Rumours of the death of cash have been circulating for some time. The rise of contactless payments and digital currencies is heightening speculation that paper money is not long for this world, but cash is proving to be remarkably resilient.
Analysts have been predicting the demise of cash for almost six decades, yet according to the think tank Cambridge Security Initiative (CSI), eight out of 10 global transactions still involve notes and coins.
A 2016 report by the group predicted that cash will ‘remain the dominant form of transaction’ around the world. Ironically, the rise of digital currencies (think bitcoin), and much improved online and contactless payment systems, has highlighted some of the advantages of cash, it said.
CSI noted that in 2015 the French government announced limits on the amount of cash that could be used in payments to help track transactions that finance and equip terrorist attacks such as the one on the offices of the satirical publication Charlie Hebdo.
But the government’s promotion of web-based electronic transactions has had the reverse effect, ‘creating more significant terrorist targets’, the group’s research concluded.
Sir Richard Dearlove, the former spy chief and joint chair of CSI, said that developed economies are likely to need mixed systems in which cash can co-exist with digital and contactless payments.
The advantages of cash are that it is classless, reliable and ‘offline’, so offers privacy, yet unlike digital currencies it can be controlled by central banks, which means it will be around for a long while yet.
However, just because cash is surviving, it doesn’t mean to say it is thriving either. In developed economies its decline in everyday transactions is unmistakable. According to the British Retail Consortium (BRC), the use of cash in UK shops fell almost five percentage points in 2015 – down to 47% of all retail transactions – compared with 52% the previous year.
As Tom Ironside, Director of Business and Regulation at the BRC, put it in the group’s annual payments research: ‘The use of cash has been in decline for some time and it saw a significant dip in 2016. Retailers are seeing cash used in less than half of all transactions for the first time, marking a watershed in the payments landscape.’
While he said that cash remains an important payment method for many customers and will be with us for many years yet, he noted that contactless technology is proving extremely popular for the lower-value transactions that used to be the mainstay for cash.
Contactless is particularly popular among younger consumers who are used to paying for everything from cabs to takeaways on their mobile phone and are perfectly comfortable about leaving home without cash. A 2015 survey found that 39% of Britons said that they don’t expect they’ll need to use cash at all a decade from now.
Some economists have welcomed that as a long-term trend. Reducing the importance of cash could help with everything from deterring criminality and eliminating tax avoidance – two of the downsides of the anonymity of physical money – to even improving hygiene.
In his book The Curse of Cash, Kenneth Rogoff, a leading economist and academic, makes the case for phasing out cash. While the importance of cash is in decline for everyday transactions, the amount of it in circulation is rising.
For more than 50 years analysts have claimed that electronic money would replace printed money. Yet central banks are issuing printed money faster than ever. So where is it all going?
Instead of being used for staples like milk and bread, it is actually the higher value notes that are increasingly in circulation, financing everything from tax evasion to political corruption, and crossing borders to fund terrorism, and drug and human trafficking.
The black economy
Phasing out cash would also have the advantage of allowing central banks to use negative interest rates if they saw fit – something they are typically loathe to try when people have the option of simply hoarding cash.
But getting there is far from easy. India’s recent scheme to remove higher-denomination notes was intended to tackle the scourge of the black economy. Unfortunately, tackling one of the lubricants of corruption also meant punishing those who rely on cash for everyday transactions – those who live in rural communities and the small businesses that need it as a budgeting and cashflow tool.
The panic caused by the policy has been linked with more than 30 deaths in India, as people struggled to get hold of lower denomination notes to deal with their daily expenses.
In Sweden, a more advanced movement to undermine cash is afoot with many businesses embracing card and contactless payments at the expense of cash. However, not everyone is impressed. Longer-term concerns about reducing people’s ability to use cash are the ethical, political and privacy concerns that arise when individuals’ power and anonymity in a transaction is reduced in favour of the global banking and payments system.
It could be the case that the vulnerable and the elderly suffer the most when cash goes out of fashion. As the Swedish group Abba once sang in Money, Money, Money, ‘it’s a rich man’s world’.
That said, many businesses harbour more practical concerns about preparing for the new payments mix. Lisa Osofsky, EMEA Regional Chair of Exiger, a financial crime, risk and compliance firm, says that some companies are not preparing well enough for the decline in the use of cash.
She describes the transition from a ‘cash-based to a fully digitised monetary economy’ as among the biggest risks facing companies. The risk is not with technology itself but with the ‘human error built into any economy that invests in systems without investing at the same rate in personnel training.
‘The death of cash and paper accounting systems, and the hyper-growth of a digitised monetary and accounting system, introduces both huge opportunity for borderless economic growth and prosperity, and an inherent risk to security on business to business and national security levels.’
It may be prudent to prepare for a time when cash is no longer king; just don’t expect cash to lose all its influence and importance any time soon.
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