Readies, moolah, dough, bread… will these slang names for cash be consigned to the linguistic archives as current usage evolves towards bland technical jargon reflecting a world without hard cash? Has Covid-19 speeded up a phenomenon already under way, favouring online retailing and the many alternative means of payment (credit/debit cards, PayPal, Twint, etc.)?
Amazon, Alibaba and the like are undoubtedly the big winners of the crisis, but the much heralded decline of cash could still be well wide of the mark. The cash lobby strongly believes that is the case.
It all started with the onset of the pandemic, when the World Health Organisation (WHO) committed a faux pas which shook the entire cash-related industry. The multilateral agency advocated cashless payments, suggesting that exchanging cash could pass on the virus. This message was immediately relayed by the European Banking Authority and a number of central banks around the world.
The WHO subsequently retreated from this position, but the damage had already been done. The Bank for International Settlements (BIS) noted “unprecedented public concern,” stating in a study published in April that the number of internet searches with the keywords “banknotes” and “virus” had exploded.
As reported by Le Monde, it was logical to see a 40% reduction in cash withdrawals in France at the peak of the lockdown, due to the combined effect of people spending less and buying proportionally more online. People in France were also going to the supermarket less often and buying more in bulk, which encourages card payments. However, right now there is no sign of this change being permanent.
In Switzerland, the Covid-19 effect also made its presence felt. In response to a question from Heidi.news, the Swiss National Bank (SNB) stated: “The SNB noted a decline in the demand for cash in March and April. This primarily applies to small-denomination banknotes and is probably due to the reduction in economic activity and retail restrictions. Demand for small-denomination notes has been on the rise again since May. The volume of notes in circulation (total amount and number of banknotes) continues to rise.” At the end of May, the value of these notes came to CHF 84 billion, equivalent to about 12% of Swiss GDP.
Although online purchases increased by 8.2% last year to reach CHF 10 billion, the Swiss remain strongly attached to cash payments on both international and domestic platforms. According to the SNB, 70% of transactions by number in 2017 were in cash, well ahead of debit cards (22%) and credit cards (5%). By value, cash accounts for 45% of transactions.
However, “in relative terms, cash accounts for a decreasing share in a number of countries”, confirms Richard Wall, former Managing Director of the Currency Department at the Bank of Canada. In 2018, there were more payments for the first time by debit card than cash in the US, according to a study by the Federal Reserve Bank of San Francisco.
The situation varies greatly from one country to the next. Generally speaking, cash payments are on the rise almost everywhere in the world. According to a comparative study by the BIS covering 24 currencies, only India, China and Sweden saw a decline in the value of cash transactions as a percentage of GDP between 2000 and 2016. In the eurozone, Japan and the US, by contrast, cash transactions increased significantly.
This phenomenon is due to a large extent to central bank policies, which for several years now have been flooding their economies with liquidity to boost credit and consumption. “Cash is also a safe haven when interest rates are low or even negative,” adds Richard Wall. Hence the strong demand for large-denomination notes – there were more 100, 200 and 1,000 franc notes in circulation than ever before in January 2020.
Beyond this economic element, the resilience of banknotes in the face of technological developments also comes from their intrinsic features. Antti Heinonen, former Director of Banknotes at the European Central Bank and current Chairman of the Banknote Ethics Initiative, notes that: “more than 1.7 billion people around the world have no access to a bank account. The informal economy represents about 30% of global added value.” Banknotes are indispensable to these people.
There is also no other means of payment capable of the marvel of an immediate transaction: “Every electronic exchange is just one stage in a process and therefore subject to uncertainty”. The recent bankruptcy of German giant Wirecard, unable to trace the location of EUR 1.9 billion, demonstrates this point.
Antti Heinonen also points to the protection afforded by cash: “As long as there’s cash, there will be limits to the fees applied to electronic transactions. Remember that these instruments come from the private sector, which is not motivated primarily by the common good.” That applies particularly to international platforms, some of which offer their own cryptocurrency, such as Facebook with Libra.
Central banks are monitoring this trend closely, although it does not call their role into question, argues economist Cédric Tille, a member of the SNB Bank Council. “Price control is not dependent on the means of payment, because a purchase is not speculative. However, cryptocurrencies could affect financial stability by facilitating panic cash outflows if there were a loss of confidence in a currency.” The danger in this scenario would stem from the ease and rapidity with which it is possible to convert a currency.
However, the advocates of a cashless world are legion and they represent varied interests. Guillaume Lepecq, Chairman of CashEssentials and a firm advocate of banknotes, sees his adversaries as falling into three groups: “There are the alchemists, who want to explore negative interest rates and unorthodox monetary policies; the authoritarians, who wrongly believe that cash is a preferred means of money laundering and tax evasion and who want all our transactions to be controlled and monitored; then there are the fintechs, who have a vested interest in the expansion of alternative payment methods.”
As regards illegal activities, Antti Heinonen states that the perception of the opportunities offered by cash is biased by all the coverage given to drug traffickers. “In reality, there are vast fraud operations involving electronic transactions and they certainly don’t prevent money laundering. Of course they are easier to trace, but they also involve larger volumes and they are diluted by the thousands of transfers between tax havens.”
Cédric Tille confirms: “Cash movements are highly restrictive, they are a big logistical challenge. The ability to make anonymous electronic transfers would be paradise for drug traffickers.”
Jean-Yves Ray, Marketing Director at SICPA, the Swiss company that provides the security inks for banknotes, argues that cash protects privacy. “I had to buy clothes online during the lockdown. Two months later, I’m still receiving adverts that want me to buy more.” In addition to this targeted marketing comes the risk of individuals being tracked: some authoritarian governments use credit cards to trace people’s movements, as with the purchase of metro tickets bought during the Hong Kong unrest, for example.
Richard Wall says banks have a direct interest in the relative decline or even disappearance of cash. “ATMs are a cost so banks will want to reduce that cost. Credit cards, on the other hand, are a source of income.” As a result, the number of cash machines is falling almost everywhere in the world.
Take Sweden as an extreme example: the Swedish economy is practically cashless, with only 1.3% of payments made in cash. “Parliament noted that a whole section of the population was being excluded and ultimately obliged the banks to offer a minimum number of cash withdrawal options,” concludes Guillaume Lepecq.