Reflections on Cash

Cash Essentials reported on an article by Tristan Dissaux, AXA Fellow at the Université Libre de Bruxelles, 'The Social Role of Money in an Age of Digitalisation'. The article pulls together much of debate and thinking around the payment tension created by digitisation and, as we end 2022, it is a good time to reflect on this.

What is the problem?

Digitalisation is justified largely on economic grounds. It enables, and usually delivers, efficiency gains, convenience and increased security. In payments it can extend the possibilities of transactions to more people. Importantly it creates payment histories which are important for people who want to borrow money.

The data collected on payments increases transparency which can be used to deliver both payment security and allow the authorities, whether tax authorities, the police or the secret service, to focus on crime and societal security risk. The data can also be used to create innovative new products and services and new business models.

Digitalisation generally and digital payments in particular can be transformational, bringing lower costs in every sector, increased speed and convenience and completely new ways of doing things. From online media streaming to health clinics to connecting suppliers directly to consumers, change is already here.

For payments, ‘faster payments’, open banking, mobile wallets, QR codes etc are already here and delivering change.

Programmable money and crypto currencies (stablecoins, CBDCs) are coming, with the offer of cheaper, easier and faster cross-border payments and general transaction costs.

So, what is the problem?

The implications of digitalisation

The fundamental problem is that digitisation means many of the old ways of doing things are no longer profitable. When the public changes behaviour fast, then the impact is starkly visible. For example, if people no longer post letters, stop watching terrestrial state TV, move to online shopping, stop going to bank branches or stop paying by cash, the providers of those services are left wondering how to cover their costs faced with the lower usage.

Many central banks outsourced cash centres and cash services on the basis that the private sector could deliver these better. The private sector was able to provide these services profitably and all was well. With falling cash volumes all is now not well.

Tristan Dissaux lays out the social cohesion role of cash. He uses the term ‘community of payment’, referring to the shared values, legitimacy and societal trust that lie behind cash delivering societal resilience. If my ‘money’ is not as good as your ‘money,’ are we a society?

Digitalisation can feel like a juggernaut, a tyrant even when the ‘analogue’ alternative is arbitrarily withdrawn. Those who cannot, or will not, participate are then excluded. The closure of bank branches or the withdrawal of cheques removes the familiar from people who perhaps struggle with access to technology or understanding it.

The transparency and security that digitisation can deliver comes at a price, that of freedom and institutional trust. An extreme example perhaps, but in Hong Kong a few years ago demonstrators used cash to buy transport tickets so that their presence at demonstrations could not be proved using their digital payment record.

More mundanely, if one searches for a term on a search engine and then find adverts for that item on ones’ social media feeds, does that always feel benign?

The cost of digital payments is felt more heavily by the poor than the well off. Prepaid cards, necessary to access digital services, charge high fees. The cost of the points earned by card use are part of the price of products paid for by cash, but the points are not accessible.

There is growing awareness that access to digital payments also exposes people to new challenges – the risk of indebtedness, fraud and online gambling for example. Financial sophistication is needed to manage these risks.

The challenge

Visa has just announced that it will spend $1 billion in Africa over the next five years to accelerate the adoption of digital payments. Whether overtly like this, or through the bundling of services and payments together by technology giants such as Alipay, WeChat Pay, Google etc., the spending power and reach of the commercial interests that benefit from digital payments exceed those wanting to maintain cash.

With central banks almost universally ‘payment neutral’, and many of those actively driving digital payments in the name of efficiency, modernity and inclusion, cash has few friends or resources. The central bank interest in CBDCs in part reflects a view that cash will soon be part of history.

Optimism and solutions

Enough gloom and doom. The decline in cash use seems to be stabilising in the countries which have experienced the earliest and fastest declines.

The argument that cash is a public good, a public utility even, has gained in support. The importance of maintaining access to cash is widely recognised and there are now many examples of central banks and parliaments taking positive actions to safeguard cash. The Bank of England’s consultation on wholesale cash system is mentioned in this edition, for example.

In a sense, the interest in CBDCs reflects an acknowledgement of the need to maintain public money, extending it into the digital sphere, although it will need to be designed well to maintain the societal benefits described by Tristan Dissaux.

Digital is not necessarily ‘bad’ for cash. Mobile money schemes, such as M-Pesa, have extended and enabled the use of cash.

While the demise of traditional bank branches is moving fast, with all the implications for cash and communities this brings, there are, perhaps, positive signs.

First is innovation. Shared bank branches (think OneBanx and the Post Office’s BankHubs in the UK), and new types of branches (HiveBank) are examples, as are so-called CashTech solutions that are deploying digital technology to maintain and increase cash access and deposit.

Second, interest rates are rising. As the Dutch Payments report said, low interest rates are a key reason payment are not profitable today. Rising interest rates, therefore, will make securing bank deposits important for bank profitability. Bank branches can play a key role in this, perhaps giving banks a reason to pause for thought.

Finally, following on from the pandemic, the war in Ukraine and other conflicts have seen yet another spike in cash withdrawals. This underlines the need for central banks and politicians to think through how they expect citizens to hold liquid assets when things are uncertain. This is a legitimate need and without cash, what is the plan? Digital is not liquid. Deny people portable value in the domestic currency, and alternatives will be found, some of which may not be desirable.

The future of cash is changing. This is an exciting time to be involved, to be shaping the future. Onwards to 2023!