[Dave Birch] The amount of cash in the US has gone up so some people are wondering whether this means that there is a cash “fightback” underway or whether it’s just a blip.

Several interesting hypotheses for this cash increase trend include:

Cash-based budgeting: Many nationally recognized “consumer financial advocates” (Suze Orman ring a bell?) have encouraged consumers to cut up their credit cards and get back to “cash based personal accounting… using budgeting tools like envelopes to track spending and minimize the “Starbucks Effect” of spending too freely and too often on expensive little treats. Despite behavioral economic evidence that suggests this type of “budgeting” does not necessarily improve the overall economic health of consumers, there may well be a number of consumers who eschew electronic payments in order to pursue this type of strategy.

[From Cash Usage: Reports of My Death Have Been Greatly Exaggerated – pymnts.com]

But cash doesn’t leave a record, so surely if you really wanted to manage a budget you would use a pre-paid card, a debit card or a credit card so you could go online and see where your money is going. Since online good and services seem to be cheaper than offline, you’d also end up spending more money, wouldn’t you?

The “Mattress Effect”: As the credit crisis worsened in 2008-2009, the failure of both large and small banks made national headlines, creating nervousness and uncertainty among many consumer deposit holders. Some observers suggest that this may have caused a portion of the population to avoid the traditional banking sector and keep their savings/reserves on hand in the form of cash.

[From Cash Usage: Reports of My Death Have Been Greatly Exaggerated – pymnts.com]

The proportion of savings held in demand deposits has been falling continuously for the last 60 years, not because people are keeping their money in cash but because they keep it in “near money” (such as Cash Management Accounts) made more liquid by information technology. But if you thought that banks were going to collapse and that the deposit insurance wouldn’t pay out because the entire economic infrastructure is going to collapse too, then what use would dollar bills be? You’d be better off buying toilet paper, because after the apocalypse, it might be the only luxury people can afford. People who put their money under the mattress are being ripped off (by inflation) while they sleep even when their cash isn’t being stolen or lost.

Increase of “informal economic activity”: With greater unemployment and economic uncertainty, the incidence of cash usage to avoid government tracking/tax implications may be on the rise, as individuals pursue casual employment opportunities “under the table” or small businesses look to avoid increased tax burdens by reducing the electronically traceable portion of their overall receipts.

[From Cash Usage: Reports of My Death Have Been Greatly Exaggerated – pymnts.com]

This, I suspect, is closer to the truth. Legitimate purchases are made with debit cards, for everything else there’s cash. When the financial crisis began, the trend to debit was continuing unabated.

PIN-based transactions grew 13% last year while signature debit transactions grew 9%. Those respective growth rates were the same as in 2008 but exceeded forecasts of 7% for each type. The average number of monthly point-of-sale debit transactions per cardholder remained unchanged at 17.3.

The median ticket declined from $22 in 2008 to $18 last year, which means consumers increasingly favor debit cards for small-ticket transactions, according to Ballard. Hayes notes that 58% of debit transactions are now for less than $20,

[From News]

Look, the big picture is clear. The overall use of cash to support the economy is falling. Over the last decade, it’s fallen considerably.

In our 1999 study, cash accounted for 39% of consumers’ in–store payments. Last year, cash payments made up just 29% of the payments mix — a dramatic shift for a country where cash has long remained king, even in the face of alternative payment options and emerging electronic channels

[From BAI Online | Banking Strategies | Jan/Feb 2009 | World of Choice: Consumer Payment Preferences]

But this has nothing to do with the amount of cash. The Federal Reserve’s latest statistics on currency show that both the value and volume of US currency “in circulation” continues to rise while the use of cash for transactions continues to fall. Have a look at the graphs here.

Currency in Circulation: Value

[From FRB: Data for Currency and Coin Services]

Who is using this cash? It’s not being used to support commerce and industry, so it must be being used for something else. If the conjecture earlier is correct, then it is clear that this cash isn’t being used for budgeting or to stuff mattresses, it is fuel for the “black” economy and in the case of Federal Reserve Notes, fuel for the global black economy, not just the domestic one.

Forget China: the $10 trillion global black market is the world’s fastest growing economy—and its future.

[From The Shadow Superpower – By Robert Neuwirth | Foreign Policy]

So, can the demand from the global criminal fraternity serve to prop up demand for greenbacks? It appears not: even with the assured patronage of the world’s drug dealers, money launderers and corrupt politicians…

Aite forecasts total cash usage will decline at about a 3% annual rate between 2010 and 2015

[From Untitled]

Cash isn’t launching a fightback. There are cashless environments in the US, and they are spreading.

Toll roads across America are starting to go cashless as a way to speed things up. The E-470 toll road that does a half-circle around Denver officially went all-electronic on the 4th of July… The President George Bush Turnpike in northern Texas turned off the cash flow on July 1st, giving motorists two options; pay through a Toll-Tag account, or get a bill in the mail… Those drivers without Toll-Tag accounts will have a ZipCash account created for them and will receive a bill in the mail (at a 45 percent higher cost).

