Is cash still king?

With the proliferation of cashless payments around the world, some economies are still favouring cash over other payment methods
by Jill Insley and Bethan Rees

Who needs cash anymore? You can now pay for your morning latte by using apps on your mobile phone or waving your contactless debit or credit card over the payment point. You can order your new sofa online by typing in your credit or debit card details, paying through PayPal or making a direct payment from your bank account.

In the UK, the number of debit card payments exceeded those made with cash for the first time in 2017, and in Sweden ’no cash accepted’ signs are seen in some shops and restaurants – it is considered to be the most cashless society in the world as it steams ahead to digitise payments. 

According to World payments report 2017, by BNP Paribas and Capgemini, only 2% of the total value of transactions in Sweden consist of cash, and this is expected to drop to 0.5% by 2020. This is part of the European Payment Council’s (EPC) cash-use reduction initiative and the Single Euro Payments Area’s (SEPA) aim to remove cash machines and replace them with plastic money or digital transactions across retailers. 

In Nigeria, electronic transactions have seen an impressive growth of 389%, and in Russia, electronic payments have grown 271% from 2012 to 2016, according to the 2018 World cash report by G4S, the global security company. 

Yet cash is still king, according to several reports. In March 2018, the Bank for International Settlements (BIS) published an article titled ‘Payments are a-changin’ but cash still rules’. It mentions that “people are using cards for payments more frequently and for ever smaller transactions, but says that the demand for cash remains robust, “except notably in some Nordic countries”. And the World cash report says that cash is still the most widely used form of payment in all regions of the world, saying that demand for cash has continued to rise globally, despite the increase in electronic payment options. Cash circulation relative to GDP has increased to 9.6% across all continents, up from 8.1% in 2011. 

But why? Paul van der Knapp, strategy and business director for the G4S global cash division, says there are many factors that contribute to the popularity of cash. These include culture and history, trust in the banking system and access to banking services.

Reluctance for card in Germany Germany has the biggest economy in the EU and you might expect its citizens to be among the most enthusiastic adopters of new payment methods. But a 2017 paper by the European Central Bank says that in 2016, German citizens carried the most cash in their wallets, averaging €103 per person, out of all the euro countries. In contrast, Portuguese and French citizens carried just €29 and €32 respectively. The ECB also reports that in 2016, 19% of Germany’s cashless payments were made with cards, the lowest of any country in Europe – in comparison to 53% in France and 65% in the UK. 

Cash is still used in some 80% of point of sale transactions in Germany, Austria and Slovenia, compared to just 45% in the Netherlands.

The national bank of Germany, Deutsche Bundesbank, published a report titled Payment behaviour in Germany in 2017, which offers up some answers as to why it is hesitant to use electronic payments. When respondents were asked why they didn’t use mobile phone payments, the most common answer was that they saw no need for it, followed by worries over security and complexity of new payment methods. 
Cash is still used in some 80% of point of sale transactions in Germany, Austria and Slovenia, compared to just 45% in the Netherlands Respondents were asked why they chose their preferred means of payment, with over 90% citing: “Protection against loss, a clear overview of spending, ease of use, familiarity and the maintenance or privacy.” 

Cash is “by far the payment instrument that best fulfils almost all of these criteria,” says the report. Although, according to respondents, debit cards can provide better protection against financial loss than cash – 48% in comparison to 44%. 

Heike Mai, economist at Deutsche Bank, gives some reasons why cash might be more globally preferred, including its almost universal acceptance for daily purchases and small value payments, and the “payment habits of the middle and older generations, who will have grown up using cash, and would have only used cards for big payments, such as hotel accommodation”.

In reference to Germany, she says: “If historical experience influences payment choice at all, it might explain the awareness for data protection, which seems to be higher in Germany than in many other places. Cash is the payment instrument with the highest degree of data protection, be it against commercial or political abuse of data.”

The December 2017 Global cash index: Germany edition by PYMNTS (download here) reiterates the country’s aversion to cashless payments, and points to “its history of instability and economic crises”, such as hyperinflation in 1923 and the “economic devastation” after World War II, as a major reason for this aversion. 
Trust and accessMistrust of banks and electronic banking services is also a key factor in the enduring popularity of cash. In times of trouble, people have always favoured physical wealth in the form of gold or currency over a notional bank balance. 

