The future of cash

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by Ursula Kampmann

January 21, 2014 – In the 80s, the “Bayerischer Rundfunk” (Bavarian Broadcasting, BR) broadcasted a TV series about Jonas, the last detective, who, with the help of his supercomputer Sam, solved the most difficult cases in the strange and futuristic world of the year 2009. In this fictional version of 2009, he could transfer his euros and cents cashless directly from computer to computer – and that at a time when the EU was still called EC and politicians were debating the introduction of the ECU. The last detective would presumably feel very comfortable around computers and the euro if he were here today. However, he would be utterly surprised that cash money is still far from extinct, on the contrary, that almost all mints are receiving orders from the central banks for more and more coins.

This is not what futurologists expected. They believed that comfortable payment methods such as credit and cash cards would substitute the old cash money in a fairly short time. In order to shed some light on the discrepancy between what was expected and what really happened, the Dutch Central Bank recently conducted a study which looks more closely into the psychological background of different payment methods.
The result should not come as a surprise. The survey showed that older as well as younger people like the possibility to choose between the two options: they carry both cash and their credit cards with them when they go shopping. Which payment method they actually used depended on how high the sum was they had to pay. The study also found that people from a less stable financial background tended to stick to cash. They felt less in control of their money due to the fact that charges made to the bank account electronically are always delayed. Neither advertising nor bad publicity about phishing influenced the choice between cash and credit card for more than 24 hours on average! It seems that the decision how you pay depends more on habits than on rational thinking.

The study’s great merit is that it focuses on stakeholders rather than constantly talking about the technicalities. And perhaps this is the right way to go: to have a look at the stakeholders’ interests on the payment market in order to determine the direction of possible future developments.

The state as stakeholder
The state and its interests need to be in the centre of attention with regard to this topic. It is the starting point for two major considerations: the state has an own interest in making an effort to ensure more transparency in the financial transactions of its citizens and secondly, in reducing costs.

Government measures against cash payments:
The first country which completely banned cash payments of more than 1,000 euro was Italy. In Spain, natives may only pay up to 2,500 euro in cash since November 19, 2012. Special conditions apply to tourists. In Greece, too, similar bans have been considered. There is a clear tendency to increase government surveillance of citizens’ income and outgo in order to discover tax fraud more quickly. This is why in the foreseeable future there may well be legislative changes which have an impact on the production of higher banknote values. However, such changes would not affect coin production anyway and the government would merely ban something which has become almost obsolete – paying large sums in cash.

Austerity measures in minting:
One of the most common piece of news in the past months was that yet another state has disposed of its smallest coin unit or is at least thinking about doing so. With the current metal prices, production costs are enormous and although the population seems to use the smallest denominations readily, the coins are not being returned to the national currency circulation. In industrialized countries, it is only a matter of time until they will have disappeared altogether.
However, it is also the case that the smallest denominations constitute a major part of the production. For instance, in Germany alone more than 1 billion 1- and 2- cent pieces were minted in 2011, while the sum of all other denominations only amounted to 580 million coins. Accordingly, a considerable decrease in the coin output is to be expected if these coins are disposed of.
In the international comparison though, Europe’s annual demand for coins is relatively small. The organizers of the workshop “The Anatomy of the ideal Coin” expect the annual production of new coins for the entire eurozone to be at 4 billion coins for approx. 500 million inhabitants, whereas the Indian subcontinent alone, with 1.2 billion inhabitants, would need 6.7 billion and China, with 1.5 billion inhabitants, approx. 9 billion coins – with tendency to rise. This estimate is based on the observation that both nations – like many other newly industrialized countries – have not yet been fully urbanised and that in the years to come this will lead to an increase in coin production which is big enough to easily outbalance the losses in the eurozone.
Compare this: with “only” 126 million inhabitants, but a population density of nearly 337 inhabitants per km2, Japan generates a demand for 3.5 billion coins – almost as much as the entire eurozone, although the eurozone has a population density of only 116 inhabitants per km2. The 225 million coins that were needed for Hong Kong’s 7 million inhabitants (Hong Kong has a population density of almost 6,400 inhabitants per km2) present an even more incredible number. In other words, whereas a densely populated area like Hong Kong requires 32 coins per inhabitant, Japan needs only 10, the EU 8 and India currently no more than 6. The demand for coins seems closely connected to the degree of urbanisation and that there will be a considerable increase in the latter within the next years should be beyond question.
If you also take into account the fact that many countries are currently considering the substitution of their smallest banknotes by coins, there is a high probability that legal decisions will influence the output of individual mints, but not the overall output of minted coins.

