The Future of Cash

It's Cheap, Efficient and Here to Stay

RBR’s research into the future of ATMs and cash dispensers started by questioning whether there would be a need for cash at all in the 21st century. It concluded that contrary to conventional wisdom, the amount of cash in circulation is rising, not falling, and the frequency of using cash to make payments remains roughly constant. The cost to the banks of each cash transaction in the economy is less than the cost, on average, of any other payment medium.

Cash is a cheap and an efficient method of payment, particularly for small, face-to-face transactions. Cash use is set to continue at similar levels to the present for at least several more decades, even though non-cash methods of payment will continue to flourish.

Cash Use Persists at High Level

One way to gauge the future is to examine trends in cash holding and cash use and to examine the factors which could affect this. The evidence from many countries shows that:

• the amount of cash in circulation is increasing year by year in almost every country in the world;
• even when these amounts are adjusted for inflation, the figures show stability or an increase in the real value of cash in circulation;
• the value of cash in circulation in proportion to the size of the economy is not changing greatly.

These conclusions have been found to be valid for all the major economies examined.

Direct evidence on cash use for payments is far less frequently found. However, in the UK, where good data over a twenty year period is available, the conclusions are that:

• the absolute number of transactions and purchases made in cash has remained broadly stable over the whole of the period;
• cash use as a proportion of all transactions has gradually fallen, but still accounts for over 70% of all purchases by private individuals.

A "More Cash Society"?

Whatever the conventional wisdom of a "less cash society", the empirical evidence shows that measured in absolute and real terms, the amount of cash in circulation is stable or rising, and cash use for payments continues at a high level.

This has happened during a period when many strong factors could have been expected to reduce cash use, ranging from booming use of plastic and other non-cash means, to payment of salaries directly into bank accounts.

It is unclear what forces in the next decades will be stronger than those of the past two decades, or why they should have a stronger effect. Electronic purses, for example, will take several more years to become established on any scale and even then will only address a small proportion of cash use.

Furthermore, there are factors which encourage the continued use of cash. For example, the very existence of ATMs makes it easier and more convenient to obtain cash, and black economies are flourishing in many countries.

Estimated Size of the Black Economy (as % of GDP)

Factors Which Might Have Been Expected To Drive Down the Use of Cash

(UK statistics)

Therefore it appears that, far from moving towards the "less-cash society" we remain in a "same or bit more cash society". Nevertheless, the total number of payment transactions appears to be rising; the use of non-cash methods of payment, new and existing, can be expected to continue to rise – with the result that cash will account for a gradually smaller proportion of total payments even though its absolute value and use will continue at broadly current levels.

Cash Cheap for Banks

Might banks themselves make cash withdrawals so expensive that the public is driven away from cash use? This is theoretically possible but such actions could prove unwise for the banks.

Banks are highly conscious of the costs of providing cash to customers. However a realistic comparison of the cost of replacing a single cash withdrawal with a multitude of low-value, non-cash transactions suggests that this will cause bank costs to rise unless the non-cash transactions can be carried out at a small fraction of the current price. The cost to the banks of each cash transaction taking place in the UK averages 8p, as compared to about 45p for each cheque, and 30p for each card payment and 20p for each electronic transaction. Work by the Bank of Norway similarly suggested that cash was the cheapest payment method in that country (see Bank of Norway Economic Bulletin 4/97).

Costs to UK banks of Domestic Payments

* Most cash transactions take place outside the banking system. If they were replaced by non-cash methods (such as cards) then costs to banks would rise as these transactions (currently at zero cost to the banks) would need to pass through the banking system with associated costs.

Furthermore banks can levy fees on cash withdrawals and in-payments and many banks are discovering that profits can be earned from well-sited ATMs from interchange fees for "foreign" transactions.

It therefore seems unlikely that banks would wish to price cash out of circulation. Even if they did want to do so, it is likely that other organisations would step in to fill the gap in the market by undercutting the prices charged by banks.

Implications of Findings

Given the stubborn persistence of cash, it is important both to plan for its provision to customers as efficiently as possible and to understand its long lasting appeal. Cash has benefits for consumers which are frequently underrated. Furthermore, before rushing to replace cash, it is vital to ensure that costs will be decreased by its substitution, which in turn means that the costs of non-cash payment will need to be brought down.

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