For generations cash (banknotes and coins) have played a central role in society as the primary means of payment. The use of cash in transactions is, however, in decline, a trend that appears to have accelerated during the Covid-19 pandemic. This decline has implications for the production of cash and the infrastructure used to distribute cash to citizens and businesses.
According to a September 2020 report by the National Audit Office (NAO) in the UK, “Most adults still use cash at least some of the time and some sections of society remain largely reliant on it for meeting their everday needs.” This is as true in Uzbekistan and Uganda as it is in the UK. In the UK, over £100 billion are spent yearly, in shops, using notes and coins; that represents £1,500 for every man, woman and child.
Somewhat counterintuitively, although the use of cash in day-to-day transactions has fallen, NAO notes that the demand for banknotes has actually increased continuously over the past twenty years. Surprisingly, central banks have little reliable information to quantify how much is likely to be held, where, or why this is happening. Over the past decade research has identified an increasing use of notes as a store of value across most of the world’s major currencies. Potential factors contributing to the demand are thought to include low inflation and interest rates, leading to increasing confidence in the real value and lower opportunity cost of holding cash, and also loss of confidence in banks following the 2008 financial crisis.
The cash system is large and complex. Running the cash system incurs costs for both taxpayers and businesses. Although the production costs of notes and coins are offset by income resulting from their sale to the market at face value – a process called ‘seigniorage’ – it is estimated that the UK’s entire cash infrastructure costs around £5 billion a year to maintain.
The continuing reduction in the use of cash in transactions is putting pressure on the cash system. Many of the costs of cash production and distribution are fixed. Commercial operators have warned of pressures on their business models, which have previously depended on higher cash volumes to maintain the commercial attractiveness of their operations. Consumer organisations have raised concerns that reductions in the ability of people to access cash, and increasing costs to business of using cash, if not properly managed may increase the risk of financial exclusion for sections of society dependent on cash. In low-income, cash-based societies – i.e almost all the countries in which international aid organisations work – this means almost everyone.
Central banks are still developing their understanding of which consumers use cash most, and why they need it. Information on consumer needs can help regulators target their actions to help people who would face practical difficulties should their ability to access and use cash become limited.
Maintaining access to cash should be part of any aid organisation’s fiduciary risk approach to cash assistance. Rather than proselytize the migration to digital cash transfers, it behooves the 66 cash coordination groups currently active around the world to work with their respective central and commercial bank partners to better understand the political economy of cash as used by their collective beneficiaries. After all, it is they who will suffer most from rising costs and lower access to cash. In addition, CaLP’s member organisations should commission research into this little-understood area of humanitarian cash (and voucher) assistance.