Investment Banking

Time for Cash to tap out, or is there more to come?

July 2021

Read Time: 8 minutes

Pundits of the cashless movement have been predicting the demise of cash for over 70 years - ever since the issuance of the first credit and debit cards. The prophecies concerning cash’s demise have only become graver with the emergence of cryptocurrencies, digital wallets, contactless payments, and other new technologies. But is there any truth to these predictions? A much deeper investigation into the matter paints an interesting picture. There are many reasons why cash has been resilient for so long. To foretell its demise is far from simple and rather premature.

Let us look at some global trends that pose questions to a vision of a cashless society in the near future.

  • Developed economies have more cash in circulation since the early 2000s

    The USA and UK have seen a consistent increase in currency in circulation (CIC), outpacing even the nominal growth in GDP. CIC in the USA has increased by over 6% (nominal GDP growth: 3.7%) from 2000 to USD 2.15 trillion as of April 2021. The pace has only accelerated in recent years, with the notes in circulation increasing by c. 8% (nominal GDP growth: 3.2%) since 2015. Over the same periods, the UK has seen CIC increasing by 5.5% and 3.3%, respectively, while nominal GDP has grown by 3.4% and 2.3%.

  • Nordic countries are at one end of the spectrum, while the rest of Europe is at the other

    The narrative shifts slightly when we evaluate the situation in Europe. Sweden has led the bandwagon in going largely cashless on account of its evolved payments infrastructure, small and tech-savvy population, and high level of trust in banks and financial institutions, as per Professor Niklas Arvidsson at Stockholm’s Royal Institute of Technology. While Norway and Sweden lead the way for the cashless revolution, with the share of cash payments in retail transactions declining to 11-12% in 2019, the prominence of cash increases multifold in other European countries. The German Association of Money and Bond Services states that cash still accounts for almost 75% of the retail transactions in the country. According to a post-pandemic study conducted by Brink’s France, almost 97% of the respondents used cash frequently, while 74% used cash to pay for daily goods, up by 7% since May 2020. As in Germany and France, the preferred mode of payments in the Euro area is cash, accounting for over 73% of PoS and P2P retail transactions in 2019, as per the European Central Bank. 

Digital adoption is increasing rapidly, however, cash remains a dominant medium of transactions even in large, developed economies.

  • Despite drops post demonetization and the pandemic, India has witnessed a growth in CIC

    In India, cash has witnessed two significant jolts - demonetization and the Covid-19 outbreak. Post the demonetization announcement, the CIC dropped to INR 13.4 trillion in 2017, down from INR 16.6 trillion in 2016. However, it has seen a consistent rise to INR 24.5 trillion in March 2020 (pre-pandemic outbreak). It has further risen to INR 28.6 trillion as of January 2021, achieving a handsome 17% growth over March 2020.

Though economies are moving towards cashless and digital payments with time and the Covid-19 outbreak may speed up the adoption of contactless and digital payment modes, what remains to be seen is whether this behavior is temporary or marks a fundamental turning point in the debate of cash vs. digital payments. Given the trends, the question that arises is simple – Why is cash still popular? What lends to its enduring desirability in today’s global order, both in developing and developed countries? 

  • Cash caters to the unbanked and underbanked

    One of the key reasons for the sustenance of cash is the unbanked and the underbanked populations. Even in developed economies like the USA, 6-7% of the population remains unbanked, while 18-20% remains underbanked (implying they have a checking or savings account but still obtain financial products and services outside the banking system). Enabling digital payments presumes that individuals are within the net of the banking system. With the scenario being much worse in other developing economies, the death of cash, if at all, is still far into the future. As per a recent study by British research platform, Merchant Machine, the unbanked population is as high as 50% in the Middle East and Africa, 38% in South and Central America, 33% in Eastern Europe and the former Soviet republics and 24% in the Asia Pacific region. After the introduction of the PMDJY in 2014, the unbanked population in India has now reduced dramatically to 20%. However, there still exists a significant portion of the underbanked population among the 80%. While they have access to banking services, cash remains a predominant medium of exchange for them.


Cash remains an important transaction medium for the marginalized, underbanked and unbanked population, aiding their participation in the economy.

  • Cash is untraceable and tangible

    Even among the relatively rich, a balance of cash transactions is preferred, especially for large discretionary spending, given the untraceable nature of these transactions. To avoid government scrutiny over large ticket items, such practices are equally prominent in developed and developing economies. The sharp emergence of cryptocurrencies around the globe is a clear testament to the importance of this behavioral nuance. Additionally, there is a certain irrational attachment towards ownership and usage of cash, which is not the case for digital currencies. Research by psychologist Eric Uhlmann, from the Paris School of Management, underscores this thesis, revealing that people exhibit a stronger association with physical versus digital currency, despite both having the exact same value. This has also been seen in the strong reaction against the abolition of pennies in the USA and the 5 cent coin in Australia, despite the cost of production for these being higher than the actual value of the coins.


Cash holds significance across all strata of the society from a privacy perspective and helps satisfy an urge to own tangible monies.

  • Cash does not require unrestricted access to the internet

    As per the Global Digital 2019 report, 4.4 billion (c. 57%) of the world now has access to the internet and a further 5.1 billion (c. 67%) have access to mobile devices. Though these figures have been on the rise, a large part of the global population would be left out if there was a sudden shift away from cash. The problem is especially pertinent in developing economies. Further, there have always been concerns regarding downtime and system outage while using digital payment methods. It is also significantly more convenient to carry cash for smaller transactions from a perspective of speed, certainly, low risk and avoidance of digital payment charges.

    Having said that, though most literature and studies focus on the Americas, Europe and Asia, economies like Kenya have successfully transitioned in a meaningful manner to digital payments. M-Pesa driven by mobile phones has been a resounding success with almost 99% of the population using it. However, the point to be noted is that it is a medium to displace cash transactions (given physical safety and security concerns) and not cash per se. Users top-up their wallets at M-Pesa vendors using cash and retrieve it from them on receipt of any amount. The Kenya experience is also unique, since most of the telecom infrastructure is operated by Safaricon, the largest mobile operator. With a more evolved market structure with multiple operators, mimicking this experience may have its own set of challenges.


Developing reliable alternatives to cash would be critical in driving digital adoption. An ecosystem which allows for co-existence of digital and cash may be a more acceptable step in the transition away from cash.

The rise of digital modes of transaction has been a hallmark of the payments and financial infrastructure development of our times. However, it would be naïve for one to confuse the same with the obsolescence of cash. Cash remains and will continue to remain an important element of the financial ecosystem until a reliable and widely acceptable medium of exchange gets developed which captures its key essence – behavioral as well as practical – which makes it so popular. The medium of exchange would also need to account for the sheer diversity of the population using it, and the complexities associated with regulating it and the experience of using it. Until then, it seems like cash will continue prospering alongside digital transactions for the foreseeable future, albeit with a relatively meeker stride.


References:

  1. Data from https://www.federalreserve.gov/ as on 5th June 2021
  2. Data from https://www.statista.com/ as on 5th June 2021
  3. Data from https://fred.stlouisfed.org/ as on 5th June 2021
  4. Data from https://www.bankofengland.co.uk/ as on 5th June 2021
  5. BBC and other news articles 
Author: Anshul Agarwal, Executive Director and Co-head, Consumer, FIG & Business Services, Avendus Capital

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