Trends in the use of cash

Trends in the use of cash

Cash is the most popular payment method in the world. We all know that. However, the increasing availability and the greater use of electronic media with rapid growth in transaction volumes along with an increasingly digital society lead us to ask, what is the future of cash? Will paper money be phased out?

The attributes of cash are still valued in most of the world. Africa is the continent that relies most on this method, while Oceania shows the least dependence on cash. The differences between regions and countries can only be explained by their histories, culture, demographic makeup, organization of the financial sector, and the availability of non-cash infrastructure as well as laws and regulations.

In the last ten years, a decline in the use of cash has been observed, but the trend is expected to slow down and even begin to reverse in the coming years. The resistance to go beyond the current threshold of cash reduction responds not only to the consumer demand but also to other measures taken by governments to ensure that this modality continues to be accepted.

There is a strong trend toward cashless. If we analyze what percentage of transactions are cash, we find that these transaction volumes appear to be growing in absolute terms. But at the same time, electronic payment transaction volumes are increasing at a faster rate. The result is a decreased participation of cash in the total payment mix driven by factors such as:

  • Digitization: Retail is rapidly moving towards eCommerce as shown in Figure 1. The greater adoption of mobile phones and the Internet, new technologies such as NFC (for contactless payments), QR codes, and the integration of electronic payment functionalities in social media platforms have facilitated the use of cards and mobile payments.
  • Real-time payments: Infrastructure improvements in many countries facilitate electronic payments and make them more direct, something that used to be found only in cash payments.
  • Greater availability of infrastructure for non-cash payments: Almost all countries show improvements in this regard, helping the volumes of non-cash transactions grow.

However, current reality shows that cash still has a strong foothold in societies around the world. A survey conducted in 24 countries showed that in 75% of them, the use of cash represents more than 50% of payment transactions. In Europe, the volume of cash transactions represents 78.8% and, in terms of value, 53.8%.

Cash has unique attributes that make it continue to be used despite the existence of other payment alternatives: it is 100% available and reliable, it is anonymous, it can be used directly without the need of any technical infrastructure. Also, unlike the credit card usage in many places, it has no fees associated with its use - although some banks charge for ATM withdrawal. ATM fees to non-customers can be between $1.5 to $3.50 depending on the brand and the country. 

Furthermore, it is essential for financial inclusion because it allows everyone, including more than 1.7 billion global citizens without access to bank accounts, to participate in society on a daily basis.

In addition, there are some fears associated with cashless societies. First, the lack of privacy related to the use of electronic media generates aversion, since all movements are registered. Some individuals fear being tracked and that governments, banks, or payment processors will know their financial movements. How much power will they gain with all this information? What will they do with it? Could they sell it, publish it, or even distribute it?

Fears of a cashless society

Another fear is sharing personal data for security reasons. The amount of information that cashless methods can handle makes many people worry about their integrity and lack of privacy if these are the unique forms of payment in the future. Moreover, cash empowers users, allows them to buy, sell, and store their wealth without depending on anyone. They can stay out of the financial system if they want to. Many fear to lose this power.

In a world without cash, there wouldn't be a lower boundary (there wouldn’t be a way to avoid negative interest rates, should they arrive) on interest rates. If depositors can't save in cash, they would be forced to pay negative interest rates to keep their savings in the bank.

Also, on different occasions in the history of countries, money deposits of ordinary people have been hijacked to rescue the banking and financial systems. If your life savings were threatened with confiscation, you would run to get them out. Finally, it is well known that relying heavily on digital payment systems is liable to catastrophic consequences in case of systemic failure or cyber-attacks. The fears of this type of failure or hacking are arguments in favor of maintaining a robust system such as cash, as a backup.

People who resist new technologies are more likely to continue using cash, which preserves all the most valued attributes of a desirable payment system. At the same time, a total replacement of cash usage with non-cash payment mechanisms is not expected in the short to medium term. However, certain new developments are entering the “cash territory”. For example, instant payments combined with mobility may be able to compete on equal terms with the direct settlement attribute.

It can be assumed that, while these attributes continue to be only fulfilled by cash and not by other alternatives, this method will continue to satisfy people’s needs and will remain widely used. At present, emerging non-cash payment methods seem to overlap and compete among each other without much affecting cash usage.