The question of national pride:
The question about the connection between state-owned mints and national pride can be touched upon here only briefly. Whereas in Europe national pride easily gives way to economic benefits – just remember the end of Swedish minting on Swedish grounds after almost a millennium in 2001, the tendency in other parts of the world seems to be a slightly growing emphasis on national identity. The question is in how far this could lead to an increase of national mints, which in turn would make the already contested market of minting even more heavily contested.

What Sandy taught us:
Do you still remember Sandy? The hurricane which led to floods and power outages and completely paused public life in New York? It showed how useless credit cards and gold reserves become once a natural disaster disables all technology, even if only for a short time. That is why every government should feel responsible for providing alternative payment systems, which cannot easily fall victim to natural catastrophes or also to terrorists.

Summing up the results, we may say that, for now, governments worldwide are currently not interested in completely stopping payment with and production of coins. Even if the majority of the big industrial nations were to abolish the small denominations, the considerably diminished production volume would be more than balanced out by the global increase in the degree of urbanisation.

The economy
You would like to think that nowadays it is the economy which pushes every development in monetary transactions. It is the big internet and phone companies that have discovered the cashless payment transactions for themselves whereas the banks merely continue to stoically exist. But the fundamental conflict of interest remains: the merchant who receives a payment wants to pay as little as possible for it while the company transmitting the payment wants to profit from it as much as possible.
Consequently, merchants will only turn to newer, more expensive payment systems if left no other choice. But especially the retailers have another choice: Change is still the cheapest method of payment. And traditionally it is in retail trade that coins are predominantly used, which may be the reason why credit and cash cards have not substituted coins in everyday life to the extent imagined in the 80s.
Newer payment methods do not seem to supersede older ones – at least not in a way that is dangerous, but merely to establish them in areas which require new forms of economic transactions. Paying a restaurant bill with Paypal makes no sense. It makes a lot of sense, on the other hand, if you want to transfer smaller amounts of money internationally, say, in the context of online shopping. The success of M-Pesa in Kenya is mainly due to the fact that there is no alternative. It remains to be seen if merchants and customers would continue to use it if sufficient cash, which is still the cheapest means of transferring money, was easily available everywhere.
So it is in the interest of the most important transfer site of coins, retail trade, to continue to accept cash as valid payment method and to promote its usage. The economy cannot be expected to cause a change as long as all newly founded companies want to use their newly created payment methods to make the same old profit as others used to make before.

We: the consumers
In the Germany of the 60s, the average citizen could still conduct all business transactions without having a bank account. Today that is not possible anymore. Instead, the mature modern customer has to choose from a variety of payment methods. He does this by acting as he always does, i.e. by choosing the cheapest, least complicated and most convenient payment method.
That means, he acts as usual: in a shop, he pays smaller sums in cash and larger ones by credit card. Bills are paid via transfer, preferably online. In Switzerland, he asks for a pay-in slip and submits it at the post office. Paypal only comes into play if he has ordered something online from a dealer located in another country.
It is quite remarkable that this average citizen seems to remain calm whatever happens. Not even the NSA scandal changed that. Though fully aware of the fact that intelligences are able to reconstruct every single payment conducted electronically, people all over the world continue to use electronic payments without further hesitation.
Obviously, the frequency of credit card use and cash payments varies in different countries. In sparsely populated countries such as Norway or Sweden, people tend to use credit cards more often than in Germany, where the next mall or the next ATM is usually not more than 500m away. So, consumers cannot be expected to show much own initiative. They will continue to act as they used to.

The logical conclusion of everything that has been said so far must be that the next 10 years will see transnational shifts with regard to the demand for cash money but probably no fundamental changes. Long-term prognoses should be treated with care. Otherwise, you might end up like one of the people at the end of the 19th century who predicted that one day city centres would disappear under heaps of horse manure from all the hackneys…

You can find out more about the future of cash in our archive.