Individual Logic, Collective Idiocy? 3 Perspectives on the Need for Cash

Commercial banks are profit-seeking entities. Cost reduction to maximise profits and automation are core to achieving that. Bank branches and ATMs are expensive, hence the drive to close so many of them and, in the process, the ability to deposit and issue cash goes too. Merchants and the public are pushed towards going cashless, or at the very least, less-cash.

Less cash has a second benefit for banks. It means people have to use bank money and the digital payment system, which earns the banks revenue and gives them valuable customer data. Visa and Mastercard are happy to help. The big tech players such as Amazon are also keen to see this happen because it helps them automate what they do and cash payments are not easy for them to automate.

Brett Scott ¹ makes the point that when individual banks close branches they are acting rationally in pursuing lower costs. What they haven’t thought through is the collective impact of the wider banking community all moving to less cash. This is the point the International Mint Industry Association makes, namely that cash is a ‘value anchor’.

For commercial bank money to have the confidence of the public, the public have to believe they could, if they had to, change their bank money into cash. No wonder central banks are considering introducing CBDCs.

But this, perhaps, won’t work quite as hoped. Historically cash has been good for low value, in-person payments. Cash is ‘money’ in the minds of most. Can a CBDC really take on the local, physical role that cash occupied? What is the relationship of the public with bank money if the new ‘cash’ is also digital? Does the public need both? Aren’t they competitors? Could the individual logic of each bank’s actions lead to a damaging change in how the public regards their bank money?

It might just be easier for central banks to promote cash!

UK points way for future bank branches

Bank branches are disappearing in some countries at an unhealthy rate. The argument for branches is they make customers feel that their money is safe. The sheer presence of a building reassures people.

Further, KPMG found that 38% of consumers wanted to use branches to discuss their finances . Branches also have a role in trade, finance, commerce and society. For small businesses that accept cash and coins, they need a branch to deposit their takings.

Chris Skinner, an independent commentator on the financial markets and fintech, argues that the challenge is for banks to have enough places for customers to visit to deal with their need for a security and psychological blanket.

The response in the UK, driven originally by the Access to Cash report in 2019 has seen a wide range of innovative responses:

• Post Office – BankHubs

• OneBanx – three Co-op based hubs, pop-up for TSB

• BankHive – TSB has announced a trial of two banking ‘pods’

• Barclays Bank – pop up branches

• Cash Access UK – 29 hubs owned by nine high street banks.

Most of these solutions are shared facilities, although the Barclays and TSB solutions are not. They allow banks to maintain a high street presence and offer financial services directly to their customers without having a dedicated building of their own.

The advantages of using cash

One of the advantages of cash is immediate settlement. A recent article in PYMNTS gave information about the causes of card payments not being completed. This is important because it is said that 55% of consumers, faced with a frustrating e-commerce checkout experience, will abandon the purchase. 91% say that if they have a good checkout experience, they are significantly more likely to buy again.

• Activity thought to be suspicious 101.5

• Insufficient funds 97.7

• Incorrect information entered 93.0

• Expired card 65.7

• Missed card payment 58.4

• Large purchase amount 58.0

• Card data stolen and suspended 57.9

• Not enough credit 56.1

• Located in a different geographic area 51.5

Most of the reasons behind payment declines are out of merchants’ hands. However, taking steps to reduce the rate of incorrectly entered payment information may be a problem area that businesses can influence by encouraging consumers to store their data in payment apps such as PayPal.

Including two factor authentication in the checkout process is also an option, although it requires the consumer to do more, making their experience less straightforward.

At the point of sale, paying with cash avoids all these issues!