The advantages of cashless forms of payment have led some societies in the world to rapidly advance their adoption as a general modality. Some of the pros that can be found on cashless societies are:

  • The idea that less crime will occur: Cash is easier to steal and by not keeping records of transactions, it favors illegal trade.
  • Less evasion: It is more difficult to hide income and evade taxes when there is a record of each payment received. Money laundering is also hampered.
  • No movement of money: Both governments and businesses have costs of handling and storing paper money. In a cashless world, they are avoided. Apart from theft, they have to pay for cash processing both in employee time and in CIT (Cash In Transit) services, hardware to store, process cash, etc.
  • Paying for things while you are abroad gets easier: When people travel to a foreign country, they need to buy local change. Payments are easier if both nations handle cashless transactions.

On the other hand, they must face some difficulties associated with the loss of cash:

  • Less privacy: Every payment leaves a trace and it is impossible to predict what will be done with all that information.
  • Hacking: If there are no alternative means of payment, the consumer faces great inconveniences and perils if they are victims of hackers or theft from their accounts.
  • Technological issues: A system failure, blackout, lack of battery in a mobile phone or a simple error can cause problems in the system, leaving users with no other option to make purchases when they need to. Also, businesses have no way to accept payments from their customers if the systems don’t work.
  • Inequality: The entire poor and unbanked population would have difficulties  to carry out everyday tasks in a cashless society.
  • Fees: Despite some emerging payment methods like bitcoin don’t charge fees, some of them are unavoidable, eliminating the possibility of savings represented by payments of small amounts.
  • Less control over spending: Cash can easily transmit the feeling of spending, while electronic payments are so simple that they don’t easily lend themselves to the notion of real spending.

There are several countries that have already started on the path to cashless. Sweden is the most advanced, but societies like China, Finland, South Korea, UK, or Australia seem to follow in its footsteps. Let’s look at each case:

  • Sweden is on its way to becoming the first cashless society in 2023, with about 80% of citizens paying with a credit or debit card for their purchases. Digital payments are widely accepted and even children use debit cards. Some analysts agree that there is trust in the government and financial system.
  • Finland is ready to start the transition to a cashless society. It is the second country after Ireland in terms of card use, fifth in eCommerce spending, third in Internet banking penetration, and second in smartphone penetration.
  • China is behind Sweden on the way to become cashless, but due to the huge size of its population, non-cash payments are much more significant. The adoption of mobile payments has evolved rapidly as seen in Figure 2. One of the most popular forms of payment is by QR scanning.
  • South Korea is increasingly moving toward cashless with many people relying on credit cards and digital payment tools. 6% of GDP corresponds to eCommerce expenses, and on average, 100 transactions are made per card per year.
  • The United Kingdom is the second country in terms of eCommerce with respect to the GDP, only surpassed by China. Card or mobile payments are part of daily life and it is expected to complete the transition to predominantly cashless by 2025.
  • Australia has 70% Internet banking penetration and has been registering an accelerated growth in the use of debit cards (87% in five years) as well as in the use of digital payments.

It is believed that supporting and promoting the cashless society is an implicit way to reduce crime and tax evasion, but this is not necessarily the case. It is true that the anonymity associated with cash makes it difficult to trace and makes it a good option for criminal activity. However, criminals will always look for new ways. If cash is eliminated, they will find another system to transact in Paying in cash is legal as long as people comply with their tax obligations, although cash on hand can be used to evade taxes as transactions cannot be tracked. Countries like Sweden succeeded in reducing evasion not by eliminating cash, but by giving people tax incentives for paying for informal services such as cleaning and gardening through their bank accounts.

But will cashless really prevent crime?

Many times, cash is used to hide expenses even among members of the same family by facilitating anonymity. But the truth is that whoever wants to hide their expenses could find other ways such as digital currencies, secret bank accounts, and barter.

At the Future of Cash 2019 conference that took place in Athens, Greece, it was stated that cash circulation is growing, even in the most cashless-prone societies like Sweden. It appears that some transactions have inherent cash preference, and represent a base level of usage that is not expected to drop.

At the same time, more and more people are holding banknotes as a store of value and this explains why the circulation of cash continues to increase. However, the number of cash transactions is shrinking, sometimes rapidly. The use of alternative payment methods, especially contactless and mobile, is growing.

In 2018, only 1.3% of total transactions in Germany were contactless, and in the US, 3%. France, Finland, Greece, the Netherlands, and the UK reported that once people move to contactless, their usage will grow very quickly. In the Netherlands, 2.7 billion transactions are made in cash every year, while in the UK, if the decline in the use of cash continues, 25 million people (47% of the population) will not be able to adapt in the available time.

In Latin America, the situation is very different from that of Europe and Asia. There is a high percentage of unbanked or underbanked consumers. According to Global Findex, in 2017, 55% of adults in this region had a bank account and that number barely grew 3% compared to 2014. The digital economy requires a bank account. In addition, there is low acceptance of electronic payments in many parts of the region, and consumers mostly use cash.

