Cash is becoming less common as a means of payment. Are we moving towards a cashless society, or does cash still have an important role to play?
In June 2018, debit card payments overtook cash as the most popular form of payment in the UK for the first time, according to data from UK Finance, the trade body for the UK banking and financial services sector. However, over a third of transactions were still made using cash. An interesting report from the Institute & Faculty of Actuaries explored the benefits, risks and issues of going cashless. The issue is also well covered in David Birch’s excellent book, ‘Before Babylon, Beyond Bitcoin’.
So, what are the benefits of a cashless society? Well, there are real costs associated with using cash – for banks (including central banks), retailers and consumers. It costs money to print or mint cash, to adapt to new forms of cash (such as the new £1 coins, which required millions of machines to be adapted, or the polymer notes which required ATMs to be adjusted), to handle cash for banks and to withdraw cash from ATMs (very common in many countries, though less so in the UK). The costs of using cash are generally a higher percentage of GDP in poorer countries than in richer countries.
The average value of cash transactions has declined and fewer payments are made using cash, yet demand for cash from the Bank of England has risen. That seems illogical! Well, in their 3Q 2015 Quarterly Bulletin, the Bank of England estimated that at least half the cash in circulation is used in the ‘shadow’ economy or is sent overseas. In 2018, notes in circulation were valued at just under £69bn – that’s over £1,000 for every single person in the UK. Most of us would have far less cash than this – so where is all this cash and what is it being used for?
Figures are hard to come by, but evidence suggests that as well as being sent overseas, cash is used in the ‘shadow’ economy as a means of tax evasion and to enable crime and fraud, including benefit fraud. One way of addressing this is by withdrawing large denomination notes from circulation, as these are unlikely to be used for legitimate purposes.
In November 2016, the Indian government carried out a ‘demonetisation experiment’, withdrawing the R5,000 (£55)and R10,000 (£110) without notice. Earlier that year, the European Central Bank announced it would stop producing the €500 banknote in 2018. Why has the Bank of England decided to issue a new £50 polymer note? Wouldn’t it make more sense to withdraw it? When was the last time you had a fifty pound note?
Thirty years ago, an American professor of economics, Dr Edgar L. Feige suggested a tax system based on a fee levied automatically on every single transaction, to replace all other forms of taxation. APT Tax (Automated Payment Transaction Tax) has many drawbacks in terms of fairness but it is hard to evade and easy to implement in a totally cashless society – indeed, it is only realistic in a cashless society.
Are there downsides to a cashless economy? Certainly, not everyone thinks we should become cashless. One of the arguments for retaining cash is our attachment to it, particularly amongst older people. We don’t even like it when the currency changes – small plastic notes or strangely shaped coins take a while to get used to. We like the money we are familiar with. It’s useful for small payments and casual transactions, such as giving money to a busker or the window cleaner, though of course other payment methods are now available even for these kinds of payments. It also enables us to make payments without anyone knowing. We are all concerned about online privacy, and cash reduces the amount of information we are sharing with others. We have good reasons to want our privacy and confidentiality to be respected – but this also helps those who desire anonymity for bad reasons.
Another concern is how secure new payment methods are. We can feel safer with banknotes – there’s no chance of anyone accessing our details or of the system going down. Notes are not immune to forgery, but for our day-to-day transactions it doesn’t actually matter whether the notes and coins we use are ‘genuine’ or not, what matters is that both the buyer and seller are willing to accept them. Until we feel fully confident about the security and reliability of new payment systems, many people will continue to want to use cash.
Cash is sometimes thought to promote financial inclusion, as the poorest in society are least likely to have bank accounts. However, since this denies them access to better value services, such as paying for utilities by direct debit, it is not clear that keeping cash is really to their advantage. This is more strikingly the case in less developed countries in Africa and Asia-Pacific, where new payment methods driven by technology are leapfrogging more traditional approaches, giving financial access to the poorest in society and promoting economic development. Often these countries have made more investment in recent payment technologies – they aren’t tied to the old methodologies in the way that more developed countries are.
Another benefit of cash is seigniorage. This is the profit made by a government by issuing currency, broadly the difference between the face value of notes and coins and their production costs. The amounts can be significant, particularly for countries such as the USA whose notes are used for hoards which are often held outside the country (sometimes for illicit purposes).
Summary: Are we heading towards cashlessness? Cash is less significant than it was at the start of this century and it is likely to continue to decline in terms of both the number of transactions and their value. We may well see higher denomination notes disappear, as well as the smallest value coins (which cost more to make than they are worth). We may see the real cost of using cash being passed directly to consumers with ATM charges becoming the norm. We may not become a cashless society any time soon – but it is hard to imagine that in twenty years’ time we will still be carrying wallets full of notes and coins around and it may well be that emerging and developing countries lead the way in making most use of new payment systems to do away with cash.
What does this mean for Bristol Pound? Our paper notes are an important part of the Bristol Pound brand – the art competition every three years attracts great interest from artists and revives local interest in Bristol Pound; the three-yearly retiral income is important; they provide income from collectors; and they are an important visual tool to raise awareness and provide a talking point in a way that the app cannot. Nevertheless, we need to be aware of changing spending patterns and consider whether the costs of providing ‘real’ currency will outweigh the benefits in the near future.
Our new notes were launched in mid-2018. Will they be the last paper notes Bristol Pound produces? The rate of change in use of notes and coins has been very rapid in the past few years. Should all our attention be focussed on improving our app so that we can match the ease of use of other payment methods? It is too early to make a decision, but we need to pay careful attention to the changing pattern of payments over the next year or two.
Non-Executive Director, Bristol Pound