Much has been made over the past several years about the so-called “death of cash”.
How many articles have you seen circulating (pun fully intended) with titles that contain the words “cashless” and “society”?
Indeed, the notion that “society” is on the fast track to becoming “cashless” has become almost ubiquitous and although we here at HR have a deeply ingrained aversion to conspiracy theories (it’s a “once bitten, twice shy” kind of thing), we have to admit that the prime beneficiary of a move away from hard currency is government. Or, perhaps more precisely, policy makers.
First of all, a fully digitized system means there’s an accessible transaction ledger. The benefits of that for government are clear: tax collection is easier and oversight of citizens’ economic activities is streamlined.
But beyond that, think about it from the perspective of policy makers constrained by the zero lower bound. If you’re a central banker operating in a ZIRP or NIRP regime, cash is a real pain in the ass. Why? Well, because it constrains your ability to cut rates. At a certain point, savers will simply put their money under the proverbial mattress if they believe they are being penalized for keeping it in the bank. Importantly, the effective lower bound isn’t zero. There’s a risk to holding your life savings in cash and storing it in the closet. That risk means savers will likely put up with interest rates at or even below zero before they’ll pull everything out of the bank. But that patience starts to wear thin beyond a certain point.
Well, if you do away with cash, there is no effective lower bound for rates. If you’re a policy maker you can centrally plan the whole damn economy. Consumer spending too low? No problem. Just make rates negative 20% and force people to either spend or take a haircut. Economy running too hot? Again, no problem. Raise rates to +20% and force people to choose between spending and earning a huge return on their digital wealth. If there’s no cash, those are choices consumers would have to make because physical bank notes would no longer exist.
Now clearly, that’s a gross oversimplification that ignores pretty much all nuance, but that’s on purpose. We’re just trying to frame the debate.
Well with all of the above in mind, consider the following out Thursday afternoon from Goldman.
Have we reached peak cash? Technology has been an important catalyst for shrinking cash usage, but it is by no means a new phenomenon. As we wrote in 2012, the first technological step-change in the payments arena was the shift from cash to plastic money, i.e. credit and debit cards, which happened in the 1960s.
There are many parallels to be drawn between that period and the ongoing shift to digital money: an initial period of an increasing number of providers was followed by a consolidation stage that established a few players (Visa and MasterCard primarily) as the industry standards, eventually accelerating the adoption of plastic money.
However, the availability of technology alone has not ensured the demise of cash. As the following chart shows, there are several advanced economies in which it is still the dominant mode of payment in volume terms (surprisingly quite a few European countries are in the bottom left quadrant).
Scandinavian countries are on the cusp of becoming some of the first cashless societies, as a result of industry-co-ordinated steps and government initiatives. Swish, a payment app developed jointly by the major Swedish banks, has been adopted by nearly half the Swedish population, and is now used to make over nine million payments a month. About 900 of Sweden’s 1,600 bank branches no longer keep cash on hand or take cash deposits and many, especially in rural areas, no longer have ATMs. In conjunction with that, cash transactions were just c.2% of the value and 20% of the volume of all payments made last year (down from 40% five years ago).
Denmark’s move to a cashless society is a deliberate result of policy, with the government removing the obligation for some retailers to accept payment in cash. (MobilePay, a Danish app, was used by half the population to make 90 million transactions in 2015).
In the Euro area too, policy makers have taken steps to counter cash, both in terms of circulation and transactions. The ECB has stated that it will phase out the €500 note from 2018, with a view to making it more expensive or inconvenient to hold on to vast reserves of cash.
The advantages of moving away from cash are perhaps the most pronounced for governments. Electronic transactions allow for greater transparency, which in turn leads to greater formalisation of the economy and higher tax revenues. This lies at the centre of India’s demonetisation efforts, when the government pulled approximately 85% of currency in circulation in order to reduce unaccounted and counterfeit money in circulation. Demonetisation in India was also carried out parallel to broader measures being taken to encourage households and businesses to electronic and digital transactions, in order to reduce friction costs and improve ease of doing business.
Stack up the advantages for the different stakeholders and it is evident that governments benefit most from lowering cash usage. This is why we believe that they will be the biggest catalyst to the shift away from cash. Regulatory intervention will be needed more if the current low nominal interest environment persists. This is because cash in circulation as a percentage of GDP is negatively correlated with inflation. High inflation erodes the value of currency and increases the opportunity cost of holding cash.
A good case in point is the UK, where the decline in notes in circulation relative to nominal GDP occurred during the high inflation period of the 1970s and early 1980s; the ratio fell from c.6% in 1970 to c.4% in 1980 as inflation rose from c.6% to c.18% over the same period.
Lower levels of trust in the banking system can also exacerbate cash holdings; the ECB has estimated that there was an extra €35 bn in demand for euro banknotes in October 2008 as the financial crisis deepened.
This apparent paradox of cash – falling cash transactions but increasing cash in circulation – presents a different set of opportunities for players in the cash value chain.
Of course while even
Government Goldman Sachs admits that the the main catalyst for a shift away from cash is government self-interest, there’s always going to be the “it’ll deter crime” ruse playing out in the background.
And while we certainly imagine that criminals will have no trouble whatsoever circumventing the system if and when we do go cashless, regular folks would no doubt lose a part of their privacy. Here’s Goldman again:
One of the underrated advantages of cash is that it ensures anonymity; but it is difficult to say how much loss of privacy has hindered the growth in digital payments. The emergence of cryptocurrencies may be evidence that there is demand for a digital medium that ensures privacy, but their adoption remains very limited.
Finally, along these same lines, have a look at the following chart which shows the share of cash transactions vs. the Corruption Perception Index, which Goldman contends “makes a similar case for moving away from cash”: