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TWN Info Service on Finance and Development (Mar18/02)
20 March 2018
Third World Network

  
Cash is still king in most countries
Published in SUNS #8645 dated 20 march 2018


Geneva, 19 Mar (Chakravarthi Raghavan*) - Despite many innovations, and efforts in many countries to move to "cashless" payments, the appetite for cash remains unabated and there is scant evidence of a shift away from cash.

This is the conclusion in a special feature paper in the BIS Quarterly Review of March 2018. [Full text of the paper can be accessed at: https://www.bis.org/publ/qtrpdf/r_qt1803g.htm]

A footnote in the paper, authored by Morten Linnemann Bech, Umar Faruqui, Frederik Ougaard and Cristina Picillo, carries the usual disclaimer in such papers, namely, that the views expressed are those of the authors and do not necessarily reflect those of the Bank for International Settlements (BIS).

According to the paper, retail payment systems across the world continue to become faster and more convenient.

Yet, despite increased use of electronic payments around the world, there is scant evidence of a shift away from cash.

As the appetite for cash remains unabated, few societies are close to "cashless" or even "lesscash", note the authors.

In fact, note the authors, demand for cash has risen in most advanced economies since the start of the Great Financial Crisis (GFC).

This resurgence appears to be driven by store-of-value motives (reflecting lower opportunity cost of holding cash) rather than by payment needs.

In most advanced countries, cheques have disappeared or are dying a slow death. Credit or debit cards are now accepted by all but a few merchants. New electronic payment (e-payment) services are emerging around the world and are increasingly instant, ubiquitous and available around the clock.

Many types of payment usually done with cash are going electronic. In Denmark, for example, church collection boxes and street performers now accept mobile payments.

In China, fast food can be bought using "smile to pay" facial recognition technology. In the United States, college students pay for pizza and beers using applications that broadcast the purchases to their social media friends.

In general, innovations are putting the traditional bank-based payment system under pressure both within and across borders.

The proliferation of mobile phones has, in some developing countries, allowed payment systems to leapfrog those in more advanced economies.

For example, in Kenya and other places, mobile payments flow without bank accounts.

Going forward, crypto-currencies as well as fintech applications - the subject of feverish innovation by both small startups and large firms - will likely further disrupt existing business models, according to the authors.

In addition, some central banks (eg Sveriges Riksbank) are considering the need to issue a digital version of cash.

Payments are currently seeing another period of rapid innovation and transformation. The use of e-payments is booming and technology companies as well as financial institutions are investing heavily to be the payment providers of tomorrow.

On the face of it, all this points to a shift away from cash (i.e. notes and coins). However, the data, so far, say otherwise.

Despite continuing digitalisation, "reports of the death of cash are greatly exaggerated," say the authors.

Cash in circulation is, in fact, not dropping for most countries. The continuing demand for cash has been especially noticeable in advanced economies since the start of the GFC, and is likely driven by store-of-value motives rather than payment needs.

Based on the "Red Book" statistics on payment, clearing and settlement systems collected by the Committee on Payments and Market Infrastructures (CPMI), cash in circulation and card payments (a proxy for e-payments) have both increased since 2007.

Only Russia and Sweden show evidence of substitution between cards and cash.

[Like the US Federal Reserve's "Beige Book", the name "Red Book" comes from the red cover when it was first published in 1985, explain the authors of the paper, in footnotes. It gives an overview of the transactional flows through payment, clearing and settlement systems (i.e. for retail and wholesale payments, central counterparties and securities settlement systems).

[Among other things, the data include the value of cash in circulation (by denomination), the number and value of card payments and information on point-of-sale terminals and automated teller machines (ATMs). The most recent edition of the Red Book, covering data for 2016, was published in December 2017. Starting with the 2018 version, the Red Book will be revamped, partly in order to capture more aspects of e-payments, such as online and contact-less methods, and the data in revised versions of future should enable better analysis.]

Cash in circulation, a stock measure, is not equivalent to the use of cash for payments, a flow measure. However, comparable cross-country data on cash use are not available and cash in circulation is often used as a proxy.

