The first is changing consumer payment habits. The pandemic has undoubtedly changed the way people pay, under the combined pressures of the decline in consumer spending, the boom in online shopping, the adoption of contactless payments, stimulated by mislaid fears of viral transmission via banknotes and coins. Simultaneously, there has been a massive increase in precautionary and crises-related holdings of cash.
The patterns differ significantly from country to country. Low-cash countries such as the Nordics have seen a sharp decline in cash transactions whereas in Germany, the EHI (German Retail Federation) has estimated a modest 5% decline both in value and in volume. Some medium and low-income countries have actually seen cash usage increase due to government subsidies disbursed in cash as well as the development of the informal economy.
It is unclear today whether this evolution will become the new normal or whether it will evolve again as the health crisis comes to an end. On the one hand, the longer the lockdown policies last, the stronger the impact on payment habits as consumers increasingly adapt to the new situation. According to a July 2020 ECB survey, 40% of respondents have used less cash since the start of the pandemic, and almost 90% of them stated that they would continue to pay less with cash after the pandemic was over. On the other hand, as we move into a recession environment, history has shown that consumers have shifted back to cash during economic downturns for several reasons (lower spending, budget management, informal economy…). It is uncertain how these dynamics will interact in the future.
The second challenge is access to cash. The ECB SPACE study has highlighted the deterioration of the ease of access to cash as the level of satisfaction has dropped from 94% in 2016 to 84% in 2019. In 10 of the 19 euro-area countries, over 10% of the population perceive access to ATMs as difficult or very difficult.
The issue of access needs to include access to cash deposit services. If retailers cannot deposit their cash into a bank account at a reasonable cost, they will increasingly refuse to accept it.
Access to cash is being increasingly addressed by regulators across the globe. In Sweden, a new law requires banks to provide an adequate level of cash services. In the UK, the government announced plans to protect the UK’s future cash system and ensure people have easy access to cash. The Euro Retail Payments Board will initiate a working group. However, in many cases, these policies seem to focus primarily on slowing down the process rather than reversing the trend.
The acceptance of cash by retailers is the third challenge. Shops refusing to accept cash were a marginal trend, limited to a few countries, before the Covid crisis, which has clearly accelerated during the pandemic, fueled by government and private-sector campaigns to avoid cash. The issue is triggering responses from both regulators and consumer organisations.
In the US a bipartisan bill, which is in front of congress would make cash acceptance mandatory by law. The Governor of the Swedish Riksbank has called for mandatory acceptance of cash. A case before the European Court of Justice could have important implications for the status of banknotes and coins as legal tender and the acceptance of cash.
A regulatory approach also requires consumer support. In the UK, 61% of consumers agree that shops and businesses that encourage payment for goods and services by card, are excluding people who prefer to pay by cash. In the US, there has been a spectacular move whereby 51 consumer organisations signed a letter supporting the Payment Choice Act which would prohibit brick-and-mortar retailers from refusing to accept cash or charging consumers more for paying with cash. The European Consumer Association BEUC has published a position paper calling for all retailers to be obliged to accept cash.
Fourthly, the pandemic has also spurred innovation in the cash cycle as social distancing, confinement policies and shop closures have led to the design of new ways to distribute cash.
However, both government and corporate innovation policies in payments have primarily aimed at reducing cash usage – and sometimes abolishing it altogether – to drive the adoption of digital payments. This seemingly progressive approach has had dangerous and unintended consequences in terms of financial and social inclusion and the economy as a whole. In 2019, half the world’s adult population did not make a single digital payment.
True innovation needs to be inclusive. For instance, ATMIA has launched the Next Gen ATM project to reinvent the ATM in a phygital world; the CashTech initiative aims to foster innovation in order to rethink the cash cycle and ensure access, acceptance and efficiency. In terms of policy, lessons can be learnt from some of the creative initiatives that have been implemented to drive the adoption of digital payments.
The fifth challenge is the possible coexistence of cash and a Central Bank Digital Currency (CBDC). According to a survey published in January by the Bank for International Settlements (BIS), 80% of the world’s central banks are engaging in some kind of work in relation to CBDC. 40% have evolved from research to experiments or proofs-of-concept and less than 10% are running pilots. The evolution of cash demand is a major motivation leading central banks to investigate CBDCs. For some, CBDCs could reduce the high reliance on cash whereas for others, declining transactional demand for cash could be offset by a CBDC which would provide access to central bank money for the general public.
Will CBDCs substitute or complement cash in light of their features? “A digital euro, in any event, would be a complement to, not a substitute for cash.” said ECB President Christine Lagarde. Theoretical papers assume that CBDC should emulate the features of cash, but no-one is questioning this and analysing the features. Should the CBDC have the same legal tender status as notes and coins? What level of anonymity would CBDCs provide and how can it be guaranteed? What is the difference between retail and wholesale CBDCs? What are the implications for interest rates, positive as well as negative?