Building a More Resilient Cash Cycle

CashMoney in physical form such as banknotes and coins. More plays a key contingency role in disaster recovery and crises. The cash cycleRepresents the various stages of the lifecycle of cash, from issuance by the central bank, circulation in the economy, to destruction by the central bank. More has shown its robustness and resilience in times of natural and made-man disasters. The Covid-19 pandemic demonstrated this with the unprecedented increase in cash demand in 2021, when 75% of the world’s currencies experienced double-digit growth (Heinonen). “The resilience of cash as a social institution reminds us of the importance of understanding the economic functions of moneyFrom the Latin word moneta, nickname that was given by Romans to the goddess Juno because there was a minting workshop next to her temple. Money is any item that is generally accepted as payment for goods and services and repayment of debts, such as taxes, in a particular region, country or socio-economic context. Its onset dates back to the origins of humanity and its physical representation has taken on very varied forms until the appearance of metal coins. The banknote, a typical representati... More beyond just the innovations in technology.” said Hyun Song Shin, economic adviser for the Bank for International Settlements.

Three factors, however, challenge this resilience.

• The first is the shrinking cash infrastructure which is common to many markets and limits access to cash. The closing of ATMs and bank branches and the slow scaling-up of cashbackA service whereby the customer pays electronically a higher amount to a retailer than the value of the purchase for goods and/or services and receives the difference in cash. It is also a reward system associated with credit card usage, whereby the consumer receives a percentage of the amount spent on the credit card. More and cash-in-shopService allowing a customer to withdraw cash from a payment account using a mobile application on a smartphone at a participating shop supporting the application. Also referred to as a “virtual ATM”. Unlike cashback, a cash-in-shop transaction does not require the consumer to make a purchase. More as alternative distribution channels has led to the deterioration of access to cash, as illustrated by the ECB Study on the paymentA transfer of funds which discharges an obligation on the part of a payer vis-à-vis a payee. More attitudes of consumers in the euroThe name of the European single currency adopted by the European Council at the meeting held in Madrid on 15-16 December 1995. See ECU. More area (SPACE), which finds that 10% of the euro-area population find it difficult or very difficult to access cash.
• The second is the declining use of cash in payments. Despite increasing demand for cash, its use in payments has been declining in many markets, a trend known as the cash paradox. The shift from cash accelerated during the Covid-19 pandemic, with implications on the acceptance of cash by merchants. It creates “a ‘payments divide’ between those who have access to digital payments and those who do not.” (Auer, Cornelli, Frost 2022).
• The third factor is the convergence of different crises to create what the World Economic Forum (WEF) has dubbed the poly-crisis, “a cluster of related global risks with compounding effects, such that the overall impact exceeds the sum of each part”. Technological risks associated with digitalisation, including the breakdown of critical infrastructure, widespread cybercrime and cyber insecurity or the concentration of digital power, are one of the key risk areas identified by the WEFs Global Risk Report (see chart below).

Figure 1. Global Risks Map, 2023

Several countries have recently announced measures to improve the resilience of the cash cycle.

Increasing Cash Stocks

In Germany, the authorities, including the Deutsche Bundesbank, the financial market regulator BaFin, and industry organizations such as BDGW, the cash-in-transit association, are stepping up preparations for emergency cash deliveries in case of a power outage. The plans include increasing cash stocks held by the central bank and imposing limits on cash withdrawals to cope with a surge in demand, reports Reuters. In 2011, a report on the consequences of a permanent power outage commissioned by the Bundestag warned that “resentment and sometimes aggressive arguments” could result if the cash supply collapsed. “People are afraid that they will no longer be able to procure food and other basic necessities,” the report said. The cash-in-transit association asks to be assessed as part of critical infrastructure and given priority access to fuel and telecom services, according to FAZ.

Ensuring Cash is a Critical Infrastructure

According to Les Echos, in cooperation with national authorities, the European Central Bank has undertaken a comprehensive assessment of risks and introduced emergency policies to ensure the production and distribution of banknotes throughout the economy in case of a blackout. In France, the Banque de France has reached out to local authorities to ensure that they prioritise its 23 regional branches in the case of local power outages. All branches have been equipped with power generators, as have cash-in-transit companies. For Michel Tresch, head of Loomis France, essential lessons were learnt in 2020 when extreme weather events led to flooding and power cuts in the southern Alps. At the time, security services distributed cash and “autonomous ATMs were deployed within 72 hours, a key priority to enable a semblance of a normal life”, adds Tresch.

Storing Cash in Emergency Kits

• In Finland, Päivi Heikkinen, the Head of the Payment Systems Department and Chief cashierInitially, the person who is responsible for the safe, its opening and closing, and the contents that are safeguarded inside it. Nowadays, at a central bank, the person who is responsible for matters related to the treasury and cash. Their signature would usually appear alongside others on the banknotes issued by the bank. More of the Bank of Finland, has advised households to increase their cash holdings in case disruptions occur, reports Euractiv.
• In Sweden, the Civil Contingencies Agency (MSB) also advises holding “cash, in case payment systems go down” due to extreme weather conditions, internet outages, or “armed conflict.” People should always have “cash in small denominations,” states the MSB‘s brochure “If Crisis or War Comes.” In 2021, the Swedish Riksbank opened two additional cash centres to increase the payment system’s resilience. “There need to be better opportunities to pay by card or withdraw cash in the event of disruptions to the electricity supply or data communication,” stated the Riksbank.
• The Government of Canada recommends having “cash, traveller’s cheques and changeThis is the action by which certain banknotes and/or coins are exchanged for the same amount in banknotes/coins of a different face value, or unit value. See Exchange. More” in basic emergency kits.
• The U.S. Department of Homeland Security (D.H.S.) recommends keeping “cash or traveler’s checks” as emergency supplies. New York State urges citizens to keep “cash and coins” in their emergency supply kit. New York City advises residents to have “cash, in small bills” in their Go Bag for emergencies.

Securing the Supply of Cash

In December 2022, the Swedish Riksbank proposed that to secure the supply of cash, other actors than banks or bank-owned companies should also be allowed to enter into agreements to withdraw or deposit cash from its depots. The Riksbank also proposes that such actors be able to enter into an agreement on compensation for interest expenses from the central bank.

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