As the use of alternative payment methods grows in countries where the adoption of technology is widespread and card and digital payments are widely accepted, some trends indicate that the conversion will not be complete. A certain part of the population will continue to use cash for a long time to come.

There is much variation across regions and cultures. Governments and banks hold the position that while the use of cash decreases, cash circulation within the economy must be maintained to ensure general access to economic activity. In addition, adequate circulation must be preserved as a back-up in case payment systems get compromised, so that people can continue making purchases.

In the US, particularly in the cities of Philadelphia and San Francisco, the government has begun to impose fines on merchants that refuse to accept cash. Such refusals are considered discriminatory. The goal is to protect consumer payment choices, especially for lower-income populations and undocumented immigrants. This policy has already begun to be considered in other cities such as New York, and other states in the country are expected to follow suit. Cash in the USA will remain in circulation.

The UK is one of the countries that are rapidly moving towards cashless with many bank branches closing and greater difficulty accessing cash. However, The Access to Cash Review Interim Report has warned that acceptance of various payment methods, including cash, must be preserved. According to the report, 17% of the population -more than 8 million adults- are struggling to adapt to the cashless society.

In Spain, 84% of purchases are less than € 50, and 91% of them are cash. The total penetration of cash is 87% (Figure 3). When we compare cash vs credit card spending statistics, we find that credit cards are only used for online shopping or for payments that exceed € 50. 

In many European countries, people like to keep the traditional and most conservative methods of payment. Central European cultures’ preference for anonymity and security is deeply rooted, so cash is still the most widely used payment method in stores. Germany will remain a cash society. It is known that 75% of transactions use that method and most citizens have a cash reserve at home due to a low level of trust in the government and banking system, in large part caused by historic precedent. 

In Latin America, most merchants do not accept digital forms of payment due to the barriers they have: cost, infrastructure, limited access to business bank accounts. On the other hand, the high level of informality -close to 40% of GDP- stimulates the preference for cash because it does not leave transactional records. Banking system participation is low and there is little trust in financial institutions, and there are few banks to choose from, especially in rural areas.

The use of cash is and will continue to be for many years to come, deeply rooted in much of the world. This practice is directly related to the use of currency counting technology that includes money counter machines, cash counters, mixed currency counters, cash recyclers, and ATM machines, among others. These devices are used both to count bills and coins and to detect possible counterfeits. 

The global currency counting machine market is expected to grow at 3.94% CAGR from 2020 to 2026. The APAC region will originate almost 38% of that growth and the growth rate will be higher than in other markets like North America, Europe, and MEA. Regarding the ATM market, The Allied Market Research predicts it will grow at 5.5% CAGR to touch $ 21.9 billion in revenues this year.

In the US, there are about 500,000 ATMs according to ATMIA, and 66% are deployed in independent service organizations and their affiliates. Many of them are retail merchants with a single machine in their store or restaurant. They consider that ATMs are very important to their business and they have a significant impact on in-store sales and revenue. 

With the use of ATMs, complementary equipment becomes a must. Currency counting machines are increasingly being applied in more places such as schools, colleges, hospitals, and business organizations. They help handle large amounts of currency, count numerous banknotes, and detect counterfeits.

The increase in currency counterfeiting is also driving the demand for currency counting machines. The US Department of Treasury has estimated that the number of counterfeits in circulation could be around $ 200 million, or one every 4,000 genuine banknotes. Consumer awareness regarding this issue is rising and there are various governmental policies for the placement of currency counting machines in different organizations. Business and financial organizations, as well as retail stores, are driving significant market growth.

Carnation advanced counterfeit detection technology and state-of-the-art machines allow time effective detection of counterfeit and/or damaged banknotes. It is not limited to US dollars, as Carnation machines have the ability to add all kinds of currencies. Currently, they handle 62 currencies, and others can be added according to demand.

The increasing innovations in ATM and counting technology to meet the rising and more complex consumer needs are also driving the demand for this kind of equipment. Brands like Carnation have incorporated features such as serial number capture and printing capabilities. They require little or no specific technical knowledge, and can be handled by anyone in an organization. 

Although some economies make great advances toward the cashless scenario, this would leave a large part of the population outside the financial system, either because of their lack of resources or because of the difficulty in adopting technology. That is why some governments have started to take measures to stop it. Globally, Currency in Circulation (CIC) levels are expected to rise consistently relative to GDP. The relevance of cash in the economy is increasing and its importance will remain worldwide.
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