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Clinging to Cash: Latest Data Showing How Cash is Still King

30 July 2015  |  5563 views  |  5

 

Mark Twain famously said, “The reports of my death have been greatly exaggerated.”  The same could be said, unfortunately, for cash.  Although the death of cash has been discussed for many years and billions have been invested in more modern payment infrastructure and solutions, about 85% of all consumer payments around the world are still conducted in cash.  This post looks at the latest data and some of the reasons why people are still clinging to cash.

 

Data showing consumers are clinging to cash

People use cash for many different rational and/or irrational reasons.  Traditional economists lead one to believe that consumers are rational utility maximizers; however, the relatively new field of behavioral economics has highlighted the many irrational elements that go into affecting people’s decision-making and behavior.

David Wolman writes about these diverse elements in his 2012 book, entitled “The End of Money:  Counterfeiters, Preachers, Techies and Dreamers—And the Coming Cashless Society.”  Wolman summarizes his book as follows:  “A closer look at the long history of cash, its present-day costs and the flood of emerging technologies suggests that we may very well be on the brink of a monetary revolution.”

The BBC recently wrote “The Truth about the Death of Cash” in which they provide cash usage data and describe how cash is far from disappearing due to rational and irrational reasons:

  • In the U.S., cash in circulation grew 42% between 2007 and 2012, and the amount of American money floating around in bills and coins is expected to grow by about 5% each year.
  • In the UK, half the transactions by consumers in 2013 were with cash.  The current forecast is that this figure will drop below 50% next year (2016), but there is no prediction for cash to disappear.
  • There are now 1,400 supermarkets in the Netherlands that don’t accept cash, so card payments have been growing by 7-8% annually over the past few years.  And yet, cash is still king.  In 2012, there were 2.7 billion card payments, but an estimated 3.5 to 4 billion payments were made with cash.

“Time” magazine also recently published a piece by Bhagwan Chowdry, professor of Finance at UCLA’s Anderson School of Management, entitled “We Still Don’t Have Safe and Reliable Money.”  The author starts by saying:  “They said it was imminent.  They said so two decades ago.  But I am still waiting for a truly fast, reliable and safe form of money for people—all 7 billion of us.”

 

But cash still has many problems

Although cash is still king, Mr. Chowdry described the most pressing problems of cash:

“Cash is cumbersome to carry and store. It can be stolen and forged, remains un-invested and usually loses purchasing power over time, and cannot be transferred easily across large distances. And so, the pressing need for a digital currency that works.” 

In addition, cash has many hidden costs to a society and a disproportionate cost on poorer people.  Removing this inequity—along with the financial inclusion benefits for billions of people around the world—is reason enough to create innovative digital/mobile payment solutions to lower the use of cash.

 

Positive signs for less cash in the future

The most encouraging signs for using less cash emanate from Africa.  With the large number of mobile money initiatives in sub-Saharan Africa and, in particular, the success of M-Pesa in Kenya, recently some Mobile Network Operators (MNOs) have struck agreements which should broaden mobile money usage and further decrease dependence on cash.

That said, MUCH more progress is needed.  A new mobile money approach/solution is needed:  one which is more inclusive, technology- and MNO-agnostic, multi-issuer/multi-acquirer, and in compliance with all central bank regulations.

Forward-thinking financial institutions, MNOs and central bankers recognize the importance of innovation around digitizing cash… and creating the next-generation of mobile money—to increase financial inclusion, improve transparency, and reduce inequality.  Yes, cash is still king, but stay tuned in coming years.  Let us know what you think.

 

Clinging to Cash - Quisk blog TagsPaymentsInnovation

Comments: (8)

Ketharaman Swaminathan
Ketharaman Swaminathan - GTM360 Marketing Solutions - Pune | 31 July, 2015, 21:03

The same BBC article also said, "And it’s worth remembering that M-Pesa is a system for moving cash around, not a system to eliminate it. Users still hand cash to the M-Pesa vendors to top-up their accounts, and retrieve cash from them when money is sent to them." So, even the success of M-PESA does not imply less cash in future.

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A Finextra member
A Finextra member | 31 July, 2015, 21:16

Thanks for your comment, Ketharaman.  Assumption is that when consumers become more comfortable with mobile money and when there are more compelling use cases for keeping their cash in digital format--and this will take years--then their desire to immediately "cash out" after a P2P transaction will be reduced.

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Ketharaman Swaminathan
Ketharaman Swaminathan - GTM360 Marketing Solutions - Pune | 31 July, 2015, 21:50

@DanG: I agree that that's the assumption but I'm not sure if I agree with the assumption. Even when people are comfortable with digital money and there are more compelling use cases for keeping their cash in digital format, there's the question of trust: If I receive more money than I need to spend, I'd rather cash out when I receive the money and then reload it when I next need to spend it. If I don't receive more money than I need to spend, the whole point is moot: Digital or cash, anyway the amount of money in circulation is not so high!

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Astrid Mitchell
Astrid Mitchell - Currency Publications Ltd - sunbury | 03 August, 2015, 11:51

The years following the introduction of M-Pesa have seen a huge rise in cash in circulation in Kenya. So what M-Pesa has done has enabled P-2-P transactions, thereby increasing economic activity, thereby fuelling demand for cash. As for the irrational atatchment to cash, it's not always irrational. Look at what is happening in Greece (complete breakdwon of all payment methosds other than cash) and in Cyprus, where the govenrnment helped itself to up to 40% of peoples' money in their deposit accounts. With rock bottom interest rates and zero inflation at the moment, keeping cash is entirely rational for many people .

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A Finextra member
A Finextra member | 03 August, 2015, 16:47

Excellent points, Astrid.  Yes--I believe there are both rational and irrational elements at play.  Re: M-Pesa, it is still "early days"--or years, decades, generations--relative to physical cash.  Additional compelling mobile money/digital cash use cases must be created (vs. simple P2P and then cash out) for consumers in Kenya and elsewhere to want to keep their cash digital.

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Ketharaman Swaminathan
Ketharaman Swaminathan - GTM360 Marketing Solutions - Pune | 03 August, 2015, 17:04

If M-PESA paid interest on the balance, or if it charged hefty cash-in / cash-out fees, people would be motivated to keep their money digital within M-PESA.

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A Finextra member
A Finextra member | 15 September, 2015, 00:04

Ketharaman I agree wholeheartedly. For those multiple thouseands of people who own a cell phone and yet are unbanked, they have no choice but to constantly convert back and forth from M-Pesa digital to hard currency - there simply is no greater assurance of security to these people than to have their wealth in their hand.

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Ketharaman Swaminathan
Ketharaman Swaminathan - GTM360 Marketing Solutions - Pune | 15 September, 2015, 09:10

@BrendanBurge: Agreed. Last week, FORTUNE magazine has cited M-PESA in naming Vodfaone-Safaricom to the #1 position on its new list of 50 companies that have changed the world. I'm wondering if this accolade should change our views about trust / security!

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