Why Digital Payments Are Replacing Cash For Over 50 Years?
Uncovering the profit, data and behaviour behind the 50-year decline of money you can hold in your hand.
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In this edition of the Five Whys, we examine why digital payment systems have been steadily replacing cash for over 50 years and delve into the fundamental economic forces driving the cashless revolution.
I rarely carry cash these days; in fact, reflecting on my past, I recall being excited to apply for my first digital payment from my bank. At the time, it was a “Switch card”. I would still carry cash, but today my phone and watch have replaced my wallet.
You’ve probably experienced this shift yourself. Cash transactions that once seemed normal, like buying a newspaper or paying for a taxi, now feel oddly antiquated. Many shops actively discourage cash, some don’t accept it at all, and younger people often look genuinely puzzled when handed physical coins. Yet, a substantial number of people still use cash.
This transformation didn’t happen by accident. It has been a deliberate and systematic process that began in the 1970s with the introduction of the first electronic payment systems and has accelerated dramatically in recent decades. But why has this shift been so persistent and universal?
Let’s delve into the true driving force behind the decline of cash in this edition of the Five Whys.
Why #1: Why have digital payment systems been steadily replacing cash since the 1970s?
Businesses, banks, and governments have consistently promoted digital payments through infrastructure, incentives, and regulation. Bank of America launched its first extensive ATM network in 1969. Visa and Mastercard expanded their card networks globally in the 1970s and 1980s, and retailers began to encourage customers with cashback and loyalty points. Governments increased the cost of handling cash while reducing restrictions on digital payments. The pandemic gave further momentum as shops cited hygiene concerns to turn away coins and notes.
Fun Fact: Sweden has been so successful in discouraging cash that only 1% of its transactions now involve it, with many countries following suit.
Why #2: Why have institutions worked so hard to promote digital payments?
The answer lies in profitability. Digital transactions generate fees for banks and payment networks, reduce security and storage costs for retailers, and open the door to additional products, such as credit and overdraft services. Every swipe or tap creates revenue opportunities that cash cannot match.
Why #3: Why are digital payments more profitable than cash?
Each digital transaction creates a record. Purchase amounts, merchant categories, locations, and even item-level details, when linked to loyalty schemes, all provide data that can be monetised. This information supports targeted advertising, credit scoring, fraud detection and retail planning, while payment companies profit further by selling aggregated data to researchers and brands.
Why #4: Why is transaction data so valuable?
Detailed spending data gives companies the ability to predict and influence behaviour. It reveals what people will buy, when they will buy it and how much they are likely to pay. Firms use this to set prices dynamically, launch timely promotions and manage stock. Financial institutions can make instant lending decisions. Behaviour can be shaped by offering tailored rewards or discounts at the precise moment a purchase is likely to occur.
Why #5: Why is the ability to predict and influence consumer behaviour the ultimate driver?
The answer is long-term economic extraction. Firms with deep consumer data can segment customers by willingness to pay, fine-tune offers and outcompete rivals. The greater the insight, the greater the profit. Cash leaves no record and therefore no chance to analyse or influence future decisions.
Fun Fact: In China, over 90% of retail payments are now made through mobile apps such as Alipay and WeChat Pay, creating one of the largest consumer data sets in the world.
In summary…
The decline of cash is not simply a story of convenience or technology. It reflects a system where institutions promote digital payments because they are more profitable. That profitability comes from data, which is valuable because it enables behaviour to be predicted and influenced, and ultimately it drives maximum long-term extraction from consumers.
Will this trend continue, or will cryptography and blockchain spark the next evolution?
Perhaps this is why banks and financial institutions resist the rise of cryptography and the privacy it promises.
Stay Curious
Matt