First, there was chip and pin, then contactless, and now smartphone payments: with these extraordinary advances in payments technology in recent decades, it is hard not to imagine a cashless society where cards, smartphones and other cash alternatives will be used to pay for everyday expenses.
A study by Tufts University in the U.S. found that the costs of dealing with cash (including collecting, sorting, ATM fees etc.) amount to $200B, or $637 per person. It does not end there: the average person wastes 5.5 hours a year on withdrawing cash from ATMs. In addition to this, there are health concerns over using banknotes, as another study has discovered that the vast majority of them contain harmful bacteria.
One would assume that this growing trend of non-cash payments methods has only arisen in rich countries with high levels of consumer spending, but this is not the case. M-Pesa, which is a money transfer system that can be used via phones has been launched in Kenya in 2007 and has since grown to account for as much as 25% of the country’s GDP passing through it. There are also similar platforms in Nairobi, Uganda, Tanzania, Zimbabwe.
Despite the growing proportion of people using physical cash alternatives for payments, the number of notes in circulation in many countries has also risen over the year. In the UK, it has almost doubled in 12 years.
One could argue that this is due to the rise of the shadow economy in the UK which for obvious reasons operates only in cash, but the report by Schneider and Williams claims that the black economy has been shrinking. So as Victoria Cleland, chief cashier and director of notes at the BoE, points out “[cash] is still crucial to everyday life” and “[cash] does have a future, and a significant one.”
Cash Here to Stay?
Cash has been around for thousands of years and represents a safe way to store one’s own money: it does not disappear if the power goes out or if a technological blip occurs. People also like to keep cash because it gives them a sense of security – physical cash serves as the last resort in case of emergency.
There are a number of reasons for why cash remains a popular payment option, preferred both by the consumer and the business. Firstly, cash represents a better alternative to card payments for businesses because it is cheaper to process.
This is why we see the small businesses only accepting cash from their customers and some companies even charging extra fees for using credit cards. This is confirmed by the findings from British Retail Consortium report, where it was calculated that cost of a cash transaction is 0.15% of the nominal value of the purchase, compared to the cost of a credit card transaction of 0.79% of the value.
Cash and Society
Governments will always promote entrepreneurship, helping cash remain a big part of the economy for the foreseeable future. Consumer preferences to cash are likely to be tied to the society’s beliefs in the financial industry’s future, i.e. a high proportion of people will want to store their income in form of cash if they believe a new banking crisis is about to happen.
It is also likely to be related to the growth rate of a particular country. Provision of cash can be seen as the provision of a contract. This can sometimes cause huge disruption, as seen from the consequences of demonetisation in India. Cash is an important commodity for people, and this is why governments of many countries have demanded banks to increase the number of ATMs to improve the access to it.
An interesting observation can be made when the reports show that the number of ATMs has risen in the recent years: it has become more affordable to withdraw cash, and overall cash has become more “available”, but the number of actual transactions using cash has fallen. The growth of alternative payments seems to indicate a declining interest in cash.
The future of cash is very uncertain, although there is a very strong trend among younger generations, who make greater use of cash alternatives. It is possible that cash, much like the press industry – where the evolution of e-books has led to the print industry becoming a separate identity with its own place – will end up having its own part of the economy and cashless payments will occupy the rest.