Bank notes appeared in Europe in the 18th century to ease payments of important amounts which were usually made with gold and silver coins. Since then, we never settled on a unique method of payment, we continuously looked for convenience whilst integrating technology to reach a high level of simplicity and seamlessness in the purchasing journey. Despite everything, cash never lost its importance. According to the European Central Bank, there were 1 325 143 M€ worth euro currency (banknotes and coins) in circulation in the Euro Area in 2019.
When it comes to payments in point of sales, cash is very strong in Europe and mostly for small amounts. The smaller the amount the higher the probability that it will be sealed with cash. When amounts are under 10€, 83% of payments are made with cash. Two main reasons explain this behaviour: the first one is digital payment companies requesting fees to operate their technology. The percentage is approximatively 3% of each transaction which can become hardly bearable for small retail shops who set minimum amount for credit card or simply refuse credit card payments as an answer to these fees. The second reason is a human behaviour. Studies have shown that we are tempted to spend more when we don’t see the actual amount of cash decreasing in our wallet. Cash helps individuals to manage their everyday budget when digital payments are nontangible and encourage us to spend more…
In parallel, be in possession of bigger amounts is risky and stressful. To cover this risk, more complex methods of payments are used for the safety they can provide. Thus, for amounts exceeding 100€, 31% of payments are made with cash and 50% are made with credit cards, although dipartites are to be noted within Europe. For instance, the UK tends to use cash a lot more even for transactions over 100€ - 67% of the transactions with amounts superior to 100€ are made with cash. On the contrary, in France and Belgium, cash transactions for amounts above 100€ represents respectively 3% and 6% of the payment methods used.
With the development of new innovative ways of payments and the advent of e-commerce, cash payments are declining. And more recently with COVID 19 that triggered governmental directives to encourage contactless payments and online shopping, the question of the viability of cash is stronger than ever. Some predicts its near disappearance… but is cash really endangered?
Cash is comforting during uncertain times
We knew few things about COVID 19 at the beginning of the pandemic, but it didn’t take long to understand that the virus was staying active on different surfaces for hours or even days. The cash immediately became a possible way of transmission with banknotes and coins being handled many times a day. In response, the WHO issued a recommendation to systematically wash hands after touching cash. In addition, and as part of their plan to reduce the virus spread, governments have urged banks and retail shops to favour cashless payments, which isn’t a common habit in most European countries as we saw.
We can learn lessons from the past history of epidemics. In 2003, China expedited its path to launch digital payments with the SARS. Necessity being the mother of new trends, we have observed a similar trend over the past months. Before the crisis, 27% of under 30s were using smartphone payments and 38% contactless debit card while 56% of over 50s never used payments via smartphone in supermarkets. Few weeks only after the beginning of the national lockdowns, cash use was reduced by 44% by all age groups. The immediate effect of COVID 19 was a rush to cash withdrawal but eventually the ATM usage declined soon after (-33% in the UK) as point of sales closed their doors and social distancing took effect. In parallel, contactless payments via smartphone or debit card increased by respectively 20% and 33%.
Additional measures have been taken in China, Korea and in the US, where banknotes have been cleaned using high temperatures methods or ultraviolets. In more extreme cases, they were even quarantined before coming back into the monetary circuit.
The recent events have forced many retailers to develop their online offer. Many shops have encouraged the usage of other means of payment, while some even refused cash. The direct consequence is an upgrade of payment methods such as Apple Pay allowing customers to buy only with a facial recognition technology. These evolutions will survive the crisis and will probably accelerate the digitalisation of money over cash.
Money is going virtual
The development of new technologies and the customers’ growing appeal for online shopping fostered money digitalisation. We can find a wide range of payment methods from conventional and widely accepted ones to very specific innovative ones. Here’s an overview:
Cash is the only method that allows customers a complete freedom on their transactions while reassuring them on its reliability and capacity to be accepted everywhere.
That being said, in 2020 the Global Payment Report confirms the importance of cash for in-store payments which represents 30% of the transactions.
The same report highlights the significant influence of e-wallets payments. Supported by GAFAs, e-wallets solutions are nibbling shares within in-store payments (22%) and are prominent within on-line payments (42%) over credit cards (40%). This trend is carried out by Asia Pacific where e-wallets payments represent 58% of on-line transactions and 36% of in-store transactions.
GAFAs propelled themselves in financial services with payment solutions that proved to be convenient and super easy to use for on-line and in-store purchases even though their acceptability level is less developed in western countries.
The value of the digital payments segment reached 4,370,305 M€ worldwide in 2020 with an expected annual growth of 13% reports Statista. An easy playground for GAFAs which are already strong in the digital world.
In China, the most advanced market in digital and e-wallets transactions, AliPay and WeChat Pay completely outshined conventional banks when dealing with mobile payments which People’s Bank of China estimates at 35B€ in 2018. It is nearly 30 times more than in 2013. The money digitalization growth in China is exponential and players such as Alibaba and Tencent (WeChat Pay) hold 90% of the mobile payment market. Such a scenario encourages western banks to take action.
