Going cashless — what about legal tender?


In flouncing around the latest fad-topic of “smart nation” and cashless payments, we’re losing sight of an important principle: legal tender.

The Merriam-Webster dictionary defines it as “money that is legally valid for the payment of debts and that must be accepted for that purpose when offered”.

Traditionally, legal tender is seen in the form of cash. There has not been any formal redefinition of it to encompass digits stored on a bank’s computer.

As more and more sellers move to e-payments only, this needs to be addressed. Can sellers legally refuse cash?

It may seem like a small matter. The “problem” if defined in purely technical terms, can be solved with a tiny change in the law, but doing so – together with a rushed move to mandatory e-payments – actually has far wider implications.

There are features of cash that we all take for granted, and that we will sorely miss when this medium of exchange becomes unavailable. Therefore, in any move to e-payment, we must replicate these important and useful features.

Bearer instrument

Cash is a bearer instrument. You simply hold it physically and it is yours. E-payments, at least as currently conceptualised, requires an intermediary, some kind of financial institution where you maintain an account, and which keeps a running record of your ledger. In short, a bank account.

You can’t conduct e-payments without having one, otherwise where are the electronic digits and ledgers that will represent the transaction you’re making? And that’s where problems begin. We currently expect that these financial entities will be private corporations, who will be free to charge for their services, such as

  • a charge for every transaction made
  • a charge on your account if your balance falls below a minimum level

This would be akin to having to pay the national mint or national printer a fractional sum every time you use coins and dollar notes in a purchase or sale. If we told people they had to pay such “commissions” or “taxes” (or whatever you call it) when they use cash, it would be considered outrageous. And yet, nobody is questioning this feature of e-money that is so different from cash.

Without addressing this issue, any state-driven policy to cut out cash in favour of e-payments would in effect be an example of public policy that enriches selected (i.e. licensed) private entities.


Beware public policy enriching private interests

Another aspect of cash is its universality. Anybody, from a child to a tourist, a prisoner, to even the insane, can hold and transact cash. If I trained my pet monkey Mr Bowler to take a two-dollar bill to the corner store to exchange it for a loaf of bread, I am quite sure the shopkeeper would happily trade with my monkey. He would even give Mr Bowler change.

As things stand, the financial institutions set barriers to participation. They pick and choose which customers they welcome to open accounts with them; they set minimum balance requirements (typically $1,000 in any account) that turn away the indigent.

It’s as if our national mint and national printer could tell us who may hold cash and who may not. Or if we’re told that we must keep $1,000 of unused cash in our purses at all times, or else we either have to pay an additional surcharge for falling short or we’d be delisted. Again, this would be outrageous.

Another barrier to entry to e-payments lies in the documentation required. Transient Workers Count Too recently published a report which found that banks imposed documentation requirements for opening accounts that would require the co-operation of migrant workers’ employers. It also found that 55% of male foreign workers were paid their salaries in cash and had no bank account. A separate report from KPMG said 75% of female domestic workers were paid in cash too. Despite the hassles of handling large amounts of cash in payrolls, quite clearly many employers are still choosing not to open bank accounts for their employees. Why is that?

So, even as we preach the virtues of a cashless society, we can suspect that there are underlying reasons why many employers will resist cooperating with employees to help them open bank accounts. In that case, how is this biggish segment of our population to participate in e-payments? Something as basic as public transport is going cashless, progressively starting from 1 September 2017. How are these foreign worker commuters going to get to work?

Then of course, as a bearer instrument, cash has yet another feature: anonymity and privacy. Most people, in embracing e-money will not normally consider the loss of these attributes a pressing matter. But consider this: People who would otherwise want to make a donation to help a politically persecuted party or group might hesitate if the transaction can be traced via their bank accounts. The loss of anonymity and privacy has real effects.

What about undocumented migrants and refugees? They may have no proper identification. How are they to open an account and execute e-payments? You may say that they shouldn’t be here in Singapore in the first place, but the reality is that they are, albeit in small numbers. Are we going to be so heartless and say, not only shall we criminalise them, we shall ensure they can’t buy any food or medicine?

Payments banks

The above isn’t to argue that we shouldn’t go towards a cashless society. The advantages in ease and efficiency are obvious enough that we’d be foolish not to embrace it. Instead, we should look at how these best features of cash can be retained.

