‘Cash in Times of Turmoil’

The Bundesbank held its international cash conference in June 2021 on the topic of ‘Cash in Times of Turmoil’. Within the 22 different presentations and sessions the future of cash was extensively explored alongside the impact of the pandemic on cash usage and consumer behaviour.

Tools to understand the cash cycle and the impact of the shadow economy and contactless payments were also covered, while Central Bank Digital Currencies (CBDCs) were touched on.

With many excellent papers, we selected two which we thought particularly helpful for understanding the cash cycle. Elsewhere this month we also report on a paper presented by the Reconnaissance Consulting Group, ‘Modelling Future Cash Levels’.

Impact of contactless cards

Helmut Stix presented a paper on behalf of the Oesterreichische Nationalbank, ‘Causal Evidence from the Staggered Introduction of Contactless Cards.’

The study was possible because Swiss card transaction data could be linked to whether the card was contactless, or not, over a three year period. Three groups of cards were identified – those who were not at any point contactless, ‘early adopters’ and ‘late adopters’. The early adopters received their cards a year before the late adopters.

Switzerland is a country that has a high level of cash usage as well as having a high GDP. The study started by looking at transactions below the threshold for a PIN to have to be entered to make the transaction, CHF 40. On average 6.5 transactions a month were made. The usage of non-contact card users and those later issued with a contactless card were virtually indistinguishable. When contactless cards were issued, the two lines diverged. The same was true for both early and late adopters. If anything, the gap was larger, faster for the late adopters.

For transactions over CHF 40, requiring a PIN, the lines tracked each other with an almost constant gap.

The study then looked at changes in the cash ratio. For all segments there was a decline in the cash ratio. The Average Treatment Effect (ATE) of contactless cards was 0.3% per year and the trend change -1.8% per year. The ATE for the withdrawal frequency was -0.01 withdrawals per month, the trend change 2016-18 was -0.2 and the average was 3.7 withdrawals. The ATE for the withdrawal volumes was CHF 4.7, the trend change 2016-18 was CHF -2.0 and the average was CHF 614.

For people over 55 years old, the decline in cash use was 0.5%. For those under 34, -3.5%.

The conclusion of the paper was that although there does appear to be a causal link, it might be some time before there is a cashless society at that rate of change. The introduction of contactless cards on their own was not driving a rapid change.

Tools for understanding cash circulation

The Banca d’Italia’s Giorgia Rocco and Gabriele Sene looked to understand cash circulation better. They saw this as important because of the functions of cash, to allow production planning and because of the role of cash in monetary policy.

Unravelling the cash paradox was part of this work. They approached this by understanding the determinants of cash, the role of change agents such as legal limits on cash payments and considered whether the pandemic had created a new dynamic.

Cash had dropped 32% while card usage rose 27%. 94% of respondents said the change was likely to stick. When they studied the changes in withdrawals compared with cash lodgements, these were very different from the past. Both withdrawals and lodgements were different, both were negative and large. In addition, they were different from the 2008/9 crisis when it was predominantly the large denomination notes that were withdrawn.

Normally Italy is a net importer of banknotes due to its tourist industry. During the pandemic this has changed as domestic demand has surged and tourism has reduced.

One of the conclusions of the study was that the increase in lodgements was caused by firms and households being unable to lodge money, creating ‘forced precautionary demand’.