Three Views on the Future of Cash

The Silk Road Cash & Payments conference, which took place in Almaty, Kazakhstan at the end of March, included a session looking at the future of cash, with presentations from the Bank of Israel, the Bundesbank and European Savings and Retail Banking Group (ESRB).

Greater Efficiency is the Key for Cash

Stefan Hardt, Director General Cash Management at the Bundesbank, started his presentation at the conference with a picture of a football next to a Mastercard advertisement hoarding with the title, ‘A challenge for cash’.

Germany is the Eurosystem’s major cash user. At the end of 2022 Germany accounted for €900 billion of the €1,572 billion euros in circulation. Between 2009 and mid-2022 cash in circulation has been broadly stable in Germany, although it dipped sharply after interest rates moved from being negative to positive.

Importance of cash for Germans

The Bundesbank’s Payment Behaviour Survey shows the average value of cash carried by people in their wallets being stable at about €100 between 2011 and 2021. The share of cash as a payment method by the number of transactions in 2021 was 57.8% and by turnover 29.9%.

Both indicators started to decline from 2017, having been stable previously.

Scale of the cash cycle

The Bundesbank is itself a major player in the cash market in Germany. It has 31 branches with 1,800 staff, and 137 high speed cash processing machines that process over 12 billion notes each year.

Germany has over 1,500 domestic credit institutions, 21,000 bank branches, 50,000 ATMs and 300,000 retail companies. About 80 cash in transit companies service their needs. Large retailers can transact directly with the Bundesbank while smaller retailers use their commercial bank. Cash withdrawal is available from shop tills.

Bundesbank view of cash

A decline in cash use risks excluding the unbanked, leaving the technically unskilled behind, reducing the ability of people to pay for things with privacy and leaves the payment system vulnerable if there are technical failures or cyber-attacks.

There is a risk of a spiral of decline. If there are fewer places where people can source cash, it requires more work for people to get cash. This could lead to less cash use which means less frequent use of those sources where people get cash. As a result, the unit cost of cash goes up, which may mean businesses reduce the number of places where people can get cash etc.

The (low) cost of cash usage is the decisive attribute in the attractiveness of cash as a payment means, driving how much it is used. The Bundesbank sees increasing the efficiency of cash, lowering its cost even further, as key to its future. The role of the central bank is to be a catalyst to help this happen.

The Bundesbank warned the audience not to mistake its neutrality for passivity.

The presentation ended with an observation that cash is a societal good. It is of general interest to the population and has an important role in social policy. It deserves, therefore, greater funding from the public sector.

Europe’s Position on Cash

Diederik Bruggink provided an overview of developments in the European Union (EU) cash cycle.

While cash is still popular, the trend is one of decline. As a result, the ECB has developed a Eurosystem strategy, the Euro Retail Payment Board (ERPB) has issued a report on Access to and Acceptance of Cash with recommendations, and the European Commission (EC) is taking action to regulate legal tender and introduce restrictions to combat money laundering.

The European Central Bank’s (ECB) study on the payment attitudes of consumers in the euro area (SPACE 2022) provided significant evidence that while cash remains the most frequently used means of payment in stores, electronic payments are increasing. Cash fell from 79% in 2016 to 59% in 2022 for payments at the point of sale (POS) in terms of the number of transactions.

At the same time, cash in circulation is increasing, with a compound annual growth rate (CAGR) of 7.1% between 2017 and 2021 and an increase as a percentage of GDP of 4.7%. However, the number of bank branches has been falling at a CAGR of 4.9% and the number of ATMs at a CAGR of 3.1%.

ECB cash strategy

The ECB’s vision is that in 2030 cash will be widely available and accepted for payment, and act as a store of value. The strategy has five objectives. The Eurosystem will:

Ensure the issuance of cash
Support access to the withdrawal and depositing of cash for all citizens and businesses
Define the acceptance of cash as essential for the freedom of choice of how to pay
Ensure there are innovative and secure euro banknotes
Ensure that banknotes are healthy and safe and work to reduce the ecological footprint of cash.

Access to and acceptance of cash report 2021

The ERPB working group found that cash has a number of unique functions that justify ensuring continued access to and acceptance of cash. For users, inclusiveness, budgeting, store of value, autonomy and privacy were key.

From a payment perspective cash acts as a back-up, legal tender and is the only public money available to the general public.

Based on these conclusions, the key recommendations were that the changing situation regarding access to and acceptance of cash needed monitoring. The report suggested who might do this. It also recommended a study on the societal costs and benefits of different payment instruments in the euro area, provided a representative number of participants could be guaranteed.

Legal Tender

The EC legislative proposal on the legal tender status of euro cash is expected in the second quarter of 2023.

The current position is that cash is the only legal tender in EU, following an EC recommendation from 2010; however, clarification is needed about whether legal tender means mandatory acceptance or not.

