The Transformation in the Use of Cash and Digital Payments during the COVID-19 Pandemic

Last month we reviewed the Bank of Canada’s report on the impact of the second wave of COVID-19 on cash usage in Canada. This month we consider a report using data from four countries, the UK, the US, Spain and Mexico, as well as the EU.

Three academics ¹ recently issued a paper based on published research which examined the impact of COVID-19 on the use of cash and digital payments. In particular, they examined whether the pandemic has accelerated the move towards a cashless society, concluding that there is insufficient evidence to indicate a structural shift.

They note that payments have been changing since the 1960’s so that today physical fiat money issued by central banks coexists with digital money, with the amount of the latter increasing at higher rates. This change in the monetary and media systems has led many scholars to question whether at some point society will live in a cashless society.

According to the authors, the concept of a cashless society was born in the USA in the mid-1950s to describe a future scenario when the use of computers would lead to electronic transactions replacing physical ones, in particular personal cheques. Through the decades since, cash (banknotes and coins) and plastic were added to the list. So today the term cashless society is defined as an economy without cash in which the payment system is dominated by digital payments, with the total elimination of banknotes, coins, plastic and personal cheques.

The authors note that some countries, such as Sweden and Iceland, have made progress towards a more cashless society. In others, such as the US and parts of Asia, cash and digital payments coexist, and in others, such as in Latin America and Africa, cash remains the dominant means of payment. Cheques have mostly disappeared or are declining rapidly.

Many people thought that COVID-19 would be the last nail in the coffin to replace cash with digital money. The authors set out to answer two questions:

1. Was cash significantly replaced by other means of payment such as debit/credit cards or digital payments

2. Did the COVID-19 pandemic bring us closer towards a cashless society?

To do so, they examined the trends in a number of countries using published data leading up to and during the pandemic.

Trends in the Short Term

United Kingdom

In the UK the public get 90% of their cash from ATMs, so that ATM usage patterns roughly approximate the demand for cash. This, and other information, provided an insight into how consumers’ use of cash and payments changed during the pandemic.

Cash hoarding was overshadowed by an acceleration of electronic commerce and contactless payments at point of sale (POS) and an increase in the use of mobile payments. Some bank branches closed (some permanently) and 9,000 ATMs, 15% of the total, were closed, again - many permanently. The situation was not helped by the media indicating to the public a high risk of transmission of COVID from cash.

However, cash transactions began their recovery even before the containment measures (see fig 1). But it is also evident that due to lockdowns the volume and value of transactions were reduced to less than 50% of the pre-pandemic values observed in March 2019. The closure of places where cash is normally used – airports, restaurants, casinos, pubs, among others, caused the drop in demand at ATMs. Between April and June 2020, the decrease in ATM transactions bottomed out at half the 2019 values. The results in 2021 closely followed the trends and levels of 2020, indicating a clear recovery in demand for cash.

However, prior to the pandemic British consumers’ payment practices were already changing and ATM transactions were already decreasing as retail digital transactions increased. In 2009 cash was used in 60% of consumer payments but by 2019 it had fallen to 23%. From 2018 the credit card reached 38% of consumer payments and became the most used payment method. The adoption of contactless payments in public transport, the increase in e-commerce, the widespread use of plastic cards and digital payment applications (Apple Pay, etc) and increases in payment limits in ‘tap and go’ systems have all boosted digital payments.

In December 2019 the number of transactions had fallen around 15% compared with December 2018. Consequently, the lockdowns of COVID-19 increased the trend to other means of payments at the expense of cash payments. However, the authors deem it too soon to predict that the changes during the pandemic will lead to an economy without cash, citing the gain from 50% to 70% and 80% in cash usage compared with December 2019 at the end of each lockdown.

The authors’ view is that to identify a long-term structural change in retail payments would require a sustained drop in cash use that was more accelerated than the adoption of other forms of payment. The evidence so far suggests that no such structural change has occurred.

Further, recent attempts in the UK to accelerate the adoption of contactless and digital payments have met with resistance due to deep rooted inequalities in the population; the unbanked and vulnerable consumers groups need to continue to have access to cash.

The Eurozone

There was a cash paradox in several European countries during the pandemic. Although the pandemic caused a decrease in demand for cash as a payment instrument, there was also a more considerable increase in precautionary demand as a store of value.