Card payments and cash demand have generally increased since 2007. People are using cards for payments more frequently and for ever smaller transactions.

This is driven, in part, by more people holding cards (in emerging market economies, EMEs) and greater availability of point-of-sale (PoS) terminals (in both emerging and advanced economies).

Nevertheless, the demand for cash remains robust around the world, except notably in some Nordic countries.

Furthermore, many jurisdictions have seen an increased affinity for cash following the Great Financial Crisis (GFC).

In India, note the authors, towards the end of 2016 the Indian government announced the removal of all INR 500 and 1,000 banknotes (i.e. demonetisation) and the issuance of new INR 500 and 2,000 banknotes.

Cash in circulation dropped by more than 40% between 1 November and 31 December 2016.

The latest data from the Reserve Bank of India (RBI), however, show that cash in circulation in February 2018 was almost back to its November 2016 level, according to the paper.

[The Indian government's decision, making INR 500 and INR 1000 banknotes invalid, was announced on 8 November 2016 evening by the Prime Minister of India, who mentioned three broad objectives: attacking corruption, counterfeit notes used in "terror financing" and the "black economy" (income and wealth that has evaded the tax-man, and held in cash). The official notification next day mentioned only the last two objectives (but not the first).

[The notification (with several subsequent explanations, clarifications and changes) outlined where and how, and till when, the invalidated currency could be exchanged for valid currency, and the uses in the interregnum, where the invalid currency could still be legally used to make payments, such as in hospitals and some other essential services. Much later, official pronouncements suggested that one of the aims of the demonetisation was also to encourage "digitalisation", thus bringing more of the country's informal economy/sector into the formal. The entire exercise has become quite controversial within the country, with some echoes outside in financial media and blogs and websites.

[According to Rammanohar Reddy (in "Demonetisation and Black Money, 2017, Orient Black Swan), the announcement invalidated INR 14.18 trillion of currency or 86% of INR 16.41 trillion of currency in circulation. As of the date of this writing, the Reserve Bank of India is yet to publish FINAL data on how much of the demonetised notes were returned to the system and substitutes in smaller or bigger denominations were obtained, and how much of the invalidated currency never came back into the system and thus got extinguished.

[In its annual report released on 30 August 2017, RBI had said that "subject to future corrections based on verification process when completed," the estimated value of the banned notes it "received" was Rs 15.28 trillion. This compared with the Rs 15.44 trillion of the invalidated notes that were in circulation as of 8 November, according to data provided by the finance ministry to Parliament on 21 January 2017. In November 2016, the Indian Supreme Court was officially told by the Attorney-General (the highest law officer of the country) that around Rs 4-5 trillion (unaccounted or black money) would probably not find its way back into the system.

[In January 2017, the government decided to use data analytics to identify people whose deposits didn't match their known sources of income. According to a finance ministry note to a parliamentary committee, demonetisation had resulted in a 24.5% increase in the number of income tax returns filed till 5 August. According to the Prime Minister of India (Independence Day speech, 15 August 2017), more than Rs 1.75 trillion deposited in banks after demonetisation was under the scanner of tax authorities to identify people whose deposits didn't match their known sources of income.

[According to RBI, the volume of cash in the banking system has come down by 17%. Total currency in circulation fell from Rs 17.77 trillion on 8 November 2016 to Rs 14.75 trillion on 4 August 2017, according to the finance ministry. The invalidation also resulted in an increase in digital transactions. The number of digital transactions increased 56% between October 2016 and May 2017 to 1.1 billion. The costs of the entire exercise, according to RBI's annual report, resulted in a decrease in its income and increase in expenditure, effectively halving its net profit.

[( http://www.livemint.com/Industry/e73ZjH3vLuj6tlIn2b6wSJ/RBI-89-million-out-of-67-billion-Rs-1000-notes-not-return.html);

( http://indianexpress.com/article/business/demonetised-notes-are-being-shredded-briquetted-says-rbi-5102147/), (I.E. 18/03/18)

[Part of the confusion and controversy in India can be traced to the varying responses (with some caveats in footnotes) of the government and the RBI, at varying points of time, to Parliament, to public seeking answers under Right to Information laws, to international organisations like the IMF and BIS, and data provided in published RBI statistics. It will probably take some years before the real picture, and meaningful analysis will be possible. SUNS].

