ATMIA, the leading non-profit trade association representing the entire global ATM industry, has published the following white paper on the international endurance of cash as a payment method, despite efforts by some governments to encourage its demise.
ATMIA White Paper
Promoting Choice In Payments
Despite the decade old war on cash waged by vested interests in Europe, and repeated predictions of cash’s demise, over 80% of worldwide transactions are still performed using hard currency. This is because cash’s benefits – clearly accepted value, simplicity of use, and universal acceptance – are valued globally across cultural and socio-economic backgrounds.
Nonetheless, some continually question cash’s future. This is partly due to increasing competition from alternative payment options. Primarily, though, it’s down to a deliberate agenda to artificially supress cash use, and this is concerning to all those who believe in choice and healthy free-market competition between payment methods.
Cash remains overwhelmingly popular and looks set to remain so going forward – provided people are afforded the freedom to choose their payment method. Although some economies are moving towards lower cash usage due to institutional pressure, the onus is on banks and governments to justify their rationale clearly, and on proponents of cash to provoke a balanced and informed public debate. This paper is an attempt to start that debate on a Europe-wide basis.
The evolution of payment methods
Cash was used as early as the foundation of ancient Rome to address the limitations of bartering as a trade method. Paper currency appeared around the 9th Century AD. Convenience, portability and security prompted general usage of cheques during the 1500s; plastic cards emerged in the years preceding World War 1.
Debit Cards as we know them today arrived in 1966 and were slow to catch on – there were only 300million US debit card transactions in 1990; but in 2010 the figure was nearer 38billion. Smartphones, particularly the 2007 Apple iPhone, ignited a mobile app explosion culminating in 2014 with ApplePay – it remains to be seen how seriously this will disrupt existing payments systems.
The resilience of cash
Every time a new payment method has arrived, predictions of cash’s demise have followed. These predictions have so far been proved wrong.
Only in the last half-century has real payment choice existed – previously, there was only cash, cheque and a few business-oriented banking instruments. Even today the payment options many take for granted are far from ubiquitous. According to the World Bank, around 3billion people live on less than $2.5 a day – those with the lowest spending power are unlikely to have access to new payment technologies. Cash’s popularity across developing nations is therefore unsurprising.
But cash also continues to thrive elsewhere. According to the 2011 World Payments Report (WPR), the amount of euro currency in circulation doubled since its introduction in 2002 and “consistently rises at a faster pace than the growth in non-cash transactions”. The value of US dollars in circulation more than doubled to £564billion between 1990 and 2000, increasing further to £942billion by 2010 – a significant rise, even accounting for inflation. This trend is continuing. In the Eurozone, notes in circulation after 2014 increased in line with the previous 6 years; the US situation is similar; Asian growth – especially in China and India – is even faster. The recent explosion in ATM numbers, particularly in China, probably partly explains this trend. When cash is convenient to access, people around the globe usually make it their first choice payment method.
Why do people keep using cash? There are several clear advantages, particularly for smaller value payments.
Globally, cash is universally accepted and its value is easily understood. Cash transactions require no third-party action or electronic connection. This eliminates transaction fees, and removes the uncertainty of awkward card declines or interrupted payments where it’s not clear whether funds have been transferred or not. Cash transactions are final – once the money changes hands, there is no danger of accounts being erroneously debited or credited further or for the transaction to be declined retrospectively.
This simplicity provides a security that electronic payment forms will never achieve, limiting the liability of a cash transaction to its initial value and protecting against fraud, identity theft or cybercrime. Cash also allows legitimate purchases to be made discreetly and anonymously, protecting people’s right to privacy.
Furthermore, cash is an effective budgeting tool. It’s easy to keep track of spending and many find the physical act of handing over cash encourages them to consider purchases more carefully. Indeed Cardtronics, a global manager of cash machine services, reported that US cash usage grew by 27percent between 2008 and 2009 as recession focussed people’s minds on budgeting.
The war on cash
In 2008 the European Commission aimed to encourage non-cash payments. Card Schemes seized on this and proclaimed the start of what became known as the ‘war on cash’. This gained more traction in some markets than others.
In Sweden, only around 20 percent of transactions are made using cash. Swedish cash transactions had declined since WWII as competing payment options emerged. But from 2005 cash in circulation dropped dramatically, driven by several factors unique to the Swedish market.
First, a 2009-2011 trade union initiative promoted alternatives to cash on the grounds of member safety. Second, Swedish celebrity Bjorn Ulvaeus – a former ABBA band member – waged a personal war on cash, publically declaring it “dirty” and “disease ridden”. He even banned cash at the famous ABBA museum, which is, perhaps unsurprisingly, sponsored by MasterCard.
The Swedish government and central bank (Riksbank), while not publishing policies on the subject, seem to want a cashless economy by 2030. In 2005, the Riksbank outsourced the production and issuing of currency to a company owned by the 5 major Swedish banks. Last year, that company made a dramatic hike in the charges for banknotes, which in turn saw demand halve, as cash became relatively more expensive than other payment options.
