In Australia, the pandemic has accelerated a trend that had started long before the pandemic. Cash demand has been increasing steadily, measured by cash in circulation, largely due to store of value demand but transactional demand or the share of cash in retail payments, has been declining.
Between end February and end of April 2020, currency in circulation grew by AUD 3.5 billion representing year on year increase of 8.9%. This is comparable to surges in demand observed in other countries. The Reserve Bank of Australia (RBA) revealed in its April financial stability report that cash withdrawals from banks increased in the second half of March.“This included a small number of customers making very large withdrawals – more than $100,000, and in some cases into the millions of dollars,” it said, adding that the elevated demand had since abated.
Source: Reserve Bank of Australia
During the pandemic, payment behaviour has changed rapidly. In a recent speech, Michele Bullock, Assistant Governor of the Reserve Bank stated “Both merchants and consumers appear to have been keen to reduce their use of cash. Many merchants made it clear through signage that they preferred contactless card payment, even for low-value payments. Some even went as far as to indicate that they would not accept cash. Maybe partly in response to this, and their own concerns about hygiene, many people reduced their use of cash in stores. In addition, there was a significant shift to online shopping, where cash is simply not a payment option. As a result of these changes, ATM withdrawals in April were down 30 per cent from the month before and over 40 per cent lower than twelve months earlier.”
A fundamental question around the globe is whether this behavioural change will survive the crisis. The Reserve Bank seems to think it could; Michele Bullock said “All of these changes are likely to result in permanent shifts in behaviour as some people maintain the new ways of doing things.” On the other hand, the Royal Australian Mint said in a statement “We believe that Australians using contactless payments may increase post COVID-19 but this will not lead to a permanent shift to a cashless society, at least not in the near future”.
The Reserve Bank stresses that the change could have far-reaching policy implications, on the costs of electronic payments, on the resilience of the payments system and on the ATM network.
Michelle Bullock said that the RBA will consider reducing the cost of electronic payments for both merchants and consumers as the declining use of cash in payments is reducing competition in the payments market. Two options are on the table: one is to mandate that acquirers explicitly offer least-cost routing to all their merchants; the other is to lower the benchmarks that serve as a cap on average interchange fees. As shown in the chart below, the total cost of merchant fees can vary by a factor of 7 between the domestic eftpos system and international credit schemes. From a commercial bank perspective, this raises an interesting paradox: the decline in cash usage could lead to less profitable electronic payments markets.
Cash has often been viewed as a back-up in case of outages and this was clearly the case during the violent bushfires that swept across the country a few months ago. But if people carry less cash, the resilience of the retail payments system must be strengthened. The Reserve Bank is working with the industry to develop a set of standard operational performance indicators to be disclosed by individual institutions. The work is complemented by efforts to identify and mitigate risks of reliance on supporting infrastructure that can be ‘single points of failure, such as the telecommunications and energy sectors. These measures will likely lead to an increase in costs for electronic payments providers and could counter the previous objective of reducing costs for merchants.
One option that does not seem to be considered by the Reserve Bank is to actually encourage consumers and merchants to increase the use of cash at the point of sale. This would effectively increase competition between suppliers and would reduce the marginal cost of cash. It would also guarantee a tried and tested back-up system in case of outages.