Around the world people are relying more and more on e-payments. Data on card payments (defined as e-payments made with a plastic card at a PoS terminal) are currently the most comparable and consistent cross-country data on e-payments in the Red Book.

The value of card payments for CPMI member countries increased from 13% of GDP in 2000 to 25% in 2016, says the paper.

Not surprisingly, card use varies significantly across countries but there is no apparent difference between EMEs and advanced economies.

The value of card payments (relative to GDP) is only around 10% in Germany, Japan and Mexico, but is over 40% in Korea, Saudi Arabia and the United Kingdom.

People hold more cards and use them more often. The average number of payment cards (eg credit and debit cards) per person in CPMI member countries rose from 1.1 to 2.5 in the 2007-16 period. Cards issued in EMEs drove this increase, as cards per person were little changed in most advanced economies.

The frequency of card use increased from around 60 transactions per person on average in 2000 to close to 85 in 2016.

In Australia, Korea, Sweden and the United States, the average person uses a card more than 300 times per year while in India and Mexico the number is less than 25 times a year.

At the same time, the value of a typical card payment has declined. Over the last decade and a half, the average value of a card payment (in nominal terms) has dropped from above $60 to less than $40.

This decline has been most pronounced in Brazil, Korea and Russia. In 2016, the smallest average value of a card payment was around $8, in Brazil and Russia.

One reason why cards are being used for an increasing number of ever smaller payments is better and more widespread infrastructure.

PoS terminals used to be fixed terminals installed on counters but they have increasingly been replaced by more convenient mobile terminals.

Lately, lower-cost smartphone or tablet-based PoS terminals have emerged, encouraging even smaller businesses to invest in them.

The density of PoS terminals has correspondingly risen. In CPMI countries, their density has doubled between 2007 and 2016 to 13 per thousand inhabitants.

Density went up for all jurisdictions but the largest increases were in Canada and China. On average, there are 27 PoS terminals per thousand people in advanced economies and 11 in EMEs.

But cash still rules in many places. Cash in circulation (scaled by GDP) is frequently used as a proxy for cash demand. Since 2000, cash in circulation is up from 7% to 9% of GDP (on average) in a sample comprising CPMI members and 22 additional countries.

"Why is the demand for both cash and card payments rising? And, in particular, why has the demand for cash remained so robust?"

According to the evidence found by the authors from data, the increasing demand for cash is driven, in part, by the lower interest rates (hence a lower opportunity cost of holding cash) that have characterised the post-crisis period.

The increase is primarily due to an up-tick in advanced economies following the GFC.

Overall, a majority of countries saw higher cash in circulation, with the largest increases occurring in Hong Kong SAR and Japan (by 9 and 7 percentage points of GDP, respectively).

In contrast, in China cash demand declined by 5 percentage points of GDP.

Cash demand varies considerably across countries. While one might expect EMEs to have higher cash demand, no such pattern is evident from the data.

According to the latest Red Book, for 2016, cash in circulation is below 2% of GDP in Sweden, but 10 times larger in Japan at 20%.

Demand even differs among countries that are otherwise similar in terms of economic and social characteristics.

One such example is the Nordic region. At the start of the 2000s, Iceland's cash-to-GDP ratio was as low as 1.2%, while Denmark, Norway and Sweden were clustered at around 3-4%.

Since then, cash demand has shown a secular decline in Sweden and Norway, while in Denmark it has remained stable at around 3.5%.

However, in Iceland, cash demand has more than doubled since its banking crisis, and now exceeds that of Norway and Sweden.

As with cards, the infrastructure supporting cash has improved. Since their debut in 1967, automated teller machines (ATMs) have become the key means through which people access cash.

Like PoS terminals, ATMs have also evolved; most ATMs now accept cash deposits and some also provide other banking services such as bill payments.

