Why the war on cash is doomed to failBY STEVE HENSLEY
Every time a new way of paying for something has arrived – credit and debit cards, internet payments, contactless cards, mobile phone payments – the imminent death of cash has been announced. It sounds a reasonable prediction to make given the convenience of these new methods.
If so, here’s an odd thing. The face value of US dollars in circulation in 1990 was $288 billion. By 2000, it had more than doubled to £564bn.
By 2010, it had risen still more, to £942bn. True, the increase in total cash in circulation over the two decades, 306 per cent, is three-quarters of the increase in the size of the US economy over the period, a rough indication that other forms of payments have grown a lot faster. But, even allowing for inflation, cash is still significant.
The same trend is evident in most developed countries – cash stubbornly remains well used in what is increasingly a mixed economy of competing payment methods. The 2011 World Payments Report (WPR)* described the global use of cash payments as “still endemic”.
It said that while the US and Eurozone countries accounted for 160 billion non-cash transactions in 2009, more than 80 per cent (about 715 billion) of all payments were conducted in cash.
In 2008, following the Lisbon Accords agreed by the EU, the European Commission set out to persuade Europeans to make more use of non-cash payment methods in what became known as the “war on cash”. Yet the WPR 2011 report noted that the amount of euro cash in circulation had doubled since the currency became legal tender in 2002 and that “euro banknote circulation consistently rises at a faster pace than the growth in non-cash transactions”.
Why? The simple reason is that every form of payment method has its advantages and disadvantages. Cash is not practical for large transactions – credit cards have clear advantages there – but cash is much better for smaller value payments.
This is reflected in UK Payment Council statistics which say that cash was used in 56 per cent of all payments in 2010, but accounted for only 3 per cent of the value of those transactions, again a pattern common to developed countries. That small percentage, nevertheless, equates to a value of £262bn, big business in anyone’s money.
The resilience of cash is because people like the ease of using it. Cash payments are fast, and its value is clear and accepted by everybody. If you go shopping and buy things in several shops, you know how much you have spent, which is not necessarily true with credit or debit cards.
In the US, Cardtronics, a global manager of cash machine services, says that cash usage grew by 27 per cent between 2008 and 2009, recession having focused people’s minds on better management of their money.
Banks, however, don’t like cash because it is expensive to handle and move around. People now get 70 per cent of their cash from the “hole-in-the-wall”, reducing the cost to banks of dispensing cash by more than 80 per cent. In the same way, ATMs could also be used to cut costs further by, for example, taking money in.
There are now ATMs in Japan and Germany, which will accept cash, count it (putting suspicious notes aside for later manual checking), and credit customer accounts – little mini-banks.
Indeed, the cashless economy seems about as likely to happen as the paperless office, provided that people are allowed to choose their preferred means of payment.
Governments and sandwich shops don’t tell people they should eat cheese sandwiches rather than ham sandwiches because cheese sandwiches are cheaper to make. So why are governments and banks trying to tell people they should not use cash?
Nevertheless, if cash is to retain a position, as people seem to want, it will have to be competitive with other payment systems. Banks do have an incentive to make cash compete. Research by the UK Payments Council has shown that the heaviest users of cash are not just older people, but young adults aged 16-24. The banks that make it easy for them to access cash will have a head start in the race to win future customers.
*World Payments Report 2011, produced by Capgemini, RBS, and the European Financial Marketing Association. Also used in the preparation of this article was The Future for cash in the UK by the UK Payments Council, March 2010, and statistics from the Bureau of Economic Analysis, US Department of Commerce.
Steve Hensley, Executive Vice-President of Global Sales, KAL ATM Software
An independent company, KAL is recognized as the world's leading ATM software company providing solutions to some of the world's premier banks such as Citibank, China Construction Bank and UniCredit. KAL software is installed and supported around the world in more than 80 countries enabling banks of all sizes to reduce costs and improve competitiveness.
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