymity in digital transactions contrasts sharply with cash, which allows for private exchanges without linking identity to purchases. For vulnerable populations, this extensive data collection can be particularly concerning, leading to fears of surveillance and potential misuse of personal financial information.

The increased centralization of financial data also heightens the risk of cyberattacks and data breaches. If a payment provider or digital wallet system is compromised, sensitive information such as transaction history and personal identifiers could be exposed. This constant digital recording transforms financial interactions into a source of extensive personal data, with implications for individual autonomy and security.

Barriers to Digital Inclusion

Participation in a digital-only economy is heavily dependent on access to technology and digital literacy, areas where unbanked and underbanked individuals often face substantial barriers. The “digital divide” encompasses challenges such as a lack of reliable internet connectivity and limited access to necessary devices like smartphones or computers. For instance, about 27% of adults in low-income households primarily access the internet via a smartphone, without home broadband.

A significant portion of lower-income adults, roughly one-quarter, do not own a smartphone, and about four-in-ten lack home broadband services or a desktop/laptop computer. This limited access means that even if digital payment options are available, the underlying infrastructure needed to use them effectively may be absent.

Beyond physical access, digital literacy skills are crucial for navigating online banking, mobile payment applications, and other digital financial tools. Individuals lacking these skills may find digital platforms confusing or intimidating, hindering their adoption and effective use. This gap in knowledge and comfort further exacerbates financial exclusion, as the ability to manage money increasingly requires digital proficiency.

The cost of internet service and devices can also be a prohibitive factor for low-income households. Even when internet access is available, concerns about affordability can lead to service interruptions or reliance on less stable mobile-only connections. These technological and educational disparities act as significant obstacles, preventing many unbanked and underbanked individuals from fully integrating into a cashless financial system.