The most interesting outcome is banking institutions beginning to associate with GAFAs. Both parts involve in a counter intuitive collaboration which actually advantages them all. In this perspective, Google partnered with Citi Group to develop a checking account offer which will be available in 2021. In this partnership, Citi Group would be in charge of all the regulatory and finance topics while Google would be in charge of its core activity, being user experience, data collection and processing.
This partnership is not unique. Amazon collaborates with JP Morgan Chase to launch its own retail bank and Apple partners with Goldman Sachs to develop a credit card.
These partnerships are crucial for financial institutions who would rather collaborate than compete with GAFAs. The examples of WeChat Pay and AliPay in China represent a potential threat where transactions are made without the need of banks…
GAFAs strategy remains client centric, with the objective of collecting client’s data to continuously be relevant and improve their client approach and commercial strategy.
In the run to digitalisation, governments are willing to launch initiatives to remain ahead of the innovations. In Europe, the main examples are e-Krona in Sweden and Digital Euro in France.
With only 1% of Swedish GDP circulating in banknotes, the country is one of the least dependent on cash. E-Krona would be the first Central Bank Digital Currency (CBDC) used by individuals and according to a study by researchers at KTH Royal Institute of Technology and Copenhagen Business School, Swedish retailers could stop accepting cash as early as 2023. CBDCs are based on the blockchain technology but aren’t distributed by decentralised online communities.
The Banque de France will test a new CBDC for financial institutions. This initiative has been launched in order to improve the efficiency of the monetary system as well as to anticipate the future launch of new products such as Libra (Facebook). At this stage, the use of this CBDC would not be for individuals since it is more complex to implement but only for inter banking transactions.
Complete trust in digital won’t happen any time soon
All the fuzz around digital payments rises many concerns and enlightens the limits of a cashless society.
First of all, one of the most important concerns is data protection. Financial institutions and payment providers will gain ascendant being able to track all transactions, which might have direct consequences on their clients (loan denial, higher interest rates etc.). As of today, cash payments are the best option to stay anonymous. If not counterfeit, cash is not hackable while most digital payments are still vulnerable and in time of crisis with limited access to cash, consequences could be out of control. As an illustration, a study made by the Swiss National Cyber Security Centre revealed that cyber-attacks were three times higher at the beginning of the 2020 national lockdowns.
Today’s hacking is yesterday’s bank robbery, and in a cashless society, there will be no alternatives to spend money should this occur.
Secondly, cash represents security and comfort when digital fails.
When a crisis occurs, data have shown that the currency circulation increases, with people withdrawing larger amount of cash. At the beginning of COVID 19, the 200€ banknotes circulation has increased by 30% from March to May 2020. In 2008, with a crisis of liquidity and the fear of banks going bankrupt, the situation has been close to a bank run, where many clients withdrew most of their money. In the same vein a crash of digital payment systems could happen, which would paralyze the entire economy. Hence, the Swedish Civil Economy Agency recommends to Swedish citizens to keep “comfort” cash in small denominations even though Sweden is working of the development of its digital money (e-Krona).
Cash is still considered safe when the monetary system is not trusted and/or endangered.
Thirdly, if we anticipate some extreme scenarios, when managed by authoritarian governments, digital currencies could be a threat to citizens’ privacy and a weapon to pressure them. For instance, a government could block transactions that are considered discordant to the regime guidelines. A form of financial oppression could emerge.
Finally, on a societal point of view, money digitalization enlarges gaps between younger and elder generations, as the latest might not catch the pace of change. Another gap is the digital gap which concerns those who have access to internet technologies versus those who don’t, which is basically a gap between the poorest and the richest. One part of the population is called the “unbanked”, will be unable to make any payment should cash be removed. In 2017, in the USA, there was an estimated 8.4 million “unbanked” households. This involves a risk of discrimination, with retail shops up-charging or denying them payments.
We are clearly running towards a more and more digital society. Related to financial services and banking institutions, digitalization is the key to transparency, trackability and an optimal circulation of money in the economy. The advantages are priceless for the governments which are in pain trying to control the financial markets through multiple regulations. Nevertheless, new problematics are raised such as data protection, transactions safety and systems reliability. Problematics that are still under study and of which we probably only see the emerged part of the iceberg.
In such circumstances, we cannot consider suppressing cash anytime soon simply because all the conditions are far from being reunited. Recent history proved us once again that cash, even if it’s not the most used payment method, is clearly comforting and trustworthy. In times of crisis, especially in a fully digitalised society, Central Banks must always be able to provide cash to prevent panic behaviours that could result in disastrous consequences. Taking all these elements into consideration, we can easily predict that cash still has good days ahead.
Manager at AION Consulting
Business Consultant at AION Consulting