The European Court of Justice ruling in 2021 said it was, although deviations are possible if they are in the public interest. In making their determination, cash availability and the role of banks are considered a key element too. Member states are expected to monitor coverage.

A question to be answered is whether policy measures are needed or if soft law at member state level, or at the EU level, is needed.

Finally, clarity is needed about a possible future digital euro and whether it will be legal tender and how that will be defined.

Anti Money Laundering

The 2021 AML package proposed a single rulebook and the establishment of an EU-wide AML authority (AMLA) with direct supervisory powers over certain entities.

At the time concerns were identified about limits to large cash payments (Art. 59 AMLR), excessive Beneficial Owner identification (Art. 42 AMLR), limited outsourcing (Art. 40 AMLR) and an excessive list of subjects to PEP rules (Art. 36 AMLR).

The Council adopted their positions on these points in 2022 and the European Parliament was expected to finalise its position in April 2023. Once agreement is reached, the final texts could enter into force in Q3/Q4 2023, with the AMLA becoming fully operational by 2026.

Getting and Using Good Cash Cycle Data

Amir Safranovich, Head of the Cash Management Division at the Bank of Israel (BOI), presented on the role of information in directing the currency system. He outlined the reach, and limits, of the BOI and how it is working to ensure the public can access cash day to day, in an emergency and in the long term.

The BOI has the remit to direct the currency system and is the only entity with the overview and ability to do this. It has the ability to regulate cash centres, bank branches and bank ATMs, and indirectly to regulate non-bank ATMs. It does not have regulatory power over retail chains.

BOI Regulation 05/2020 requires daily and monthly reporting of cash related activities of banks. There are 13 different reports required covering branches, ATMs and cash centres. These include reporting on the location of branches and automatic cash withdrawal devices, non-bank ATM cash deposits and cash inventory at branches, cash centres and bank ATMs.

BOI collects detailed information on:

Deposit machines – technical data (locations, types) and deposits
ATMs – technical data (location, software version, camera version), inventory, withdrawal information, deposit information, failure Cash centres – daily counting information, inventory
Bank branches – technical data (cashier, core branch etc.), inventory, withdrawal information, deposit information.

It also carries out monitoring of non-BOI deposits counts, requires periodical reports, exceptional event reports and carries out data analysis.

Implementing policy goals

BOI wants to promote the use of low value denomination banknotes. It defines the percentage of low value banknotes that ATMs that provide:

NIS 20 => 15%
NIS 50 => 70%
NIS 100 => 95%.

BOI sets a formula that determines the mix of banknotes in a single withdrawal so that the first notes in each withdrawal of less than NIS 1,500 will be from a low denomination. For example, a NIS 1,500 withdrawal should have x 5 NIS 20s, x 4 NIS 50s, x 3 NIS 100s and the rest in NIS 200s.

The stock of each denomination in ATMs is shown in a simple dashboard compared with the target set. If stocks deviate, BOI can talk to the organisation responsible.

Business continuity

To ensure that the population has good access to cash, BOI consolidates an overview of the national cash situation. It looks for challenges in specific cities and in ATMs of specific banks.

It is able to create back-up solutions between all of the banks and provide the public with information on where cash is available.

Access to cash

As in other countries, the cash infrastructure is changing in Israel, and has been for some years. The mix of ATMs means that private sector operators now provide most ATMs, rather than banks. It is not that banks have been dramatically reducing their ATM estates, but that the private sector has been installing them. 5,500 ATMs are privately operated compared with 2,387 bank ATMs, 70% of the total.

By value, 10% of cash is withdrawn via ATMs, NIS 1.3 billion per month. By number of transactions, 25% of cash comes from ATMs, about 3 million withdrawals per month. Bank branches continue, therefore, to play the key role in providing cash.

Every branch closure is examined by the Banking Supervision Department of the BOI. If closure is approved, two ATMs have to be installed to replace the branch. The ATMs must be capable of cash depositing as well as withdrawal. BOI does not have control over the closure of teller stands within branches. In 2012 there were 1,229 bank branches, in 2022 1,003, 18% less. In 2012 there were 785 teller stands and in 2022 484, 38% fewer.

BOI collects data on the number and exact location of ATMs whether in a branch or not, cashier desks and deposit machines in businesses. It knows ATM locations by bank and the number of ATMs by population. It has a visual geographic view of the areas with less than one ATM per 5,000 people and those with more. This information is used in considering branch closures.

Looking to the future

The presentation showed a timeline of payment development. Today we are in a period dominated by payment by mobile devices and wallets, fewer ATMs and with the development of CBDCs.

The BOI defines a point of no return for cash as being when a major part of the population cannot get or cannot use cash for payments. It is assessing when this point of no return could be for Israel.

Final word

The two key takeaways from the presentation were the importance of good information and that the future is defined by what you do right now.