For example, as the financial crisis in Greece reached its peak in 2015, the Greek citizens who feared their euro deposits could end up being converted into devalued drachmas rushed to withdraw cash from their banks. Paul from G4S says: “Cash transactions now make up 70% of the total in Greece, but during the financial crisis, cash was used for all transactions – not only by retail customers but also for business-to-business transactions.” Suppliers even met supermarket representatives at G4S cash centres to exchange their goods for pallets of cash, he adds.
As the financial crisis in Greece reached its peak in 2015, the Greek citizens who feared their euro deposits could end up being converted into devalued drachmas rushed to withdraw cash from their banks The situation in the Middle East, according to payment service provider Payfort in its State of payments 2016 report (download here), reflects an affinity with cash also. The report says 50% of shoppers in the Middle East prefer to pay for their online orders by cash on delivery, and this figure rises to 70% in Egypt.

The demand for cash remains robust around the world, except notably in some Nordic countries. The BIS review states that this affinity for cash appears to have followed the global financial crisis of 2007–2009. The review points to the “store-of-value” driving the demand for cash, rather than ease of payment. “The increasing demand for cash is driven, in part, by the lower interest rates that have characterised the post-crisis period,” the review says. 
Cost of cashPaul says that consumers perceive that using cash is free. Although they may have to pay ATM and monthly bank account charges, they are unlikely to be charged extra for paying merchants with notes and coins. 
However, cash is a cost to central banks – they must pay for the production and acceptance of banknotes and coins and incur resource costs through maintaining an adequate supply of currency to distribute to depository institutions as needed.

Paul says that banks are trying to reduce these costs by sharing ATM services, resulting in fewer ATMs on the high street. Banks and retailers have also consolidated the processing of cash to produce economies of scale, with many using the services of independent companies offering cash management services, such as G4S. This can reduce the fees paid by large retailers by up to 20%, small retailers by up to 30% and banks between 20% and 40%.

According to McKinsey, costs of cash handling are rising and says one of the reasons is because cash remains a process for bank operations with high manual labour, including in distribution, maintenance and processing. 

However, processing card payments isn’t exactly cheap either. 

The 2018 British Retail Consortium's Payments survey snapshot, which surveyed half the British retail industry, finds that for the first time, the value of retail purchases made by card now accounts for more than three-quarters of all retail sales, and cash continues its ongoing decline of retail sales, by 1.2%, accounting for 22% of retail sales. With the rise in card transactions comes a rise in costs of accepting cards. The survey reveals that retailers spent an additional £170m to process card payments in 2017, reaching almost £1bn for the year. 
Problems of being cashless“Faceless, paperless, cashless” is how the Indian government describes Digital India, the flagship programme launched by the country’s prime minister, Narendra Modi, in 2015. Its aim is to “transform India into a digitally empowered society and knowledge economy” – with no need for cash. However, the Indian government’s attempt to demonetise, by removing two high-value bank notes that accounted for 86% of the notes in circulation in 2016/17, caused severe cash shortages around the country and severe damage to the economy.

In the UK, news that consumers made more debit card than cash payments for the first time in 2017 made headlines in June 2018. But contactless payments, which played a key role in this change, are causing concern at the Bank of England, as reported in its Financial stability report in June 2017, which says online shopping and contactless cards have resulted in consumers accumulating debt. 
A campaign for change?This swift transformation has left many unable to make payments. According to a BBC translation of the 2017 annual report of Sweden's central bank, Sveriges Riksbank, transformation of the nation’s payments infrastructure was “essentially positive”, but added that it needed to take place “at a rate that does not create problems for certain social groups or exclude anyone from the payment market”.

The governor of the bank, Stefan Ingves, has been more blunt about the situation, saying Sweden should consider forcing banks to provide cash to customers, and that phasing out coins and notes could put the entire country at risk should Sweden encounter a “serious crisis or war”. His argument has been reinforced by the Visa payment system’s crash at the beginning of June 2018, which left millions of customers across Europe unable to complete transactions.

In the UK, the cash machine network Link is funding a review headed by Natalie Ceeney CBE, former head of the Financial Ombudsman Service, into how the shift from cash to digital payments is affecting both people and small businesses. Ceeney said:

“The rise of contactless and digital payments has changed the relationship between cash and consumers. Many people in the UK have already made a shift to paying for most things digitally, but at the same time, there are between two to three million people across the UK who are entirely reliant on cash. Over the next decade and beyond, we will see significant changes driven by technology, and we need to ensure that we consider now how these will affect different segments of society, and plan so that no one is left behind.”
Cashing in or out?Despite continuing leaps in technology and the development of cashless payments globally, we’re still holding on to our cash, for reasons varying from one country to another but with security at its heart. Cash is still king it seems, for the time being. 

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Published: 29 Nov 2018
  • Operations
  • The Review
  • Features
  • Nigeria
  • India
  • Germany
  • contactless
  • cash
  • card payments
  • Banking
  • Bank of England

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