Why cash remains king

That the future of cash has become hotly debated there can be no doubt. Many observers predict the demise of notes and coins as an outdated and obsolete mode of payment. For example, at last year’s World Economic Forum summit in Davos, Deutsche Bank’s chief executive officer (CEO), John Cryan, observed that as cash was both costly and inefficient, it would no longer exist in another 10 years. Notes and coins would disappear. Technology would triumph.

Further fuel for the debate has from come from the European Central Bank (ECB). Last May, the ECB announced it will stop issuing the €500 note from the end of 2018 – due to a concern that the higher denomination note could facilitate illicit activities.

Cash is king

Yet cash is very much alive – and here to stay as a payment method, precisely because it is convenient, anonymous and safe. Globally 85% of payments are made in cash, and the amount of cash in circulation is growing, not shrinking.

According to research undertaken by Deutsche Bank, euro cash in circulation actually grew over the years, namely to €1.1 trillion by Q3 of 2016, three times as much as in 2003. As cash grew faster than GDP in most periods, the ratio of cash to gross domestic product (GDP) rose from 5% to 10%.  The Bank of England (BoE) comes to a similar conclusion: there has been a growing demand for cash in recent decades, not just in the UK but also in other countries including Australia, the US, and Canada. Even in Sweden, where many cashless payment methods have become popular, cash is still present.

It is interesting to look at where the demand for cash comes from: is it the domestic economy, the overseas market, or the shadow economy? The ECB estimates that more than 70% of cash is used domestically, for transactions or cash “hoarding”, about one fourth is held outside the euro area and only a very small percentage is held in banks´ vaults.

So, the problem of cash in the domestic economy is a “big one” and thus worth looking at.

Are there differences by country?

Consumer usage of cash varies widely by country, as evidenced by a cross-country comparison by the ECB. But it is not only the level of cash usage which differs across the seven countries studied. Differences can also be found in terms of the type of alternatives used for cash – for example, credit cards versus debit cards. One explanation for these cross-country differences is attributed to differences in market structures and the pricing policies re. retail payments.

Germany, EU’s largest economy, is a cash-intensive country. Research after research points to the fact that while consumers are increasingly using the internet for their banking needs, cash is still the predominant method of payment. A 2016 German Central Bank study highlights that 79 % of all transactions in Germany are paid via notes and coins. Moreover, payment habits have not changed much since 2014: in that year the percentage of cash transactions was 80%.

Go cashless! 

But, cash need not stay as popular as it is today, say those who foresee its demise or who would have government abolish its use. The proponents of a cashless economy argue the following:

  • Without cash, it becomes easier to fight against money laundering and terrorism financing: however, there are no hard facts supporting the argument. Illegal activities do not depend on cash – criminals have multiple non-cash alternatives for their activities. Bitcoin is certainly a case in point.  Deutsche Bank Research argues that if society were to take away cash, criminals could find new ways of moving money without detection. Simply put, when payments go digital, fraud follows.
  • Without cash, the shadow economy will shrink or disappear: however, as Deutsche Bank Research points out, surveys and estimations for different countries show that a high share of cash in total payments does not always indicate a large shadow sector. Some cash-intensive countries, such as Germany and Austria, have relatively small shadow economies. In Sweden, cash payments have become rare but the country still has a mid-sized shadow economy. Findings from various European countries are diverse, but what seems clear is that the abolition of cash would not eliminate the shadow economy.
  • Bribery would become less popular if cash were not available: again, research shows that cash cannot be blamed for bribery. In some European countries, the simple equation of “much cash, much bribery” seems to hold true, but it does not hold true for others.
  • Cash is inefficient and costly: this 2016 statement by John Cryan has been touted as an argument for the abolition of cash. Yet despite numerous studies in the field of payment system costs, there is no clear picture on the cost of payments to the economy as a whole.

Hold on to cash!

This simple phrase sums up the position of those who want to be able to keep using cash.  By the way that’s about 91% of the German population, according to a survey by the German Postbank.

The defenders of cash point to several advantages:

  • Cash is universal: not every store will accept Bitcoins or other virtual currencies, PayPal transfers, or payments via mobile phone.
  • Cash is anonymous and untraceable: in contrast to cash, digital forms of payment can be easily tracked.
  • Cash is secure and does not require sharing of sensitive personal data: the merchant from whom you buy goods will not require your phone number, email address or other identity-related data. In contrast, digital payments can be the victim of data breaches.
  • Cash provides payment finality: while credit cards are based on the principle of buy now but pay later, physical money offers finality of payment. There is no possibility of defaulting on your payment.
  • Cash enforces self-discipline: when asked about their preference of paying cash vs. paying by credit card, survey respondents often point out that cash in the pocket forces them to spend less. Quite simply, when one’s wallet is nearing emptiness, shopping has to stop. Overspending can only occur when credit is used.
  • Cash is reliable: sadly we have become used to news headlines reporting quite frequently that a bank’s or a company’s electronic payment system is unavailable. Consumers find that they are unable to access their account. Payments by cash are untouched by such difficulties.
  • Cash is cheaper than other payment methods: many businesses pass on the credit transaction fee to the customer. If you don’t pay your bill on time, you’ll also be hit with interest fees. With cash, many businesses offer discounts to the consumer.
  • Cash circumvents negative interest rates: should banks levy negative interest rates on bank deposits, consumers can use cash to avoid such a penalty.

The future of cash

Evidence from various sources shows very clearly that while payments have increasingly moved from paper to electronics and new technologies enable cashless payments, cash usage and holding have not disappeared. In fact, cash is still used extensively in some countries.

What does the future hold? The future of cash depends on a multitude of factors which makes any type of prediction difficult. These factors include:

  • emerging and new alternative ways to pay (mobile wallets, biometrics and wearables);
  • the emergence of new virtual currencies beyond Bitcoin;
  • preferences of retailers (e.g. preference for cards and mobile payments vs. acceptance of cash;
  • commercial banks´ distribution channels of cash (e.g. availability of automated teller machines (ATMs), opening hours of bank branches);
  • changing attitudes of consumers towards cash (e.g. negative interest rates on bank deposits are likely to increase the hoarding of cash);
  • government intervention and restrictions on the usage of cash; and
  • socio-economic developments (e.g. inflation, trust in governments, etc.).

Conclusion

If cash could speak, it might very well end this article – while tipping its hat to Mark Twain – with the following quote: “The reports of my death are greatly exaggerated.”

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