India faced a problem when it wanted to direct social benefits to its citizens via electronic transfer. It was a huge problem: hundreds of millions did not have bank accounts, and as is the case in Singapore, there is no interest on the part of the legacy banks to serve them since this constituency is generally poor and rural.

India then created the concept of Payments Banks.  These are absolutely basic financial enterprises that will welcome every adult to open a savings or current account, but will not engage in lending. The deposits taken from customers must be invested in government securities. As the payments banks will be paying interest on savings accounts – they don’t have to, but since India conceived of these as commercial entities, competition forces them to — margins from this business will be thin. To keep costs down, they are supposed to focus on money transactions via mobile devices or link up with shopkeepers to provide customer service rather than build brick-and-mortar branches.


India Post has launched a Payments Bank

Of eleven licences issued in 2017, to date only four such payments banks have opened for business. At least one licence winner has officially dropped out. Given its thin margins, whether this is a sustainable model, even for a country with enormous economy of scale like India, has to be seen.

While payments banks address one problem – the tendency of normal banks to serve only middle-class and well-off customers – they leave other problems unaddressed. India’s payment banks are free to charge for their transactions and services though it may become the norm not to charge if transactions are between account-holders within the same bank. Airtel payment bank, for example, charges 0.5% for payments above 1,000 rupees (about S$21) made to a payee in another bank.

A single universal platform as public service

Nonetheless, payments banks are a useful reference for us. However, if we truly understand the public and social purpose they must fulfil, we will see that going down the privatised commercial route will not be best.

The most efficient system for activities with a network character is one where everybody is on the same platform. With different platforms, no matter how much we try to achieve smooth interoperability, there will always be inefficiency in transferring from one platform to another. There will also be duplication of infrastructure and resources needed to operate the various platforms.

That’s why we have a single currency and a single form of cash. We would be frustrated if our fifty-cent or one-dollar coins come in different designs, weights and sizes, where some vending machines takes some sizes while others take the different sizes. We don’t have that. What we have is a single-platform system, a result of the State taking over cash issuance and making it legal tender

We see it as in the public interest to have a single platform. Of course, this could have been achieved by giving a commercial, profit-making, body a nation-wide monopoly. But that would set the scene for abuse and price-gouging. So instead, we pay for our single legal tender platform through the public purse. Minting and printing cash is a State responsibility. The mint and the printer do not charge us for every coin or note we use.

Thus, to fully ensure we keep the best features of cash, we need to consider these:

1. There should be a single, universal, state-owned payments bank;

2. By default, every registered person, including children and foreign workers will have an account in his or her name opened automatically at the time of identity registration, no need for the person (or employer!) to show up and present documents;

3. No minimum balance in the accounts;

4. No interest earned however fat the account balance;

5. No charges for any basic transaction;

6. A free debit card to be issued (replacement cards may be chargeable);

7. In the interim – which could be 20 years – when cash is still widely needed, the card should be interoperable with all banks’ ATMs. Electronic payment and cash deposits via ATMs should be free, but cash withdrawals may attract a fee (to discourage over-reliance on cash);

8. A simple app should be available for mobile (near-field communication) payments;


9. Tourists can either open an account by presenting their passports – automatically at Passport control? – or they can open an anonymous account (more below);

10. Anyone, including tourists and undocumented persons can also open anonymous accounts, merely by creating a username and password, with two-factor authentication if need be. However, to prevent abuse of anonymity, a limit on maximum balance (e.g. $10,000) and maximum value of transactions (e.g. $1,000) may be imposed.

It is hard to imagine this system working well with different, competing, profit-making platforms. It is ultimately a public service, the way minting coins and printing dollar bills has been for centuries. Except for non-essential services provided to customers for which the national payments bank can charge, the costs for running it should be borne by the State.

This means that Singapore’s present approach – only encouraging private parties to innovate fintech payment systems, which will remain essentially privatised commercial (patent-protected?) systems – is misguided. Innovators may well offer attractive products, but they will not be serving the same purposes as served currently by legal tender. Better to have a nationwide non-profit system, with no barriers to participation, open to all. Absolutely all. Mr Bowler included.

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