The paperSee Banknote paper. More analyzes the role of a well-functioning cashMoney in physical form such as banknotes and coins. More infrastructure for the stabilizing role of cash and the resilience of cash cycles. For that purpose, experiences from developed countries with low and high cash usage are assessed. It starts with the paradox of banknotes and asks what are the main determinants of the remarkable decline in cash use at the POSAbbreviation for “point of sale”. See Point-of-Sale terminal. More in the developed world by distinguishing between demand and supply factors. With respect to the demand side, the authors first refer to the surprising fact that the correlation between the preference for cash stated in surveys and the actual use of cash is quite low. Given this observation, important demand determinants are the convenience of contactless and mobile payments as well as incentive programs. However, the information available on the characteristics of different paymentA transfer of funds which discharges an obligation on the part of a payer vis-à-vis a payee. More options also play a role. On the supply side, cash payment restrictions and thresholds, the policy of banks and retailers on access and acceptance of cash and more general supply-side restrictions of governments and central banks, e.g. on the validity of banknotes, are the relevant factors.
The Cash Infrastructure and the Four A’s
The paper also highlights the importance of keeping cash as a vital means of payment as a necessary condition for keeping total cash in circulationThe value (or number of units) of the banknotes and coins in circulation within an economy. Cash in circulation is included in the M1 monetary aggregate and comprises only the banknotes and coins in circulation outside the Monetary Financial Institutions (MFI), as stated in the consolidated balance sheet of the MFIs, which means that the cash issued and held by the MFIs has been subtracted (“cash reserves”). Cash in circulation does not include the balance of the central bank’s own banknot... More (held for transactional and non-transactional motives) which, in turn, depends on a well-functioning and cost-competitive cash infrastructure. This points to access, availability, acceptance, and affordability of cash as crucial building blocks of a robust cash infrastructure, the so-called 4 A’s.
- Access: Ensuring widespread and convenient access to cash through ATMs (currently the most important access point), bank branches, and retail services. The paper notes a decline in the number of ATMs, especially since 2019. Important aspects are regional distribution, whether the ATM is adequately accessible, is functioning properly and is not often out-of-order, whether there are regularly long queues at the ATM or whether the ATM only dispenses very specific denominations. However, access to cash does not only mean possibilities to withdraw cash, but also access to depositing facilities for banknotes and coins. Options to guarantee sufficient cash access points also in the future are to ensure viable business models, regulation of the ATM industry, to strengthen alternative access possibilities besides ATMs or public provision of ATMs.
- Acceptance: Cash acceptance by merchants and retailers is sometimes seen as more important than cash access as the restricted ability to use cash at the POS can have substantial repercussions on their basic attitude towards cash as a means of payment.
- Availability: Guaranteeing availability of cash implies that ATMs and other ways of cash distribution provide the people with the full variety of coins and banknoteA banknote (or ‘bill’ as it is often referred to in the US) is a type of negotiable promissory note, issued by a bank or other licensed authority, payable to the bearer on demand. More denominations. This is especially important in crisis periods, but necessitates a well-functioning 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 in normal times.
- Affordability: On the individual cost side, the ease of access to cash, i.e., time and effort to acquire cash, and possible fees charged for cash withdrawals and deposits are the main factors. International cost comparison studies often face the problem that card fees are not always “directly visible” as many countries impose “no-surcharge rules” which do not allow price discrimination with respect to different means of payment. From a commercial bank’s view, providing and withdrawing cash on behalf of the central bank usually comes with no cost compensation. This provides incentives for banks to actively foster cashless payments. An important aspect in this direction is ATM interchange which are set by the card schemes. The costs of cash also affect merchants’ acceptance of banknotes and coins. Once the cash infrastructure is mainly reduced to rubble, cash-related costs per transaction increase significantly which might drive out cash of the payments market although the preference for cash might still be substantially.
The Cash Institution is a Public Good
A final chapter of the paper discusses the public good characteristics of the “institution” cash which should encourage central banks to re-evaluate their position of “neutrality” as a player in the payments market to a more active role. This is usually in line with central bank mandates.
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