Don’t do as I do

The character of the contract between the government and the bank is of too intricate a nature to be readily fathomed or described, but it substantially amounts to the government borrowing the larger part of the fifteen millions of deposits, and allowing the bank to use the rest to cover the cost of printing and managing the note circulation.

This why there is a tension between the parts of government who profit from the interest on money in circulation and the parts of government who see cash as a drain on resources. In some countries there is also a tension between the parts of government who try to collect tax and government ministers who want to minimise on the overheads associated with complex record keeping.

Until a few weeks ago Giulio Tremonti, Italy’s finance minister, was paying one of his former government advisers €1,000 a week in cash for the use of a Rome apartment. Quite why Mr Tremonti felt it necessary to make his rental payments in cash, rather than by bank transfer or by cheque, remains something of a mystery… It is inconceivable that he is unaware of the role that cash payments play in perpetuating the chronic Italian disease of tax evasion.

[From Renting in Rome – FT.com]

As the FT politely noted, “Mr Tremonti’s cash payments set a poor example to Italian society.” Indeed they do. In fact they set a poor example for other societies to, including our own. I think that anyone who pays rent, or builders, or car dealers in cash should be prosecuted for conspiring to defraud Her Majesties Revenue and Customs. But that’s not to say that everyone in Italy is as pro-cash as the finance minister. The banks there recognise the high cost that cash imposes on Italian society as a whole.

The Italian Banking Association has declared “war on cash” [saying] it costs banks and companies as much as 10 billion euros ($13.3 billion) a year to process cash payments, mainly in increased security and labor.

[From Italian Banks Wage `War on Cash’ as Consumers Pass on Plastic – Bloomberg]

Well yes, but the efficiency of the banking system is only one of the drivers for cash replacement. In large parts of Europe, particularly Southern Europe, the financial crisis will, in my opinion, turn out to be a much more important driver for the adoption of electronic payments not merely for consumer convenience but for cash replacement.

Companies often pay salaries in cash to evade taxes, particularly in Italy’s southern region, where organized crime is prevalent.

[From Italian Banks Wage `War on Cash’ as Consumers Pass on Plastic – Bloomberg]

This should simply be illegal. End of. Bear in mind the scale of this problem at the time when the Italian government’s ability to repay its debt is a matter of grave concern and economists are openly discussing default.

Italy loses about 100 billion euros of revenue a year from untaxed transactions in the so-called underground economy, which amounts to about 22 percent of gross domestic product, according to government statistics. The Finance Ministry agrees with ABI proposals to make public offices accept electronic payments and install point-of-sale terminals.

[From Italian Banks Wage `War on Cash’ as Consumers Pass on Plastic – Bloomberg]

So even if the finance minister isn’t taking a stand against cash, the finance ministry is. As, as noted, are the banks, who have put forward a simple plan to get started.

Banks also want a ban on cash salaries…

[From Italian Banks Wage `War on Cash’ as Consumers Pass on Plastic – Bloomberg]

Now that’s fighting talk, if you ask me. It’s also not completely bonkers: some countries have done this already (in UAE, for example, you are not allowed to pay migrant workers in cash) and I think it makes sense. It doesn’t mean forcing people to have bank accounts, by the way, because for a great many people simple prepaid instruments would be a better choice for them and a better choice for the banks (who are forced to waste money providing “basic bank accounts” to people who don’t want them. Paying salaries electronically is the first step but it’s going to take something like that to make serious inroads into cash-based tax evasion. We need to make all transactions electronic as well.

And yet cash on the table is simply the only way to do business—even when buying homes or entire companies—for many people in Argentina. Transferring such money electronically would solve the problem in an instant. But in a society where income tax evasion runs about 50 percent and taxes eat up 65 percent of the money people do declare, many people are reluctant to use banks that way

[From Argentines risking all to carry huge wads of cash – Yahoo! Finance]

The point, though, is that if banks make cash reduction a strategic issue, then they can develop market-specific tactics and make the effective in the short term. Look across the water to where the National Irish Bank (NIB) is blazing a cash-free trail across the Emerald Isle.

By the end of this year, all of NIB’s remaining 33 branches will be cash-free. (About a fifth are already cashless.)

[From Farewell cash: e-banking is becoming more popular but some risk being left behind – Surviving the Recession, Personal Finance – Independent.ie]

I probably seem a little blinkered in these comments, because not all cash use is because of tax evasion, naturally. Some if it is for money laundering, corruption, drug dealing and organised crime.