[From Going Cashless In A Moving World | Culture Wars]

This isn’t a US phenomenon. There are examples from all around the world that show that cash is falling into disfavour. In the UK

the majority of people (57%) refuse to carry around one or two penny coins. Half of Blighty’s residents… give away small change. Unbelievably some even reported that they throw coppers and silver in the bin (trash)!

[From Barclaycard and Barclays Study finds the writings on the wall for cash « Near Field Communications / Smart mCommerce]

I don’t think this is an unusual finding. Small coins are near-worthless and nothing more than an annoyance. I used to keep cash in a dish on the kitchen table because I needed it to pay my bus fare, but now that I pay my bus fare on my iPhone, the coins are just a waste of space.

A new survey shows Australian spending patterns are changing, with one in five respondents saying they would like to eliminate cash altogether

[From Cash losing favour amongst shoppers | IR News | Inside Retailing]

The colonials certainly are revolting, but they still use cash more than we do. In the UK, cash has just dipped below 60% of all retail spending, whereas in Australia it remains slightly higher.

The proportion of transactions conducted using cash declined over the last three years, falling from 70 per cent to 64 per cent, according to a recent study. Figures from the Reserve Bank of Australia (RBA) showed that plastic and online payments have started to replace cash for purchases between $25 and $50, reports the Australian.

[From Cash transactions drop as Aussies favour debit cards – Mozo]

As readers of this blog will know, I’m fascinated by the evolving Australian situation because it is a living laboratory for the regulation of interchange.

“Visa is of the view that cash is an expensive, out-date payment option that does not well serve the interests of a modern economy like Australia’s, even in relation to smaller value purchases. It is a payment method that contains numerous embedded costs including production, replacement, handling, storage, transport, security, higher fraud rates, lack of traceability and accountability, higher rates of tax evasion and costs linked to its ease of use for the black economy, money laundering and terrorist financing.”

[From Visa calls for cash versus card review – Business – News – ZDNet Australia]

Hear hear! I hope I won’t be seen as a Visa shill if I say that I agree with them completely. The e-payment industry is just going with the grain of what the consumers want.

A study conducted by RFi last month revealed that 40 per cent of people between the ages of 18 and 34 prefer to use debit cards rather than any other payment method.

[From Cash transactions drop as Aussies favour debit cards – Mozo]

As far as I can see, then, the steady decline of cash is continuing, consumers are by and large happy with that. Governments (especially in Europe) are beginning to feel the pinch and the tax revenues lost to the less-regulated economy are becoming unaffordable. Maybe it’s time to push a little harder? Cash wastes a lot of money for banks, so maybe we should encourage the US banks to a) stop charging for debit cards b) start making cash less convenient. In the UK, Nationwide is raising the minimum on over-the-counter cash withdrawals significantly in order to reduce queues in its branches.

The UK building society is increasing the minimum cash withdrawal limit for FlexAccount customers with a Cash Card and CashBuilder customers with a Cash Card, from £30 to £100. Nationwide’s divisional director of the branch network, Graeme Hughes, told the BBC’s MoneyBox programme the change was essential… “About a third of all counter transactions are carried out by less than 8% of our customer base,”

[From Finextra: Nationwide bids to beat branch queues by stopping small value cash withdrawals]

Why do they let people make cash withdrawals across the counter at all? National Irish Bank don’t.

National Irish Bank has written to thousands of its customers this month informing them of a “new style of banking” in which branches will not handle over-the-counter cash transactions.

[From National Irish moves to cashless banking – The Irish Times – Tue, Dec 22, 2009]

Anyway, what else could be done? I think one thing to do might be to look at retail sectors where cash use is falling dramatically and then encourage the merchants (through tax breaks, as is done in some other countries) to reduce it further so that in time it becomes economically more sensible for the merchants to just give it up (because the costs are falling on fewer and fewer transactions). And perhaps here’s a place to start:

We used to pay for 90% of our beer in pubs with cash but it now we use it less than half of the time. The days of cash may be numbered with only one tenth of Londoners using cash, and a quarter of Northerners. Dave Birch, a payments expert and the director of consult Hyperion, tells “Wake Up to Money” that a cashless society may be closer than we think.

[From BBC – BBC Radio 5 live Programmes – Wake Up to Money, 14/04/2010]

Cash is fighting back? I don’t think so. I’m going to the pub over the road to explain my plan to them as soon as possible.

These are personal opinions and should not be misunderstood as representing the opinions of
Consult Hyperion or any of its clients or suppliers


1 comment

  1. Your point about the Nationwide is well taken but it is not as easy as that. I suspect a large proportion of the 8% are either (very) old or young. My sprightly 91 year-old Aunt happily uses her Barclaycard when shopping but resolutely refuses to use an ATM and still goes to the cashier. At the Nationwide, and many other banks, you cannot get issued with a card until you are c12, so you have to use the counter. This issue is probably not going to go away quickly aka cheques!

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