Going shopping? Let’s go Dutch.

You might expect central banks to be somewhat ambivalent about the replacement of cash with more efficient electronic alternatives that reduce the overall total social cost of payments in the economy. That's because the minting of coins and the printing of banknotes is a very profitable activity and a central bank monopoly. It's not as lucrative as it used to be, because the high cost of metal has reduced the seiginiorage on coins (in fact, for low-value coins it is by and large negative already) and low interest rates have reduced the income from the note issue. I don't have exact figures in front of me, but I imagine that the Bank of England's income on note issue this year is somewhere between a half and a third of what it was a few years ago. The Bank of England don't actually get to keep the loot, I should point out, because they are forced to remit the interest earned to the Treasury. This is in effect a handy stealth tax on the poor, the old and, to be fair, the criminal since they are the people who use cash. I can't help but wonder why central banks aren't charged with at least contributing to an improvement in the efficiency of the payment system (that would be something they could do that is good for everybody!) but they don't seem to be.

In most developed countries the use of cash in economically useful transactions that are of benefit to the economy (for example, retailing) is steadily falling, whereas the amount of cash "in circulation" is rising, opening up the cash gap that we've discussed before. The Netherlands is an interesting case study, because it has almost universal bank account coverage, is almost exclusively PIN debit at POS and has the bank account-based iDEAL for online payments. The general populace has begun to dispense with low-value coins and at the other end of the money scale, Euroclear Netherlands has gone completely digital. There are no longer paper share certificates in the country that invented share certificates back in the sixteenth century. Incidentally, Belgium is going the same way, but with an interesting twist.

It introduced a 1% tax on shares being dematerialized this year, rising to 2% next year. That's just the start. From 2016, the paper will slowly but surely become worthless, with 10% of the face value evaporating each year.

[From In Belgium, Some Paper Fans Shirk the Shredder – WSJ.com]

The European Commission has proposed complete dematerialisation for 2020, and I shouldn't imagine many would argue with that, although I'm sure there will be a tinge of sadness attached to the passing of the share certificate. People who collect share certificates as history and art must hate people like Euorclear as much as people who collect coins and bank notes hate e-cash nutters like me. By the way, why not do the same with €200 and €500 notes prior to their abolition? Just pass a law that they will be worth 10% less each year… But back to retail. Some retailers are already cash-free and some supermarkets do not accept cash at night.

A coffeebar company in The Netherlands only accepts debit cards as a payment method, cash is banned. Tourist that fear being charged for purchases made abroad leave without their cappuccinos.

[From Payment Hype and Delusions of Grandeur | FinVentures]

Well, SEPA and the regulation of cross-border interchange will take care of all that (I have a prepaid euro MasterCard that I use in such circumstances). In so many ways the Netherlands is blazing the electronic payments trail, so I was surprised to read that the central bank is not more enthusiastic about getting rid of the inefficient and outmoded medium of exchange it is responsible for.

While not frowning per se on the current experiments with cashless shops, DNB says that it would regard any larger-scale refusal or pricing of cash payments as "undesirable".

[From Finextra: Dutch central bank comes down in favour of hard cash]

I thought I would check out some figures to see just what the dynamics are in the Dutch market. When I was last there (in fact, the last few times I've been there) I don't remember using cash at all except in the truly bizarre case of topping up my transit card in machines that don't take Visa or MasterCard.

The latest research by DNB reveals that the volume of debit card payments at Dutch points of sale has increased from €81 billion in 2010 to €84 billion in 2012. At the same time, cash withdrawals at ATMs dropped from €52 billion in 2010 to €49 billion in 2012.

[From DNBulletin: Cash: we can't do without it yet – De Nederlandsche Bank]

According to the figures from the Bank, however, Dutch M0 (the notes in coins in circulation) was €46 billion at the end of May 2013, up from €45 billion at the end of May 2012. In the last year, then, the use of cash at POS has gone down and cash withdrawals at ATMs have gone down, yet there is more cash in circulation. What is this cash being used for? The DNB bulletin doesn't say, but I think we should be told. If I was to take a wild guess, I'd say it was because one of the main uses of euros in the Netherlands is to avoid tax. This might be the toughest barrier for electronic payments to overcome: persuading small merchants to go legit. I'll blog some more about this soon, but for now I'll just flag up this this comment which, although it comes from India, accounts for a substantial fraction of the inertia in Europe.

What REALLY concerned me was that even if I wanted to get a receipt and pay extra and offer to pay the extra 2% to process electronic payments, or NEFT the money to the merchant, they were in most cases unwilling to accept these payments

[From (4) Can a swish of a pen – i.e. govt. policy – accelerate electronic payments?]

In other words, and to spell it out clearly, some retailers don't want to get rid of cash because they use it to evade tax.