And criminals prefer cash. Whitey Bulger, the Boston gangster who lived in Santa Monica for 15 years, paid his rent in cash, and stashed thousands of dollars in his apartment walls.

[From As Plastic Reigns, the Treasury Slows Its Printing Presses – NYTimes.com]

Note what was stashed in the walls. Not prepaid Visa and MasterCard products, not gift certificates from major retailers and not Oyster cards. Cash. It’s time for governments to get serious about cash and whatever the treasuries might say about seigniorage loss recognise that cash does significant damage to the economy. Other countries are beginning to take a stand and tackle cash use head on.

To discourage the use of raw cash in economic transactions in the country, the Central Bank of Nigeria (CBN) yesterday in a circular to all banks, Cash-in-Transit (CIT) operating firms, payments system service providers, as well as money card acquirers, issuers and processors, said that the new policies, including payment of increased penalties for cash transactions by individual and corporate bank account holders, are to help reduce the high usage of cash as well as moderate the cost of cash management among operators in the country’s financial system.

[From Central Bank sets new cash withdrawal limits]

Good for them. Remember, the costs of cash fall disproportionately on the poor, so in developing countries that means that most of the population pay the costs of cash while the benefits accrue to the few.

According to the CBN, about N150 billion is spent yearly to produce, store, transport, protect and destroy naira notes.

[From The Nation – CBN’s drive towards cashless economy]

That’s a billion dollars per annum that could be invested in more productive sectors of the economy, so no wonder any intelligent government would be working to actively reduce the amount of cash in circulation and to actively support the transition to ceaselessness at points of sale and service.

The CBN announced its intention to implement the cashless banking policy with effect from June 2012. It drew a lot of apprehension from the general public and stakeholders.

[From allAfrica.com: Nigeria: World Bank Endorses CBN Cashless Banking Policy]

It’s a bit like the announcement of the end of cheque clearing in the UK. I hope the CBN demonstrates more backbone that us Brits did in the face of reactionary whingeing. I hate the UK U-turn on cheques, not simply because my clients are from the e-payments sector but for what is says about the UK’s vision of itself, its dreadful backward-facing non-technologically informed leadership and national aspirations and trajectory as a supposedly developed nation. A truly forward-looking nation would move in a different direction. Look across the water to the Netherlands, where cash is on the way out in retail.

Marqt is a new concept-store, where you can get a wide selection of groceries, delivered directly from local farmers. It’s has the quality products you’d expect from an organic market, but the streamlined experience of a modern store, which means no cash, only PIN.

[From Marqt – Amsterdam, Netherlands – Shopping]

The use of language in this review is both illustrative and informative. A “modern store” means, amongst other things, “no cash”. I couldn’t agree more. I used to live in the Netherlands and have fond memories of my time there, but these are now being subverted by the green-eyed monster of jealousy!

Personally I live in a up-class village just outside of Amsterdam. In my village (7000 inhabitants) we have a supermarket that accepts no cash after 6PM whilst between 4PM-6PM only one cashier accepts cash. The IKEAstore in Amsterdam has 15 cashier-outlets: 3 for cash and 12 card-only.

[From Are Central Banks Killing Cash? | LinkedIn]

I live in an “up-class village” just outside of London and when I last went to the pub I had to walk round to an ATM to get cash (at my time and expense) because the pub only takes cards for transactions over £10. Perhaps the government should look at Korea and other economies where retailers are given a tax break to share the proceeds of cashlessness.

According to Deputy Minister of Taxes Sahib Alekberov, serious tax credits will be submitted to the persons implementing cashless payments using plastic cards

[From News.Az – Implementation of large cash payments to be banned in Azerbaijan]

OK, so maybe “back-to-Baku” isn’t a great rallying cry. We need to find a better figurehead to take the British public forward on a journey to a more efficient and more equitable economy. I don’t really understand modern politics, but I think getting an old pop singer on board might be an excellent first step.

“There are no direct practical reasons, as far as I can see, to have coins and banknotes,” wrote Abba star Bjorn Ulvaeus in a recent blog post. “There are obvious advantages in getting rid of them. Sweden should be able to be the first country in the world to do this.”

[From The Monetary Future: Sweden Considers Cashless Society]

Sweden is certainly an advanced nation and we should look to them for guidance and direction in many fields. But this isn’t one of them and I don’t want our United Kingdom to come second. We may not have Abba, but we do have a daft government initiative on e-petitions and an endless supply of nutters to propose them. So I hope that you will sign my e-petition to abolish cash and cheques in the UK within a decade as soon as it is approved. Watch this e-space.