Exaggerating the death of cash

Consumers hear a great deal about the projected demise of cash and paper cheques in the new digital payments world. The Reserve Bank of Australia (RBA) Governor, Philip Lowe, has even talked of cash becoming a “niche payment instrument” while banknotes will be “used for relatively few payments”.

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It’s a decent niche: Australia has over $A76 billion polymer banknotes in circulation, the vast majority (93 per cent) by denomination accounted for by the $50 and $100 notes, according to the RBA.

"Countries with different cultures and experiences reveal why and how cash remains a useful and ever-popular payment option.”

However this disconnect between forecast and reality in payment trends is not confined to Australia. Other countries with different cultures and experiences can also reveal why and how cash remains a useful and ever-popular payment option.

Take Canada which demonstrates the ongoing attraction of cash for those who wish to avoid surveillance of their activities by authorities.

Going up in smoke

Canada was the first major developed nation to legalise the ‘over the counter’ purchase of cannabis in late 2018. Research by the London School of Economics (LSE) revealed the number of circulated banknotes in Canada fell sharply after the new legislation passed.

The LSE argued this was because cannabis consumers no longer needed to pay with cash in the ‘shadow economy’ to avoid detection and possible prosecution for their purchases.

The popularity of cash for use in the shadow economy is based on a “Triple A” of enduring qualities:

  • Anonymity - based on the absence of an audit trail
  • Widespread acceptance
  • Authenticity - durability and instantaneous settlement

These are all useful features for those active in the shadow economy, which the International Monetary Fund (IMF) estimated in 2017 to be worth between 12 and 13 per cent of Australian GDP.

Cashing in

In the United States of America, the findings of the 2018 Diary of Consumer Payment Choice (DCPC) from the Federal Reserve System show cash as a payment medium is alive and well, even if it is slowly decreasing as a proportion of total payments.

The latest DCPC shows cash is the second most used payment instrument in the USA, accounting for approximately 26 per cent of all payments and about 35 per cent of in-person payments.

As in Australia, the demand for cash, both as a payment mechanism and as a store of value, continues to increase with over $US1.67 trillion dollars in circulation at the end of 2018, a 17 per cent increase on 2015.

Cash in the USA is generally used for small value payments at a wide variety of merchants with 42 per cent of payments for less than $US10 made in cash. Two thirds of all cash transactions took place at merchants selling food, personal care items, auto related items and general merchandise, showing cash is primarily used for ‘everyday purchases’.

The 2018 DCPC reported about 75 per cent of individuals carried cash on any given day and 95 per cent carried cash on at least one day. Furthermore, the average value of cash American’s carried on a daily basis increased from about $US50 in 2015 to about $US60 in 2018.

Cashless pushback

The growing backlash in the USA against ‘cashless’ merchants is founded on the issue of financial inclusion. Several states and cities have already taken steps to force merchants to accept cash as a payment instrument.

Even the cashier free, Amazon GO stores have been forced to tug the forelock as the San Francisco Board of Supervisors voted in May 2019 to ban cashless ‘bricks and mortar’ stores, following similar bans in the state of New Jersey and the city of Philadelphia.

Cashless stores, it is argued, discriminate against the elderly, disabled, communities of colour, recent immigrants and the unbanked in the USA of which there are many millions.

Even in Sweden, a country often described as the ‘poster child’ for the cashless society, there has been a pushback against digital-only payments. This is a country where over 4,000 Swedes have implanted microchips in their hands, allowing them to pay for public transport and retail purchases with a wave of their hand.

Around 85 per cent of transactions in Sweden are already digital (card or mobile) and with Swish, Sweden’s popular mobile peer-to-peer app, now also moving into in-store payments, that domination can only increase.

However Sweden’s central bank, the Riksbank, is asking all banks to keep providing and accepting cash, until the Swedish government can decide on how best to protect the elderly, those with disabilities and recent immigrants, who find it harder to access and use electronic payments and thus still rely on cash.

Sweden has benefitted from lower crime and higher tax revenue as cash usage has fallen but there is an increasing awareness of the need to avoid demonising those who operate with cash, when many have no choice but to do so.

Debt and guilt

As well as financial inclusion there are also cultural challenges to the advancement of the digital economy.

In Germany a desire for privacy and a fierce fear of debt has meant Germans have historically preferred to pay with cash. Card payments allow monitoring of where your money is being spent, which is something which reminds Germans of the slippery slope to a surveillance state.

Also, a German distaste for debt has hindered the development of credit cards. Indeed, the German word for debt - schuld - also means guilt which is not so great for marketing credit cards. Not surprisingly, a recent study by the German Bundersban found 88 per cent of Germans wanted to continue to use cash in the future.

In Japan, around 80 per cent of all retail transactions are in cash and physical money is a deeply ingrained part of life in that country. Also, to be seen to be using a credit card as a payment mechanism is perceived to be a sign of almost certain indebtedness, also a social stigma in Japanese culture.

Adding to the debate on digital payments, the recent announcement by Facebook that it intends to enter the payments sphere with the Libra project has reopened the issue of privacy as an attraction of cash – particularly given Facebook’s record of data protection was tainted by the Cambridge Analytica scandal of 2018.

A recent report from Deutsche Bank looks at “the growing information asymmetry between people and companies and public authorities” and makes the point that if citizens have a right to preserve their personal privacy, then cash is an attractive option.

Withering cash

The report also states the charge towards a cashless society poses a democratic risk to citizens. “Whenever civil rights are not respected by the government, cash - much more than digital payments - helps opposition activists to protect themselves from the illegitimate use of public power, for example from surveillance and intimidation.”

Allowing cash to ‘wither on the vine’ would further the rise of the surveillance society, graphically illustrated by the recent protests in Hong Kong. Normally, the contactless and hugely popular Octopus card allows digital payments for public transport and many retail purchases and is a central part of life for Hong Kongers.

Yet during the protests there were long queues to buy single journey transit tickets with cash. Few locals used their Octopus cards to get around Hong Kong during the protests, as they feared the authorities would use the central database of Octopus transactions to identify who was where and when. Some Hong Kongers would not even use ATM’s to access cash during the protests, as they wanted to avoid leaving a digital footprint.

Chequeing out

The demise of the paper cheque also remains an aspiration, rather than a reality. Research from the RBA reveals the total number of cheque payments fell by 22 per cent in 2018.

There are however still 12 million cheque accounts open at the end of January 2019, 80 per cent of which were held by personal customers. Some of these may not be actively used and indeed about 60 per cent of all cheques are written by commercial customers.

Having been literally written off, Mark Twain famously made the riposte “the reports of my death have been greatly exaggerated”. As far as cash and cheques go, he was on the money.

Steve Worthington is a Professor at Swinburne University Business School

The views and opinions expressed in this communication are those of the author and may not necessarily state or reflect those of ANZ.

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