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But cash is better than cashless

After my discussion yesterday of cashless
, and my blogs before about a cashless world such as this
I find that nearly all of the cashless discussions come from the card
companies.  For example, Peter Ayliffe, CEO of Visa Europe, made a
statement in March 2007 that we would be living in a cashless society by

Five years to be completely cashless. 

This kicked off a great debate at Channel 4 Newsdesk, where the great British public made
comments like:

"It will create an underclass who will be
forced into a barter economy which the government will be even less able to
keep track on. That may even be a good thing by creating a parallel

"Lets hope if/when the cash in hand people
pay their taxes we will be able to reduce the loads of methods Brown has to
shaft us."

"I can’t see it happening. I use cash for
everything – it’s a lot quicker than using a card. Just hand over your
notes/coins, get your change then leave the shop."

"The population is aging. There are a lot of
people in the higher age groups who dislike credit/debit cards. There are still
quite a number of pensioners who do not have a bank account.   I
think this is wishful thinking from a vested interest."

"I bet I can tap in my PIN number in less
time than it takes a lot of people to fiddle about looking for change."

"Maybe you can, but most people can’t. It’s
really irritating to get stuck behind someone paying in this manner in the
supermarket queue."

"Perhaps we should reorganise supermarket
checkouts so that instead of having a ten items or less queue, we have a
non-timewasters queue, no old dears etc allowed?"

And so on and so forth.

There was also the usual major resistor’s comment
in relation to card interchange fees, which is already being clamped
upon by the
European Union
, with Nick Mourant, treasurer at Tesco, saying: "There
is a duopoly between MasterCard and Visa in the UK. Their setting of fees is
anti-competitive."  And other retailers saying there’ll never be a
cashless society whilst interchange fees charged to retailers cost around 4p for
each transaction.

So what’s the truth?

The truth is that ever since Diner’s Club, the
first credit card, was invented we’ve believed that a cashless society would
one day come upon us.  However, instead we have rising levels of cash in
the economy, and some say that the cashless society is about as likely as the
paperless society, e.g. not in our lifetimes.

And yet, rarely reported in our wonderful world of
infrastructures and processing, is the fact that cash makes more sense both as
a medium of exchange and also as a cost to process.

What?  Cash is cheaper to process than
cards?  You cannot be serious!

Well, rather than presenting the card processing
view of the world, let’s look at the cash processing view of the world.
The most interesting perspective I’ve seen in this area is this research (33 page
) produced in March 2006 for the European Security Transport Association
(ESTA).   These are the people who move cash around Europe, so yes they’re also biased.

The report, titled “The Role of Cash in EU Payment
Services”, makes some interesting and bold statements with the Executive
Summery stating:

Directive proposed by the EU ‘on payment services in the internal
market’ is intended to harmonise the regulatory regime for payments
across Member States, but the Directive excludes cash and paper cheques
‘since, by their very nature they cannot be processed as efficiently as
other means of payment, particularly electronic payments.’

report challenges this basic assertion and argues that if markets are
allowed to function properly, price signals will lead to the most
efficient allocation of resources and that consumers should be allowed
to choose whether to make cash, paper or electronic payments …

  1. The
    EU Commission has exaggerated the significance of payment systems in
    national income, but valuable efficiency gains might still be achieved.
  2. An
    efficient payment system would be produced where consumers are provided
    with the right signals: a number of conditions are necessary for this
    to happen but consumers must be presented with a full range of options,
    including cash.
  3. Electronic
    payment systems have expanded in recent years, but cash is still the
    most significant method of transaction and, particularly for smaller
    transactions, an efficient and low cost one; and there is some
    tentative evidence that its use may have increased in those countries
    where electronic payments are particularly well developed.
  4. The
    Directive has ignored some important features that affect the relative
    cost and benefits of cash and electronic payments, including
    seigniorage income to governments, the potential improvements in
    handling ‘cash in’ to banks, and the importance of increased fixed
    costs in any significant shift from cash to electronic payments and a
    ‘cashless society’.
  5. The
    Directive fails to differentiate sufficiently between different
    electronic payments, in particular the high cost of credit cards, which
    might actually be stimulated by a blanket encouragement of electronic
  6. Some wider economic concerns have not been
    addressed: in the longer term a dramatic shift towards electronic
    payments and digital money could have some very significant
    implications for central banks; and even in the short term reduced
    demand for central bank money could affect the conduct of monetary

“The paper
concludes by arguing that it is impossible to know the optimal balance
between cash, electronic and other forms of payment that will emerge
from the market being allowed to function properly. It is therefore a
mistake to favour one form of payment over another, even on grounds of
efficiency, let alone the non-price preferences of consumers.”

know what?  There therefore is an argument to be had here.  Is cash
better than cashless?  Should we even think that paper is that

I’ve got lots of other proof points that says
the ESTA could be right … but most of it comes from the ESTA and
their friends so I’ll just have to look around the banks and see what
they say.

About Chris M Skinner

Chris M Skinner
Chris Skinner is best known as an independent commentator on the financial markets through his blog, the Finanser.com, as author of the bestselling book Digital Bank, and Chair of the European networking forum the Financial Services Club. He has been voted one of the most influential people in banking by The Financial Brand (as well as one of the best blogs), a FinTech Titan (Next Bank), one of the Fintech Leaders you need to follow (City AM, Deluxe and Jax Finance), as well as one of the Top 40 most influential people in financial technology by the Wall Street Journal’s Financial News. To learn more click here...

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  • Anonymous

    “However, instead we have rising levels of cash in the economy,”
    This isn’t true. Will blog soon…

  • Thank you anonymous
    It is true that the total value of cash circulating in the economy is rising … but you may be pointing to the fact that this is at a decreasing rate. For example, see this from the FT the other week:
    “Last year, the value of notes in circulation was still growing at annual rates approaching 10 per cent and overtook the value of dollar bills. In Europe, six in seven payments are made with cash, according to the ECB.”

  • Interesting comments from Lars Nyberg, Deputy Governor of the Sveriges Riksbank, Sweden:
    “M0 in nominal terms has actually increased. If we look at the statistics for ATM withdrawals, we find that the total transaction value has remained fairly constant at around SEK 275 billion a year during the entire 2000s. The number of cash withdrawals has been around SEK 320 million.”