Can cash resist the digital tide?

The two main criteria that distinguish a Public Good are that it must be non-rivalrous, which means does not dwindle in supply as more people consume it, and that it is non-excludable, in that it is available to all citizens.

“High cash users were more likely to be older Australians, have lower household incomes, live in regional areas and less likely to have access to the internet.”

As the digital economy has progressed, there is a new candidate for the designation Public Good: physical cash. Cash would be considered an essential service both as a means of payment and as a store of value. The rationale here being that to be cut-off from using cash is tantamount to being excluded from society.

The decline in the use of cash as a means of payment has elements of a positive (or negative, depending on your view) feedback loop in that access to cash has been reduced by reduction in points of distribution such as bank branches and ATMs. Which are in return responding to less use of cash. (Although cash is also now available from merchants like supermarkets via “cash back” at point of sale.)

Particularly during the pandemic, cash usage has been constrained by the much greater uptake of ecommerce – where obviously cash can’t be used - merchants refusing or reluctant to accept cash and the growth of alternative payments options, such as payment cards, mobile wallets and quasi-credit schemes like buy now, pay later (BNPL).

Nevertheless, cash remains a fee free payment option for ma to use, as both credit and debit card transactions can incur a surcharge. Plus, as pointed out by Jodie LeeTet in her July 2021 bluenotes article, titled “Banking on the future of cash”, the level of cash in circulation grew in 2020 and there is now more cash in the system than ever before, as people want to hold onto physical money for reasons of privacy, security and convenience. Thus, Reserve Bank of Australia (RBA) data show there are now 36 $A50 notes and 16 $A100 bills in circulation for every man, woman and child in Australia.

Paying for cash

Of course, cash also has its costs. The physical distribution of cash costs money. For merchants, there is a higher incidence of shrinkage – money going missing – with cash together with the security risk of cash on the premises. Moreover, despite the arrival of cryptocurrencies, cash is overwhelmingly used to finance the “black economy” of criminal and terrorist activities. The black economy also erodes the tax base of a nation.

However there is also a demographic issue with cash. The RBA Bulletin June 2020 Consumer Payments Survey, carried out in 2019, found high cash users were more likely to be older Australians, have lower household incomes, live in regional areas and are less likely to have access to the internet. Indeed, the Australian Bureau of Statistics (ABS) estimates over 2 million Australians have either limited or no access to the internet.

The RBA Survey results also suggest many consumers perceive cash to be important as a backup payment option during outages in the electronic payment systems. Outages can originate in financial institution technology systems, point-of-sale terminal networks and/or telecommunication networks. The resilience of these essential elements to digital payments is acknowledged by the RBA to be an issue that needs urgent attention. The average duration of these outages in the 2019/2020 financial year was six hours and the RBA plans to introduce mandatory reporting which will then be publicly disclosed by the payment providers.

Meanwhile, the RBA in its 2020/21 Corporate Plan, has also committed to work to support the ongoing provision of cash services in Australia.

So, like the fable of King Canute, if we cannot delay the incoming tide of digital payments, how then can we best manage the retreat of ‘King Cash’ as a popular means of payment? In a way we do not financially exclude those who still rely on or prefer to use cash?

There are international examples which may help guide us.

Global trends

In September 2020, the European Union declared cash to be a Public Good, stating “cash is a means of payment that offers instant settlement in face-to-face transactions, without any technical infrastructure. It is still the only form of money individuals can hold directly and as such, it should remain widely accessible and accepted”. The Court of Justice of the European Union (CJEU) subsequently also stated people must be allowed to make payments in cash for goods and services.

In the USA, a group of trade associations and consumer groups have banded together to fight for the right to pay by cash. Their immediate priority is to support the passage in Congress of the Payment Choice Act of 2019, a bipartisan bill that would maintain nationwide acceptance of cash payments for consumer purchases of goods and services at brick-and- mortar retail outlets. The State of New Jersey and cities such as New York, Philadelphia and San Francisco have already enacted laws, requiring retailers to maintain a cash payment option.

In the United Kingdom, Universal Service Obligations (USOs) already exist for essential services such as water, electricity and postal services, and Age UK is currently lobbying the Government to introduce a USO for cash. The Financial Conduct Authority (FCA) has also made it clear maintaining access to cash in local communities remains a regulatory priority that the financial institutions should take on board when making decisions on the future of their branches and ATMs. The FCA, as a watchdog, has set out expectations for financial institutions when they are considering closing branches or withdrawing ATMs from service.

One option being investigated in the UK is the establishment of Bank Hubs where five of the major banks effectively share a branch. Each can host their customers in drop-in appointments, in a private meeting room, on their designated weekday. This potentially offers a model for sharing the costs of the cash infrastructure. From the merchant’s perspective, thousands of retailers in the UK have signed up to a ‘cash -friendly pledge’ which guarantees they will continue to accept coins and notes.

The challenge

So is cash a service? Well other essential services must, by their very definition as Public Goods, serve a nation, region or city and continue to do so even in locations that are unprofitable. We are using less cash as a payment mechanism but today people still need access to cash. That may be because of a desire for privacy, convenience or as a backup payment option, when all else fails.

Reducing the traditional cash distribution infrastructure does on the one hand reduce the costs of distribution at the institutional level but, paradoxically, increases the unit costs of the infrastructure that underpins the distribution and collection of cash.

The challenge then is twofold: understanding the extent to which cash is a “public good”; and, assuming it is, how should policy be structured and regulators empowered to ensure cash continues to be both accessible and useable as a physical mechanism.

Steve Worthington is a bluenotes columnist and professor at Swinburne University Business School