The strangely simultaneous rise of cards and cash

By Suzanne Cluckey on ATMmarketplace

"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 apps that broadcast the purchases to their social media friends."

And yet, demand for cash continues to increase, observes the Bank for International Settlements, an international financial organization owned by 60 central banks and based in Basel, Switzerland.

	[youtube https://www.youtube.com/watch?v=eexhWAMc254?rel=0]
	"We're not that close to having a cashless or even a less cash society." Co-authors Umar Faruqui and Cristina Picillo discuss findings from Payments are a-changin' but cash still rules.(courtesy BIS)

So what gives?

In a quarterly publication titled Payments are a-changin' but cash still rules, Co-authors Morten Linnemann Bech, Umar Faruqui, Frederik Ougaard and Cristina Picillo examine data and trends in order to answer this question.

Along the way, the authors present a slew of statistics and some interesting asides, like: Do the millions of ATMs around the world drive the demand for cash, or do they merely deliver on it?

The article begins with the observation that — as we've all heard countless times — both cash in circulation and card payments have both increased since 2007.

Cards are crushing it

The authors note that the overall value and volume of card payments varied among BIS member countries — for instance, in Germany, the total value of card payments is about 10 percent of GDP; in the U.K., it's closer to 40 percent.

But with all countries lumped together, the average value of card payments as a portion of GDP rose from 13 percent in 2000 to 25 percent in 2016.

This increase was taking place even as the average value of individual payments declined by a third — from $60 in 2000 to $40 in 2016 — as consumers began to use cards to pay for purchases as small as a can of soda.

That has to mean a big increase in card use by consumers. In fact, the average number of card transactions per person per year has grown more than a third, from 60 in 2000 to 85 in 2016.

Cash is king

According to the authors, cash in circulation has grown 7–9 percent since 2000, driven by increased demand in developed nations following the global financial crisis. For instance, demand in Iceland has more than doubled since that country's banking crisis, which spanned from 2008 until 2011.

There seems to be no correlation between cash in circulation and level of economic development among countries, either, according to the report. For instance, cash in demand is less than 2 percent of GDP in Sweden, but 20 percent of GDP in Japan.

As one possible explanation of cash in circulation, the authors consider ATMs:

The number of ATM terminals per thousand inhabitants has surged over time. In CPMI countries it has risen by 50 percent 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 percent to 20 percent of GDP. These increases were driven by rapid growth in [emerging market economies], where the number of ATMs as well as the amounts withdrawn rose significantly.

But again, trends in developed countries are inconsistent — withdrawals as a share of GDP fell in some European nations (notably, Sweden and the U.K.), and stayed the same in others. Only Italy saw an increase.

The article observes that:

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. Moreover, it can be difficult to determine whether higher cash demand leads to a greater supply of ATMs or vice versa.

The current state of currency

The authors finally look at currency itself to explain the simultaneous increases in card use and cash in circulation.

Using statistical analysis and logic, they show that the demand for large-denomination notes over the past decade has significantly outpaced that for smaller denominations.

Based on this observation, they conclude, "The evolution of large- and small-denomination notes suggests that cash is being increasingly used as a store of value rather than for payments."

This is particularly likely given the low opportunity cost for holding cash with current central bank policy favoring low interest rates. A regression analysis by the authors confirms that, "Cash demand increases as opportunity cost decreases."

As any stockbroker can tell you, past performance is not indicative of future results. But two observations hint at the authors' expectations:

[T]he average age of the population is positively related to the total and transactionary demand for cash. This is consistent with survey evidence which 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.

And:

[Payments] have historically been the channel through which technological innovations first affected the financial system. They might even be the area where innovation brings the most benefits: Paul Volcker once quipped that the ATM was the only financial innovation that had improved society.

The takeaway:

In everything, innovation rules.

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Download the complete BIS quarterly review article, Payments are a-changin' but cash still rules, complete with graphs and footnotes.