News in Brief

Reflections on Cash in Canada

A recent article by RBC ¹ demonstrated that in Canada the use of cash as a proportion of GDP decreased from 4.8% in 1961 to 2.9% in 1981. From then until about 2008/9 it held steady at about the 3% level. Since then it has risen steadily reaching 4.4% in 2021. No doubt the global financial crisis kickstarted the increase, and the pandemic has seen it surge further, but it is not clear why cash continued to increase between these events.

Canadian payment diaries show cash transactions falling from 54% in 2009 to 22% in 2020. The data suggests that cash is being used to store value just as e-commerce and the ease of digital payments erode transactional use.

The increase lies largely in high value notes with the $50, or more, accounting for all of the increase in demand as a share of GDP since 2014. The $100 accounts for 60% of all cash in circulation, up from 50% in 2010. It will be interesting to see how inflation and rising interest rates affect this.

It would be easy to suggest that cash is on its way out in Canada, but Bank of Canada surveys show 62% of respondents having made a cash payment in the previous week. 81% intend to remain using cash.

Half of the people saying they were already cashless still had cash on hand.

The theoretical benefit of going less cash is probably smaller for Canada than other countries. It already has a relatively low cash to GDP ratio accompanied by a high share of cashless payments. In addition, the IMF’s 2015 data found that Canada had the 10th smallest shadow economy in the OECD, less than 10% of Canada’s GDP. Canada does have a relatively large ATM network reflecting its size and dispersed population, 214 ATMs per 100,000 adults. Australia, also a large country, has 137.

This suggests there may be some scope for reducing the number of ATMs.

The RBC article ends reflecting on a future Central Bank Digital Currency (CBDCs). It suggests that an examination of the factors behind cash’s appeal could be critical when considering the design of CBDCs.

The obvious preference of the public to use cash as a savings vehicle is a particularly difficult area which may demand the future coexistence of cash and CBDC. Equally, as digital currency replaces cash use for transactions, the Bank of Canada risks losing its role as a payment provider—a role that could prove valuable should private players come to dominate the market for digital payments.

Legislating for Cash in the US

The Payment Choice Act is a bill currently going through the legislative process in the US. In 2020 a similar bill failed to go to vote. The House Financial Services Committee passed this new bill and it now moves to the House of Representatives. The bill is supported by 48 Democratic and Republican representatives. A companion bill is expected to be introduced in the Senate by a Democrat and a Republican senator.

The Act has two particularly important elements to it. First it requires applicable physical retail locations to accept cash for transactions under $2,000. Second it does not allow customers to be charged higher prices than those who don’t pay with cash.

A range of organisations are supporting the bill. Two years ago, the Consumer Choice in Payment Coalition was formed in the US to promote the use of cash, including access to it. The Coalition is made up of a range of consumer advocates, businesses and non-profit organisations. The Consumer Federation of America is also supporting the bill, citing the privacy that cash gives people as a key reason to maintain cash.

The bill does not require retailers to accept denominations over $50. There are exceptions, including if a retailer temporarily does not have sufficient change to hand or is experiencing a systems failure that stops it processing cash payments. If the retailer provides a way for customers to convert cash to a pre-paid card, at no cost to the customer, to load or spend the money, then the new law would not apply.

ATM Industry Makes Case for Out-Sourcing

The US ATM industry is promoting out- sourcing ATM management to address three challenges for financial institutions, particularly community banks and credit unions. The first challenge is staff shortages. Consumers are used to using ATMs; overall, consumers use ATMs three times to deposit and four times to withdraw cash a month.

If Interactive Teller Machines, Video Teller Machines, deposit automation and off- premise ATMs are introduced, institutions can reduce pressure on tellers, freeing them up to answer bigger questions and provide larger-dollar services.

Out-sourcing ATMs allows their capital cost to be off the balance sheet. Management contracts can include complete service packages to deliver dependable daily operations, robust machinery, software upgrades and security patches, and any hardware compliance mandates.

Finally, with more people working from home and statistics showing that up to 77% of employers will use a hybrid work model going forward, ATM outsourcing can help improve and expand ATM access in a way that is both practical and economical.

Rise of the Micro ATM in India

India has only one ATM for every ten villages, meaning access to cash can be challenging. The cost of infrastructure acquisition and servicing is one of the main reasons that formal financial institutions find it difficult to operate ATMs in rural areas.

Micro ATMs allow people to access cash from local shops rather than through formal infrastructure, although connectivity is a requirement. Organisations such as PayNearby claim to have 4.1 million retailers signed up across India serving 150 million people.

1 - Proof Point: Canadians can’t kick cash (rbc.com).