Data show that the circulation of euro banknotes grew by 12% year-on-year in February 2021 compared with February 2020. Although the growth rate slowed to 10% in March and 9% in April, these values are significantly higher that the approximate 5% average growth for the same months during the 2015 -2020 period. The increase in low denomination notes (€5, €10, €20) was lower than the growth of the high denominations, consistent with the increase being more related to storing value.

During this period the ECB, the Federal Reserve and central banks of Mexico, Chile and South Africa all made statements to the effect that cash was safe to use and not likely to be a transmitter of COVID-19, but the announcements came late in the pandemic.

In an IMPACT survey commissioned by the ECB, 49% of respondents said they used cash ‘as before’ the pandemic, 10% said they used cash more frequently, while 39% said they used cash less frequently. About 38% of respondents mentioned that they were afraid to use cash as a potential vector of transmission of COVID-19, and 33% thought they were at risk of contracting the virus through physical contact with or proximity to other people.

The authors noted that although research indicated, that despite the probability of the virus being transferred from cash to humans being very low and no greater than from the surface of other materials, large players in the payments sector such as Mastercard and Visa and some central banks and fiscal and financial institutions took advantage of the situation to promote the use of other means of payment, reflecting a facet of the ‘war on cash’.

Spain

The Spanish strongly prefer to use cash for retail payments – an ECB study on consumer payment attitudes indicated that 83% of all transactions were settled in cash in Spain, compared with the average of 73% in the euro area. The result by amounts is similar- 83% of Spaniards used cash and 15% payment cards compared with 73% and 24% in the eurozone. In person to person (P2P) payments, 66% of Spaniards used cash and 28% payment cards, compared with 48% and 41% respectively in the euro area.

In a recent YouGov survey (2020), 53% of Spanish respondents said they would not support moving towards a cashless society and only 27% said they supported a rapid adoption of cashless payments; the rest were indifferent or didn’t know enough about them. However, the authors point out that these preferences should be treated with caution as sizable segments of the population cannot afford a preference for payment given their income level and socioeconomic status.

Another more recent study on the use of cash in the EU found a positive relationship between the use of cash and the ratio between ATMs and point of sale (POS) terminals – the use of cash is reduced if the growth rate in ATMs is less that the growth rate in POS terminals. Since the maximum number of ATMs in absolute and per capita terms was reached in 2007 and 2011 respectively, it is likely that there will be a reduction in cash payments.

There has also been a consolidation process of financial institutions since the financial crisis of 2008 and consequently a reduction in bank branches and ATMs.

The authors noted that a newspaper highlighted that there were about 1,700 fewer ATMs since the pandemic began due to the closure of bank branches and increased use of cards. This, they noted, is of relevance because in Spain there are many businesses where transactions for less than €5 can only be done in cash and other places where cards are not accepted. The scarcity of ATMs is especially prevalent in semi-rural areas and those affected by depopulation, and some regional governments are providing subsidies with the aim of protecting universal access to public services.

A significant proportion of consumers and workers in precarious employment were greatly affected by the reduction of cash use during the pandemic. Another casualty was tips to waiters in bars and restaurants. In a 2019 survey, 97% of Spanish consumers said that they always paid their tips in cash, and 60% never left tips when they didn’t have cash. Only 30% said they would tip if all establishments only accepted card payments.

Latin America

Cash continues to be the dominant instrument of retail payments in Latin America due, in large part, to the high inequality in income and wealth, levels of financial exclusion and the prevalence of informal work.

The situation varies from country to country; in some countries 50% of adults do not have access to a bank account and up to 50% of the economically active population survives from activities in the informal sector. Quarantines and the pandemic have only slightly affected the behaviour of consumers and merchants in payments.

Mexico

In between 11 March, when the WHO declared COVID-19 a pandemic, and 31 March 2020, the cash in public circulation increased by 30.33% to 2,180 billion pesos (US$110 billion) from 1,670 billion pesos (US$84 billion). with high value banknotes dominating.

Between January 2020 and March 2021, the volume of 1,000 peso bills grew by 34.7%, the volume of 500 peso bills by 33.1%, the 200 peso bills by 18.2% and100 peso bills by 14.21%, reflecting the growth being predominantly as a precautionary measure or store of value.

This growth was despite the government of Mexico City in alliance with the Association of Banks of Mexico in June 2020 promoting alternatives to cash, such as the Interbank Electronic Payment System and the Digital Collection payment solution (CoDi), which was intended for retail payments.

