Cash - Is it still king?

Welcome to Bitesize Payments! In this episode, we're delving into the world of cash. Over the past few years, I've had numerous conversations about cash and its unique characteristics, including its anonymity. I even had a memorable discussion about it while getting my hair cut – thanks, Ali!
 
 It’s the most personal payments method, it’s the most integrated into our societies and its old – 5,000 years plus. 

Is cash still king? Well, that's a question we'll explore today, and I must admit it's an emotionally charged topic.  Hold on here we go….

Payments Industry Insights

History of Payments

Payment System Explained

Corporate Payments Strategy

Payment Regulations Impact

ISO20022 Standard

Digital Payments Evolution

CBDC Advancements

Cryptocurrency in Payments

Financial Technology Education

Transcript

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Welcome back to Bite Size Payments. In this episode, we're going to delve into the world of cash. Over the last few years, I've had numerous and I really do mean numerous conversations about cash and its unique properties. In particular, the ability for the user to be anonymous, which just seems to be the key tenant that keeps coming up time and time again. I even had a very memorable discussion stroke interview with a barber while I was getting my haircut. Thanks, Ali. That was a memorable one. Is cash still king? Well, that's a question that we'll explore today. And I must admit it's, or it can be anyway, an emotionally charged topic. So hang on tight. Let's go. We're going to dive into the wonderful world of cash. So let's talk about cash, baby. Cash is the most liquid of assets by its very nature. However, sometimes we get a little confused by what's cash and what's liquidity. A liquid asset is an asset that can be easily and quickly converted into cash. So that includes the contents of your savings account or your current account, for instance. Cash, on the other hand, can encompass any form of currency that can be used in a transaction without the involvement of a bank or a financial institution. So, this then includes physical currency, cash, cheques, all those good things. Cash holds significant importance for several reasons. One, it's incredibly convenient. It's secure and it's inclusive. Anyone. Well, almost anyone can use cash, regardless of their income or their credit history. Cash is also a very secure form of payments. Cash is very difficult to counterfeit, and it's not subject to the same risks as electronic payment methods, such as fraud and identity theft even. As we've discussed in previous podcasts, the definition of cash varies according to the government, and their central banks around the world. So when we talk about a cashless society as some kind of utopian world, we're not implying that there'll be an absence of savings accounts or current accounts. What people are really saying is there won't be a need for the coins and the paper that we currently refer to as cash. We've also touched upon the historical development of cash from beads to paper currency, each country having its own currency or using common ones like the EU or the mighty dollar. Cash is also known, however, as fiat money. Its value is determined by what's printed on it. This concept ties in with legal tender, which we discussed earlier, but essentially, The concept of cash is king signifies that it holds its stated value and can easily be spendable without any conversion. So for many people, cash is king. Cash usage varies widely across the globe. Norway stands out as the country with the lowest cash usage, typically about 3% to 5% of all its payments. And this is attributed to high bank account penetration. a robust electronic payment infrastructure, and a culture of trust in the financial system. And all three of those need to be in place for this to work, and clearly it does in Norway. Firstly, Romania tops the list of the highest cash usage, with over 78% of all payments made in cash. Factors contributing to this include, well, a lower bank account penetration rate and a significantly informal economy. The acceptance and cultural reliance on cash are closely linked to the trust levels and the availability of bank accounts in region. And it is essential to note that on the corporate side, however, cash is seldom used for paying suppliers. Our focus here is therefore primarily on citizens and their use with merchants. Central banks are responsible for printing and distributing banknotes and coins to commercial banks. Commercial banks then distribute the cash to their customers through ATMs and branches, and in some cases, of course, merchants. While cash may seem straightforward, it's not really, and it's not entirely free. There are costs associated with its issuance, its security, cleaning, transportation, etc. So the cost of cash, roughly speaking, is about... 7%. And that's pretty common across the world. However, it's also true that merchants in care costs of acceptance, typically around 2.5%, which is already integrated into the price that we pay. So when a merchant takes cash in its shop, when it takes that to the bank, the bank charges them this 2.5%. So it's not at all free, in fact. The introduction of ATMs have revolutionized how we accessed cash. The first ATM was introduced by Barclays Bank in 1967, and it was initially called a cash dispenser. Automated teller machines have also been called, holes in the walls, they've got various names for them. However, the landscape surrounding ATMs has changed massively. And of course, what we're seeing now is ATMs are much scarcer than they used to be. And that's literally due to the associated costs of maintaining them, i.e. topping them up with money, updating them and installing them and what have you. It's also true