The Future of Cash – A View from the Philadelphia Fed

The future of cash is, without doubt, the most discussed, presented and written about topic in the cash and retail payments industry during the last 10 years. The topic took on a new dimension with the arrival of COVID-19, the effects of which feature in a discussion paper by Soloman Tarlin from the Supervision, Regulation, and Credit Department at the Federal Reserve Bank of Philadelphia, titled simply ‘The Future of Cash’.

The Federal Reserve Diary of Consumer Payment Choice indicates that from 201619, the share in cash payments in the USA fell from 31% to 26%. This decline, Tarlin points out, cannot be attributed to cash becoming more burdensome for consumers or businesses because, in the period, cash became easier to count and handle through automation and other technical improvements.

The experience of a cash user at the margin didn’t change, but the relative benefit of using cash decreased because of improved outside options. Spending using credit and debit cards surged in popularity as, maintained Tarlin, banks aggressively marketed payment cards to consumers using tactics such as rewards programmes and low interest rates. In addition, using cards to make payments became more convenient as payment card systems improved and contactless use became more widespread.

The trend has concerned policymakers. The US may be a highly banked country – over 93% have access to either a general-purpose credit or charge or debit card, and close to 97% have some sort of relationship with at least one financial institution (2016 Fed. Survey of Consumer Finance). But according to a 2019 FDIC survey, about 5% of US households do not have a checking or savings account at a bank, so around 7 million households rely on access to cash payments. If participation in the modern economy depends on access to the banking system, changes to enable access need to take place.

Remaining resilient as store of value

Cash remains resilient in its function as a store of value. The Diary indicates that around 20% of Americans store cash in addition to what they carry daily, and those who do store on average $1,100. Also, cash in circulation continues to grow, more than doubling in nominal terms between 2007 and 2018, causing an increase in the cash-to-GDP ratio of almost 50%. Tarlin points out that as long as there is interest in keeping savings in cash, it will continue to have an important role in the economy.

The Diary provides useful information on how people acquire, hold and use cash as well as other means of payment. Cash, credit and debit card purchases make up most transactions in roughly equal amounts, but even when all three options are available, consumers tend to use them for different types of purchases.

This disparity is found both within and across consumers. For a given consumer, cash purchases tend to be used for lower-value purchases compared with card payments. Although the median debit and credit card purchases are $25 and $28 respectively, the median cash purchase is only $10, so that while cash is used for 26% of transactions, it only represents 6% of the value of all purchases. Demographics come into play; for example, younger and older consumers use more cash than middle aged consumers.

Alternative surveys and data

Data from a national retail chain based on a 3,000 person per year diary provided a useful comparison with the Federal Reserve’s Diary trends. Its goods and services did not change and the sample was large. Between February 2011 and February 2016, the cash share fell by around 8.6%. This may understate the cash share decline, given it focuses only on the time series of in-store retail sales, while simultaneously more retail purchases shifted online.

Tarlin justifies this premise with Visa Payment Panel data – in 2007only 32% of panel participants reported an on-line purchase; from 2015 to 2018 the average was 80%. Also, the percentage of spending on-line increased from 7% in 2007 to over 25% by 2017.

A shift in purchasing from in store face-to-face to online necessarily means the overall cash share of purchases will decline. A Federal Reserve 2019 Payments Study showed the growth in ecommerce payments using cards was 20.5% per year for 2015-2018, well above the 5.8% growth rate of in-person card payments.

In 2020 the cash landscape was affected by the pandemic. A Federal Reserve survey from mid-March to mid-May indicated that 63% of consumers reported not making any in-person payments at all – due to fears of becoming infected with the virus, business closures and stay-at-home orders. Also, 22% of consumers reported switching from in-person to online or phone payments. There is inconclusive evidence that consumers’ fears regarding contracting the virus from banknotes may have eroded the cash share.

The survey did show massive increases in the amount of cash held by participants – compared with 2019 the average cash held by a person increased for $69 to $81 and the amount stored from $257 to $483. As a result, the total growth of cash in circulation more than tripled compared with previous years.

Falling cash share worldwide

It is no surprise that the author singled out Sweden as the country with the most extreme case of cash decline, followed closely by Norway. Many Swedish banks no longer allow deposits or withdrawals in cash, and payments traditionally made in cash have migrated to cards. The country, however, has an impressive mobile banking and payments system and high levels of trust in the banking sector.

In Canada currency in circulation has not declined but there is a 20 year pattern of declining cash payments, leading economists at the Bank of Canada to consider the impact a potentially cashless future would have on society.

In Japan, cash in circulation has increased despite advances in other means of payment, with cash hoarding thought to be responsible for the increase and determined to account for 42% of the currency in circulation.

Persistently low interest rates reduce the incentive to keep money in banks. Tarlin speculates that it is feasible, given the persistently low interest rates worldwide, that demand for cash could remain even as cash payments are substituted by other payment methods.

Pros and cons of falling cash share 

For consumers, those most likely to be affected are vulnerable populations and the falling cash share is explained, in part, by improving technology. The convenience of card payments – not having to visit an ATM, ease of payment at purchase, protection in cases of disputed payments and sometimes cash back and other reward programmes – is indisputable.

But not all consumers are winners when cash is no longer available. In Sweden there is concern that some individuals – the elderly, poor, immigrants etc. – do not have access to portions of the economy because they don’t have payment cards. This same concern is raised in other countries where cash is declining.

Another cause for concern for an economy without a cash payment option is privacy. Cash payments are generally anonymous whereas with a credit card the purchase is linked to a database and can be traced.

Meanwhile for businesses, some prefer cash, others card or digital payments. The cost to the recipient is the most important determining factor. Studies in Canada have shown that cash is the cheapest payment method for merchants when the transaction size is small and debit card when the transaction is large. Some businesses have chosen to become cashless, one reason being simplicity and efficiency.

Is the era of cash almost over?

The author makes the point that the decline in cash usage could lead to a self-perpetuating cycle which could cause the virtual elimination of cash sooner than current trends would indicate.

This could happen if consumers increasingly reduce their cash usage, if businesses stop accepting cash in large numbers and cash becomes more of a burden than a convenience because it is no longer be so readily available (less ATMs, banks not offering the service etc.). One way of preventing this is a law requiring businesses to accept cash in payment for goods and services.

Preparing for a cashless future

Cash is the means of payment in most crises, and this begs the question, without it how would we cope? Electronic payments can be susceptible to serious disruption in the case of power outages or electronic faults. There is also the possibility of data breaches or cyber-attacks.

At the same time, the shift from cash to electronic payments has benefits. Cash is expensive to produce and distribute and replace when worn out. It can be counterfeited and easily stolen without trace.

There are some who argue that without cash, banks would have the ability to implement deeply negative interest rates as individuals and businesses would no longer be able to avoid paying by shifting their holdings into (zero interest) cash. Also, cash costs government money when unreported – one study conservatively estimates the foregone tax revenue to be $100 billion each year.

Many central banks around the world are preparing for a digital future and some are developing their own digital currency to use along side (or possibly eventually replace) their physical currency.

The author concludes by leaving open the question as to whether there is a future for cash, stating ‘it’s hard to predict’, but has no doubt that cash will continue to decline as a medium of exchange.

The first question is how quickly, the second is how to ensure that all economic actors can take advantage of the economic benefits of electronic payments?