The number of ATM terminals per thousand inhabitants has surged over time. In CPMI countries it has risen by 50% since 2007, from 0.4 per thousand people in 2007 to above 0.6 in 2016.

Over the same period, the amount of cash withdrawn rose from 12% to 20% of GDP.

These increases were driven by rapid growth in EMEs, where the number of ATMs as well as the amounts withdrawn rose significantly.

In contrast, for advanced economies ATM density is, in general, little changed since 2007. An interesting case is the Netherlands, where the density of ATMs declined, in part, because of a shift towards using the "cashback" option at the point of sale.

The rapid rise in the mobile payment solutions in China (eg AliPay and WeChat) has likely contributed to this decline in cash demand.

Lastly, the value of ATM withdrawals in advanced economies saw disparate trends.

Withdrawals as a share of GDP fell for the Netherlands, Sweden and the United Kingdom, stayed unchanged for Belgium, France, Germany and Switzerland, and increased for Italy.

The relationship between ATMs and cash demand is not straightforward. ATMs can both boost and constrain cash demand.

On the one hand, by facilitating easy access, ATMs increase cash demand. On the other hand, wider distribution of ATMs can reduce the amount of cash consumers hold, since they can withdraw it as needed.

It is difficult to determine whether higher cash demand leads to a greater supply of ATMs or vice versa.

Cash, like other forms of money, is used both as a means of payment and a store of value. Banknotes sewn into a mattress are likely held for store-of-value purposes but it is harder to tell whether a banknote in a wallet is held for one or the other motive.

A common way to try and disentangle the two types of cash demand is to assume that larger-denomination notes are mostly held as a store of value and smaller ones for payments.

The most valuable notes currently issued by CPMI members are Switzerland's CHF 1,000 and Singapore's SGD 1,000 notes.

The most valuable note still in circulation (but no longer issued) is the SGD 10,000, which at end-February 2018 was worth a cool $7,600.

The issuance of the CAD 1,000 bill was stopped in 2000 and the European Central Bank (ECB) plans to stop the issuance of the EUR 500 banknote at the end of 2018.

In contrast, countries whose largest-denomination notes have the smallest value are China and South Africa.

The relative share of total cash in circulation accounted for by large notes varies greatly across the CPMI countries.

For Mexico and Sweden, the large-denomination notes comprise less than 10% of the outstanding stock of cash in circulation while in Hong Kong SAR, Japan and Saudi Arabia, these notes constitute more than 75% of the total.

The evolution of large- and small-denomination notes suggests that cash is being increasingly used as a store of value rather than for payments.

Over the last decade, the demand for large-denomination notes has outpaced that for smaller denominations.

In fact, a handful of countries (eg Korea and Russia) saw the demand for smaller-denomination notes have declined and that for larger-denomination ones have increased.

Sweden is again an outlier: demand for all notes has decreased since 2007.

Other things being equal, the authors of the paper expect store-of-value demand to fall when the forgone interest of holding cash increases. In contrast, transactionary demand is expected to be less sensitive to movements in the policy rate.

The authors of the paper point to several uncertainties, overall (due to data problems), and country-specific ones where variations may be due to cultural factors (such as preference for cash as against use of financial intermediaries, and propensity to pay tax or to avoid/evade tax etc), confidence in financial intermediaries, and other elements.

Higher levels of uncertainty (due to country-specific financial and economic uncertainty) may increase the demand for cash due to a number of precautionary motives, including diminished trust in financial intermediaries and less clarity about future payment needs.

Uncertainty would be positively related to cash demand, especially for the smaller banknotes.

Also, everything else being equal, cash demand is expected to be higher when the average age of the population increases.

Survey evidence shows that younger people are more likely to use electronic means of payments, whereas older generations tend to be more attached to cash for payments.

Both the total and transactionary demand for cash is also inversely related to GDP per capita. According to the paper, cash demand increases as the opportunity cost decreases.

The impact of opportunity cost is statistically significant for total demand and for large notes but not for small ones.

[* Chakravarthi Raghavan is the Editor Emeritus of the SUNS.]

 


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