to note that while banks initially thought that they could reduce branch presence and have an ATM in place, these two things have both declined. We're getting now a lot less branches and a lot less ATMs. This is, in my opinion, direct result of our drive and our positive drive, I believe, to try and have a lot less people unbanked in our society. However, As I say, that had the consequences of banks not getting the same income as they used to have. That means that they have started to reduce the number of branches that they have. And of course, the same thing is also true, as I said, for ATMs and an intended consequence of what I believe is trying to do the right thing. However, that said... We're now seeing a huge decline of about 35% in three years in the US and about 20% over six years in Europe. And I would expect that trend to go down and down and down. However, it is clear to me that while we talk about cash and we think about it in our heads as free, actually, it's not free. There's a lot of costs associated here. We just don't necessarily see them. It's also true to say that some of the more modern technologies, whether it's contactless and using a card or using your phone, during the COVID times in particular, these have become a lot more acceptable. And so going to the bank, going to the ATM, not being able to find them has meant that people have moved in different ways. Of course, people didn't necessarily want to be touching money during COVID times. They didn't want to catch it. COVID. And of course, we also see now that ATMs are charging fees and we have a lot of independent or third party ATM providers. All of this in its own little way has meant that the use of cash is going down. But one of the big things I want to get across is really this thing. Cash is not free. It really isn't. There are a lot of costs. We just don't see them. Okay, so let's talk about some of the darker side of cash, things that we don't always talk about. And I want to stress here, this is not specifically about cash per se, but it is about, of course, people who abuse cash. So it's not about cash, it's about the people. So while cash offers numerous advantages, there is a darker side to its use. The anonymous nature of cash can enable abuse, including predatory lending, tax avoidance. It facilitates the drug trade and, of course, terrorism financing. The IMF estimates that the tax evasion estimates is somewhere around 1.6 trillion annually. A significant portion of the drug trade, roughly 40%, relies solely on cash transactions. Cash is very difficult to trace and it makes it very appealing to criminals, as it allows them to relay law enforcement and, of course, taxes. Furthermore, tax is challenging to recover when stolen as there are no records or means of identifying the ownership of that cash. The abuse of vulnerable individuals in society is another critical concern relating to cash. Predatory lending and non-payment to individuals who lack recourse to law enforcement are a significant issue. While there are other concerns, the fundamental point is that cash's nature can be exploited by bad actors, posing challenges for governments and law enforcement agencies while trying to balance the inclusive nature of it. Hence, some of these become compound as cash is difficult to track, which makes it easier for the bad cash to avoid detection by law enforcement. Second, cash is a global currency, which means they can use it to conduct transactions with people from all over the world. Third, cash allows them to avoid paying taxes on that income. The terrorism issue, I think, is clear too. However, another issue here is once it's stolen, It's hard to get it back. There really are no records of its issue or its ability to identify you and your cash. However, the abuse of vulnerable people in our society, whether it's predatory lending or it's people not paying folk what you promised to them, knowing that they're in no position to go to the police is a big issue. Clearly, there are other issues here, too. But the point is that the nature of a cash allows these bad actors to abuse its nature. And as such, government law enforcement agencies and human rights activists see this anonymous nature of cash as an issue. But we also need to balance that with the inclusive nature of cash. On balance, I think we need to decide what society we wish. And that's hard. There is also a key message of crypto being used outside of society here, and I will pick that up in a podcast soon. In recent years, a number of countries have reduced the denomination of their cash. For example, in 2016, India demonetized its 500 and 1000 rupee banknotes, which accounted for over 80% of the country's cash in circulation. This move was aimed at trying to reduce corruption and the shadow economy. Similarly, in 2021, the European Union announced that it would be phasing out its 500 euro note. This move was aimed at making it more difficult for criminals to use high denomination banknotes for illegal activities. As I say, with many things, it's not the cash per se that's the issue. but it's how it's used. And it casts a dark shadow over our society that's not always apparent to the good guys. I guess one of the other things you've got to bring up here when we talk about cash is that it's the day-to-day stuff, right? So when we get in a taxi and the guy says, I'm going to take, only takes cash. I go into a barber's and the guy says, I'll only take cash. Well, okay, fine. Why are they doing that? Are they doing that because cards are too expensive? It's a fair point. Or is it because they're not going to report it and not going to pay tax on it? And when we say, OK, that seems like an expensive job to an electrician or a plumber or something, we say, well, how much for cash? And they say it's less. Are