The dominance of cash over other means of payment prevailed during the pandemic. A survey by Bank of Mexico indicated that before the pandemic 93% of the target population (representing 66.9 million Mexicans) used cash in transactions although in December 2020 86% of those surveyed (equivalent to 61,9 million) reported having used less cash on payments.

During the pandemic rather than diminish, the cash infrastructure has expanded in Mexico. The number of ATMS grew by 1.3% from 56,600 in the first quarter of 2020 to 57,400 in Q4. with those in bank branches increasing by 2.1% to 28,300 and those outside bank branches by 0.58% to 29,100.

Although the volume of ATM transactions decreased by 2.9% in the first year of the pandemic, their value increased by 15.9%. The average value of a withdrawal increased 17% from 2,050 pesos in Q1 2020 to 2,402 pesos in Q4.

The growth in demand for cash during the pandemic can be explained by the expansion of the informal economy to absorb the unemployed (Mexico does not have unemployment insurance), federal cash benefit payments, higher remittances from the US and financial support from drug cartels and other criminal organisations to communities impoverished by the pandemic.

USA

The proportion of cash in US payments has been declining – from 31% in 2016 to 26% in 2019, according to the Federal Reserve, while debit cards increased their share to 30% of all payments.

Also of note is that between 2008 and 2020, 13,432 bank branches (14%) closed. Despite this, cash has continued to dominate low value retail payments, being used in 47% of transactions under $10 and 33% of transactions between $10 and $25.

During the pandemic, cash in circulation for precautionary reasons increased significantly, with cash in circulation increasing by 16.5% ($297 billion) to reach an all-time high in January 2021 of $2.09 trillion. The acceleration took place in March and April 2020 – the first months of lockdown restrictions.

The fear of the spread of COVID9 via banknotes and coins did not strongly affect Americans, the majority (70%) saying they did not avoid using cash. However, some retailers refused to accept cash as a form of payment or asked for cards.

This had consequences not least because of who it affected, the unbanked and underbanked who tend to be those on low incomes, retirees, migrants, people with low educational levels, people with disabilities or members of racial or ethnic minorities. This led to cities such as New York, San Francisco and Philadelphia introducing regulations to protect the use of cash in retail payments. Later a federal bill was introduced to protect the right to use cash in retail transactions.

Long term trends

It is the view of the authors that although COVID -19 has accelerated prevailing trends in the retail payments sector, it is unlikely to generate innovation that eliminates cash for retail transactions.

The use of cash for spot payments and small value payments remains and will continue to be superior to any other payment instrument.

Consumer surveys promoted by central banks generally indicate that more than 70% of respondents do not plan to do without cash; the figure is even higher among cash users in retail transactions. Of note is that younger consumers tend to use more and more digital payments, including contactless, and carry little or no cash.

The importance of a resilient structure with support systems for the means of payment has become apparent in the pandemic as global supply chains have suffered financial disruptions. Even before the pandemic, vulnerabilities and failures of digital payments have been apparent on numerous occasions.

As pressure to migrate to digital and contactless payments increases, consumers should become aware of the costs. There are obvious pecuniary costs (eg. commissions), but also non-pecuniary such as the traceability of transactions, loss of anonymity, fraud, infrastructure vulnerability, digital and natural catastrophes – matters that the public should be informed about regarding a cashless society.

The duopoly position of Mastercard and Visa as the main national and international retail payment settlement platforms will be challenged by national and regional initiatives such as the European Payments Initiative. Also, financial technology companies’ applications can contribute to financial inclusion.

Conclusions

Cash in retail payments has declined, in some countries much more than others. The pandemic, particularly lockdowns, caused cash payments to decline while digital payments, and in particular cashless payments, grew. However, the use of cash recovered strongly after the most stringent lockdowns.

Overall, cash is expected to continue to decline but will maintain a minimum level according to the infrastructure and economic development of countries and is essential to provide a means of payment for the unbanked and socially deprived.

While the authors did identify accelerated trends during the pandemic, they did not find robust evidence to suggest there is a definitive structural shift towards a cashless economy in the countries studied.

1 - “The Transformation in the use of Cash and Digital Payments during the COVID-19 Pandemic” by Bernardo Bátiz-Lazo (Northumbria University, GB and Universidad Anáhuac, Mexico), Manuel A. Bautista-González (Columbia University in the City of New York, United States) and Ignacio González-Correa (University of Santiago, Chile).