Ph.D. in U.S. History, Columbia University in the City of New York
Post-Doctoral Researcher in Global Correspondent Banking, 1870-2000 – Mexico and South America, University of Oxford
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The Global Money Week initiative is an annual global awareness-raising campaign on financial literacy to achieve financial well-being and resilience. The Organization for Economic Cooperation and Development has organized the campaign since 2012. This year’s campaign took place on March 21-27, with the theme “Build your future, be smart about money.” Central banks, banking and financial firms, industry associations, government agencies, universities, museums, foundations, and non-profits joined the initiative worldwide.
The Center for Research and Education in Economics (CIDE), a public research university in Mexico City, organized a conversation about cashMoney in physical form such as banknotes and coins. More and its resilience for Global 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 Week. Gustavo del Ángel, an economics professor at CIDE, chaired the conversation. Fernando Gutiérrez, a reporter at El Economista, covered the event.
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 grew in Mexico during the Covid-19 pandemic. As in most countries worldwide, an increase in the public’s precautionary demand for cash more than compensated for the fall in consumers’ transactional demand for notes and coins.
During crises, people demand cash due to heightened uncertainty. Mexicans used ATMs less during the pandemic but kept withdrawing the same or more cash as before. Most of the growth occurred in high denominationEach individual value in a series of banknotes or coins. More notes.
Cash is resilient because it is 1) universal, 2) trusted, 3) efficient, and 4) an instrument of social cohesion.
Most Mexicans prefer to use cash in payments. They did so before the pandemic, and cash will remain dominant after. Technology firms such as Uber and Amazon have had to implement cash paymentA transfer of funds which discharges an obligation on the part of a payer vis-à-vis a payee. More solutions to include users unwilling to pay with debit and credit cards.
Consumers have not embraced Banco de México’s Cobro Digital (Digital Charging or CoDi). This instant payment solution was not developed around the user, delaying its acceptance, limiting its growth at scale, and causing a weak path dependence in its usage and adoption.
People should question whether the accelerated adoption of digital payments is desirable, as their infrastructure is vulnerable to naturaldisasters or human failures, such as hacking or cyberattacks.
Visa and Mastercard have preserved their market power and hold over payment networks. Payment processors’ revenues fell during the pandemic. The media should not enthusiastically embrace their agenda against cash.
An Institutional Approach
Sara Castellanos, a senior researcher at Banco de México, said that cash is the means of payment par excellence. An institutional framework makes it different from other payment instruments. Cash fulfils all functions of money: it serves as a means of payment, a store of valueOne of the functions of money or more generally of any asset that can be saved and exchanged at a later time without loss of its purchasing power. See also Precautionary Holdings. More, and a unit of account; it also has a legal tenderMoney that is legally valid for the payment of debts and must be accepted for that purpose when offered. Each jurisdiction determines what is legal tender, but essentially it is anything which when offered (“tendered”) in payment of a debt extinguishes the debt. There is no obligation on the creditor to accept the tendered payment, but the act of tendering the payment in legal tender discharges the debt. More. According to Castellanos, these elements grant cash unopposed purchasing power instead of other alternatives.
The Mexican central bank has long worked to develop safeSecure container for storing money and valuables, with high resistance to breaking and entering. More alternatives to cash, such as the interbank electronic payments system (SPEI) and CoDi.
Digital payment innovations such as cryptocurrencies and blockchainAn unchangeable digital record where transactions are processed and verified by a network of independent computers rather than by a single referee. This decentralised structure has been described as an open distributed ledger. It supposedly enhances security as there is no single entity to be hacked. It also protects personal identity and guarantees that governments can’t block transactions or otherwise manipulate the payments space. The blockchain is the underlying technology supporting most ... More (distributed ledger) technology offer many promises. Cryptocurrencies surged after the global financial crisis of 2008 when many feared that robust monetary expansions would create inflation that eroded the value of money.
However, many regulators have realized that digital payments cannot fulfil these promises yet. Cryptoassets require strong user protection, as they behave as financial assets with variable returns rather than serving as means of payment.
For a payment solution to succeed, people need to get used to it to find it hard to leave it behind. Younger users lead the way, as M-Pesa demonstrated in Kenya.
Credit card companies have long known that the adoption of payment instruments accelerates with rewards.
Sara Castellanos’ remarks do not reflect Banco de México’s official positions about the topics discussed.
A Behavioral Science Approach
Ana Laura Martínez, a public policy professor at CIDE, stated that money is a product of society. Our money habits reflect personal and social values. Martínez also said that the dominance of cash in retail payments reflects social mores and consumers’ search for security.
Cash usage is emblematic of self-sustaining habits and social norms. A strong preference for cash might reflect extreme risk aversion amid high uncertainty. As far as the world has become more uncertain, cash brings certainty. In contrast, digital payments might be convenient but bring uncertainty.
Many people from vulnerable groups in Mexico started selling their products and services via Facebook and Whatsapp during the Covid-19 pandemic. In surveys, these sellers reported that they prefer to get paid in cash, given their mistrust of digital payments.
The most vulnerable consumers cannot afford to use new payment channels because they can present problems and prevent immediate settlements. Cash also helps people plan and control their budgets.
The adoption of digital payments faces structural bottlenecks in economies with a high number of consumers with variable incomes and the many risks absorbed by the working population due to instability in the labour market. In these economies, using cash is a social norm.
Digital payment solutions such as CoDi lacked awareness campaigns, rewards for usage, and user accompaniment. The last was a critical missing element. People go through a learning curve to 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 their payment habits. Consumers need information, rewards, and prizes, all parts missing in Banco de México’s bet on CoDi.