we being the bad guys? I think there's something in there. I don't want to labour the point, but I think you get the point that I'm trying to make here. Cash is not necessarily bad. It's about how it's used. Okay, so we often hear about the so-called cashless society. But what is it? And do we even want it? During COVID times, and probably during normal times, many people took cash and stuffed it into their mattress or hid it away in a wardrobe or somewhere safe for a rainy day. And during COVID times, we also saw moves in the opposite direction. We saw people going, hey, I don't want to be touching this cash because I might get COVID from it. And so we saw the accelerated use of contactless. We also saw an increase in the acceptance of using apps to pay for things. Merchants moved incredibly quickly to make these changes happen. We saw the card networks visa, for instance, increase the rate of contactless up to, I think it was £100. But the rate of acceptance of these new payment methodologies was absolutely fantastic. People were saying, oh, you know, certain groups within our society won't accept this. And yet, guess what? Things happened really, really quickly. The adoption of contactless went up. The adoption of using our phones to make payments all went up too. So what is stopping us going to a cashless society? Well, I guess the very first thing to say is not everybody does want to go there. And many people think that it's not even a desirable place to be. There certainly are very strong people groups saying no we want to keep the use of cash and in some ways it keeps an identity you know the pound is a British pound etc but you know some folks really just like to have cash and you know some use it as a physical method of fiscal planning for their household if I only have so much cash then I can not get overdrawn I won't have fees etc and I can decide what I need to do on my weekly shop. And you know what? That really works. Of course, there are also people that say, hey, look, I just don't want to be tracked by Big Brother, by the government, by merchants. It's my business and I want to use cash accordingly. And, you know, that's a perfectly fine point of view. During my time, I've sat on many boards and I sat on the UK's Payments Regulatory Advisory Board. And many of the times this question came up about cashless society and what people want, what people don't want. But, you know, to be clear, I think the last timeframe that I had was about 17 years out. That's an awful long time in the payment world. It's an awful long time for people to change. So, you know, I think cash is going to be around a long time. But if we wanted to manage without cash, we would need a method of always being able to pay these cashless payments. And as yet, we do not have a way of doing that. It's very desirable for most countries around the world to say that they want 100% internet access, but we are a long way from that. You know, I live here in the UK and in my house, frankly, I don't always get internet access. on my phone. But imagine that I was in a remote area of Scotland, for instance, and there is no internet access. Then how is my card reader going to work? Well, it won't. So the issue we have is probably less to do with our desire, although it is a major portion of this. It's more about a very major issue is our technology is not there yet and there are many people working on trying to work on offline payment methods that's you know are alternatives to cash but there are ways away yet so you know really a cashless society is really about advocacy do we want it or not but probably and practically it's more about the fact that The technology is just not there at this moment in time to go cashless. So if I was to summarize, I would say cash is not going away anytime soon. I believe that 17 years is very, very short and I think it's much longer than that in reality. I think the things that I'd like to point out and hopefully I've made the point here is it's not cash per se that's the problem. It's the people that abuse its anonymous nature. And those bad actors, we need to work out how to address that. And that's quite hard. And we've seen changes in Europe. We've seen changes in India. And I think we'll see more and more of that. I think the other side of this is to say, as cash is used less or accepted less, the cost of its management and the cost of acceptance will start to go up. The ability to get hold of it, i.e. through an ATM, the fees are likely to go up. branches are less, it's going to be more difficult. I think all those factors will start to come together and they will start to accelerate the decline of cash. And it wouldn't be that hard to see merchants saying, you know what, it's five euros for a card, but it's six euros for cash. Well, there you go. A bite-sized review, hopefully, of cash and its pros and its cons, some of its costs. And clearly it has numerous advantages. It's over 5,000 years old, after all. There is a darker side, but there's also an inclusive side. And we need to get our brains around the whole of that. And it's pretty hard for us to do. But it's going to be around for a long time yet. Forecasting your future is always entertaining. But the truth of the matter is, it takes a long time to find out if you're actually right. Anyway, I think the thing to leave with is, unlike every other type of payment, cash is extraordinarily personal. And it's heavily, heavily ingrained in our society. So it's going to be around for a long time yet. Cheers now. Oh, but if I could ask one thing. If you liked it, if you'd like this podcast, tell a friend. Your recommendation is worth much more than all my LinkedIn plugs. If you have any comments or you want to give me any feedback, please do so at bitesizepayments at gmail.com. Cheers, guys.