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Cash is still #1

Another day, another payments conference and this one is International Payments Summit 2011.

Just had an interesting panel discussion with:

  • Dr Michael Salmony of Equens;
  • Dr Malte Krueger of the University of Applied Sciences, Frankfurt;
  • Bridget Taxy of De La Rue; and
  • Ron Delnevo of Bank Machine;

about the feasibility of a cashless society.

We’ve talked about this so often that it’s a discussion that is pretty meaningless as, no matter how hard card companies and banks talk about a war on cash, cash is still just as prevalent as ever.

Worldwide, the number of banknotes in circulation increases around three percent year on year, and cash in circulation still represents about six percent of the GDP of the Eurozone (12% in Russia!).

Even the most advanced payments economies, like Iceland, where 94% of transaction volumes are electronic have 6% therefore in cash.

Across the European Union, 78% of all payments transactions are in cash by volume of transactions, and that rises to over 90% in Russia and China.

It all reminded me of a speech from Lars Nyberg of the Central Bank of Sweden in 2008 who said that, for all of the attacks on cash, the volumes remained steady and could not decline further:

Cash payments still account for a large proportion of the number of transactions in the Swedish economy. But it comes as no surprise to anyone if I say that they have declined in significance in recent decades. As a per cent of GDP, the share of Swedish banknotes and coins in circulation (M0) has more than halved since the 1950s, from around 10 per cent to just around 3.5 per cent.

In the past fifteen years, however, the trend has levelled off. The use of cash has not declined in the same way as before. 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.

Does this mean that we have reached a lower limit for how much the use of cash can decline? Has the heyday of the account-based payments ended? I do not believe we should be so sure of that. Cash is still expensive to transport and manage and a heightened risk of robbery in recent years has not made cash management cheaper. In the end, it is we consumers who pay the costs in different ways. However, we must probably point out that we Swedes like our cash more than most analysts believed a few years ago.

Similar experiences are reported elsewhere and cash remains a stalwart backbone of most societies worldwide.

Why?

Because there is no reasonable alternative.

Cash is simple, reusable, has no limits on values that can be exchanged, is totally anonymous, has no hardware involved, cannot be tracked and traced, is immediate and so on and so forth.

Equally, cash makes sense in all sorts of ways.

Try selling a car and what’s more trusted? A bank promise or a wodge of cash?

Try paying your babysitter with a credit card … it’s difficult.

How should you tip staff in a hotel or restaurant?

And when will merchants change their view and accept card payments for sub-£10 transactions?

Sure, some do, but they are still few and far between.

It’s a generational thing some claim, but others say Gen Y are bigger cash users than any.

Why?

Because it makes budgeting easy.

If you have £100 on Monday for the week and it runs out on Friday, you know you’ve spent out.

You don’t when it’s on a card.

That’s why I was intrigued to hear the story the other day of a woman who uses her television as a piggy bank.

How?

Because her TV works on a meter.

She pays £1 for two hours viewing.

However, if she’s paid in over £40 in a month, she gets anything left back.

So she puts £1’s in her TV all night every night, on the basis that this is the way she budgets and saves.

Strange, but true.

So why do we want to get rid of cash.

Various reasons with the cost being the biggest.

But what is the cost of cash?

Cash in transit and cash management systems are efficient, and the challenge is how to replace such systems.

Who would pay?

The merchants? The consumer? The government? The banks?

And if we got rid of cash, what would happen to all the cash machines?

Equally, is it really that costly? After all, look at counterfeiting operations and they’re pretty pathetic in comparison to card theft numbers.

So cash makes sense, especially the Seigniorage that governments make from cash.

For example, the US Government makes $5 billion a year from issuing quarters that cost dimes to make. The average 25 cent coin costs 10 cents to manufacturer. The 15 cent profit makes eminent sense … or is that cents.

And what about the success of alternatives?

Contactless for example.

Is contactless really a viable alternative?

Not according to one card firm who has spent millions advertising contactless cards in the UK, and yet recent numbers showed 6,000 contactless transactions in London across 20,000 readers in a month.

Not bad?

Not good!

Their busiest London ATM saw 29,000 transactions the same month.

29,000 transactions at one terminal versus 6,000 across 20,000 readers … not great.

Sure, that will change …. but it’s not happening yet.

And then we have the final argument: cash supports the underground economy.

Yea, right.

Do we honestly believe that if we got rid of cash completely, that the criminal fraternity wouldn’t find some other way to launder and pay?

Come on, get real.

So, as you can see, our panel firmly believed that cash is here and here to stay.

A bit like a paperless society, the cashless society dream is still just that.

A dream.

 

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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  • I suspect that another reason for the prejudice against cash is that ever-control-seeking governments just hate the idea of citizens carrying out all sorts of transactions that they (governments) cannot monitor, police, regulate, intrude into and – above all – easily tax.

  • Matt O’Donnell

    You forgot to mention waterproof!

  • “For example, the US Government makes $5 billion a year from issuing quarters that cost dimes to make. The average 25 cent coin costs 10 cents to manufacturer.”
    I simply didn’t believe any of these figures so I went to track down sourced estimates.
    I checked at US mint, and they say that over the 10 years of the program they shipped 34.3 billion quarters to the Federal Reserve Banks (FRB), generating $8.6 billion in revenue and nearly $6.3 billion in seigniorage. This means that quarters cost them about 4 cents to make.