The 5 major Swedish commercial banks are also limiting public access to cash, with all their ATMs now operated under one umbrella company, Bankomat. Efficiency was cited as the reason for the grouping, but the result has been reduced ATM numbers, where only part of the gap has been filled by smaller actors expanding, and significantly curtailed convenient public access to cash. Some banks now make no cash available at over half their branches. Only one bank accepts deposits of coins. Retailers are also limiting cash use – even ice-cream sellers at park stalls have had to reject cash.
Yet a recent public survey revealed that over half of Swedes view the ability to use cash as a basic human right. This raises the question: are Swedes choosing not to use cash, or are Swedes not using cash because of coordinated campaign to make cash less accessible and convenient to use?
Chicken or egg?
Swedish authorities and banks argue that reduced access to cash reflects the trend of reduced cash use by the public. But the wildly different picture elsewhere can only be explained fully by the different levels of convenient public cash access. In the UK, where around half of transactions still involve cash, all 9000 bank branches still provide cash on demand; unlike in Sweden, both the absolute number of UK ATMs and the number per million of population are increasing.
In Russia, cash usage is particularly high. The Bank of Russia reports that over 90percent of commodity purchases are made with cash, and cash withdrawals account for around 85percent of ATM transactions. Alternative payment options carry fees up to 40percent. Although recent laws limit cash transactions to improve transparency, the logistical and demographic challenges of improving access to non-cash options will mean a continued Russian reliance on cash.
National variations are to found across the payment market. For example, whilst almost 100% of internet shopping in the UK is carried out using cards, in Germany and Poland over 50% of such purchases are made using cash, since many consumers insist on paying “Cash on Delivery”.
Most believe that a wide range of payment methods should be available to the public. ‘Card only’ and ‘cash only’ are equally unacceptable, as both restrict choice. Many are therefore concerned by attempts to artificially supress any payment method.
The variation in the pace of declining cash transactions echoes that of the other long-established payment method – the cheque.
Internet banking, direct debits, card use and fraud fears surrounding cheques have contributed to a fall in usage. However, this drop has not been uniform. In the Netherlands, cheques have been eliminated totally and deliberately from the payment mix; in the UK cheque usage has declined, but millions are still used every day as the government prevents banks from discontinuing them.
In the US, banks have actually invested heavily to make cheque use more convenient – to considerable public approval. ‘Cheque 21’ – a programme that allows the electronic deposit of cheques at ATMs – was recognised by Bank of America customers as the most important banking innovation of recent years. This is likely to be introduced into the UK during 2016, following pressure from the UK Government.
Transparency and communication
Critics question the reasons given by banks and governments for suppressing cash.
With so much public support for the continued use of cash, it’s difficult to accept the often repeated line that reduced provision simply reflects reduced demand. If that were the case, why wage ‘war’ in the first place? The public and even the cash industry understand and accept the benefits of cashless payments in certain contexts – convenience, the near-universal acceptance of major cards, their suitability for online or large-value purchase etc. – so why the need for heavily-funded campaigns against cash?
Cost is the most common reason given by banks against cash use. But cost to whom? Not to customers or retailers, who pay no fees on cash transactions, although banks may impose high fees for cash deposits. While plenty is made of the costs associated with cash (handling, security, transport etc.), the scarcity of information surrounding non-cash payments implies that they are virtually cost-free. In fact, card costs are recouped through fees to retailers and customers, including, of course, those costs generated by the huge amount of card fraud experienced worldwide.
The nature of non-cash transaction fees is also open to question. If the cost to a particular bank to process a transaction is X, this should not vary according to the value of the transaction. So why charge a percentage rather than a fixed amount? If fees recouped from card transactions are used to cross-subsidise other banking areas, this should be transparent to customers.
Governments supporting the war on cash also cite cost, in similarly vague ways. But governments do not steer the public towards cheaper goods or services elsewhere – so why make an exception for payment methods?
Along with cost, government ambitions to leave cash behind are attributed to public protection – from money laundering, terrorism, organised crime, tax evasion etc. Critics say that the other side of this coin – the erosion of privacy and civil liberties that come with increased electronic surveillance – is less willingly communicated to the public. The assumption also seems to be that cards are somehow “clean”, a claim that does not gel with the fact that virtually 100% of internet pornography is paid for using cards.
The future of cash
It’s clear that cash has a future, provided people are free to choose their preferred payment method.
Though banks have long harboured desires to move away from cash, they have an incentive to persist with hard currency. UK Payments Council research shows the heaviest users of cash are 16-24-year-olds; banks that make it easy for young adults to access cash will win customers earlier.
But if cash is to remain in the payments mix it must compete – and ATMs will play a key role. People now get 70 percent of their cash from ATMs, reducing banks’ distribution costs by over 80 percent. Innovations in ATM technology can cut costs further – for example, ‘cash recycling’ ATMs that accept cash deposits and credit customer accounts are common across Japan and increasingly popular in China and Germany. More and more, traditionally expensive branch functions can be completed at the ATM terminal. For this reason, it’s hard to accept ‘high processing costs’ as a justification for artificially supressing cash use and reducing public choice.
With cash the preferred payment method and store of value for over 80 percent of the global population, it’s important that any efforts to create ‘cashless markets’ come with public approval. This demands greater transparency from governments and banks when communicating decisions and their effects on citizens and customers. Those on the other side of the war on cash must work hard to ensure the public hears both sides of the story.