Physical cash should still have an important — albeit diminished — role to play in the economy of the future.
Ever since the pandemic began, the use of cash around the world has been heavily demonized for increasing the risk of Covid-19 infection, with the result that physical money, long cast by its detractors as unhygienic and dirty, has become even dirtier in many people’s minds. In the minds of some it is too dangerous to even touch, As the World Economic Forum said in June 2020, “the (overhyped) concern that cash could help spread the virus” gave contactless cards and wallets a marketing boost, prompting “more stores to go cashless.”
This, together with the huge fillip that the on-off lockdowns have provided to e-commerce, has sharply accelerated the move away from cash, a trend that began many years ago.
In preparation of this article, I asked friends and family in Barcelona (where I live), the UK (where I’m from), Mexico (where my wife is from) and a few other far-flung places about how their payment habits have changed in the wake of the SARS CoV-2 pandemic. The response was almost universally the same. With a few notable exceptions from the Mexican contingent, almost everyone said they are using cash a lot less than before.
My friends in the UK, already one of the world’s most cashless economies before Covid struck, are hardly using cash at all now. Many supermarket retailers are politely but firmly urging people to use contactless methods, ostensibly to reduce the risk of covid-19 contagion, even though people are just as likely to catch covid from any number of supermarket items, including, of course, digital payments PIN pads. In a country where a majority of people had already bought into the speed and convenience of cashless payments, the effect has been to push cash even further to the margins.
“I don’t use cash unless I have to,” says Stuart, who lives in Chester. “My favorite Chinese takeaway only takes cash and it is annoying… but worth it. That is pretty much the only time I have used cash in the last 12 months.”
The situation in Spain is somewhat different. Before the pandemic it was one of Europe’s most cash-heavy economies. But even here, cash’s role is dwindling. In my neighborhood of Barcelona (Eixample Dreta), cash is being used in roughly one in three transactions, based on my own observations and canvassing of local retail businesses. More and more people are using mobile payment platforms to settle P2P payments. Bizum, the free-of-charge (for now!) payment platform launched by Spanish banks five years ago, doubled its number of users to 13.2 million in 2020. That’s more than a quarter of the population.
“Much depends on demographics,” says Yahya who runs a local bar. “Broadly speaking, the older you are, the more likely you are to use cash. Under-35 hipster types from North America or Northern Europe don’t seem to even know that cash exists. By contrast, over-35 year-olds of Asian origin almost always use cash. Almost all of my female punters pay by card, even for a €1 cafe solo. Perhaps they are more afraid of the virus and believe that paying by card is a safer option.”
It’s a similar story in Italy, another country with a soft spot for physical lucre as well as a long history of tax evasion. According to the Bank of Italy, since the first lockdown cash has been used less and less for large transactions. The government has tried to capitalize on this trend by offering financial inducements to encourage people to use traceable cashless payments more often. Since December 1, the state has pledged to refund Italians 10% of all their credit or debit card spending up to a ceiling of €3,000 euros. It has also offered tax breaks for outlets with card machines and a new €50 million state lottery for card users only.
But there is still a danger of exaggerating the decline of cash, especially given that so many people still depend on it. In the UK, the Access to Cash Review warned that more than 8 million UK adults, including many elderly, would struggle to cope in a cashless society. For many people it is the only option available. In the U.S., 6% of American adults don’t have a traditional checking or savings account, according to the Federal Reserve. Using population estimates by the U.S. Census Bureau, that comes to more than 14 million people.
Disparagingly referred to as the “unbanked” or the “underbanked,” these people are often the most financially vulnerable. They tend to bear the brunt of economic crises and have also been hit hardest by the covid-19 pandemic. In less advanced economies their share of the wider population can be huge. A study published just before the pandemic by Minsait Payments found that just 37% of Mexicans have a bank account. That compares to 43% in Peru, 70% in Brazil and 94% in Spain.
“Most of the people who provide the basic services we depend on can only use cash, from the person who collects the trash to the gas station attendant,” says Susana, a Mexico City resident. “That’s why none of us could live without it.”
This is one of many reasons why physical cash should still have an important part to play in the time of Covid. Here are five more:
1. Cash offers the only means of actually holding the currency you “own”. Cash is the only form of state money we hold, says financial journalist Brett Scott, author of The Heretic’s Guide to Global Finance: Hacking the Future of Money:
In much the same way that casino chips are privately-issued promises (issued by a casino) for cash we might hand in to them as we enter a casino, the ‘money’ we see in our bank accounts is actually ‘digital chips’ issued to us by those commercial banks. These chips are promises – or IOUs – promising us access to state money. We can pass these digital chips around within the private ecosystems controlled by the banking sector, but every time we go to the ATM we are redeeming those chips to exit the banking system (like walking out of the casino). It follows then, that as ATMs get shut down, our ability to exit the banking system goes down too. We are getting trapped inside their private ecosystems.
The costs of using those systems are mounting, as more and more central banks seem poised to cut interest rates below zero. In Europe, where rates have been negative since 2014, some banks have passed the negative rates onto their better healed retail depositors, meaning those depositors must now pay to keep their money with the bank. Instead of taking this route, other banks are ramping up maintenance fees and other charges, especially for low-income depositors.
2. Cash = privacy, anonymity, and personal freedom. As police surveillance, digital tracking and social media censorship become a growing feature of the so-called “new normal” taking shape around us, cash offers one of the last vestiges of privacy, anonymity, and personal freedom in our increasingly controlled and surveilled lives. A world without physical money would mean living in a dysopian surveillance state where every transaction is tracked by banks, tech giants and the state and where people’s access to money could even be denied.
3. The high cost (for merchants) of cashless payments. An oft-overlooked benefit of cash transactions is that there is no intermediary. One party pays the other party in mutually accepted currency and not a single middleman gets to wet his beak. In a 100% cashless society there will be nothing stopping banks, tech firms or other financial mediators from taking a small piece of every single transaction.
To a certain extent, we are already beginning to see this happen. As card and mobile transactions take up an ever larger share of the payment pie, many merchants are having to pay more and more in transaction fees. In the past cash customers have subsidized their cashless counterparts by reducing the total amount merchants have to pay in swipe fees. But all that has changed with the recent surge in digital payments.
4. Rampant data misuse, abuse and theft. Even before the virus crisis, tech monopolies such as Facebook and Google showed that they would stop at nothing to harvest and mine our data, including our financial data. As Fast Company reported last year, Google has been automatically tallying up users’ digital and real-world financial transactions based on receipts found in their Gmail accounts and other Google services:
The data can be eye-opening: a partial catalog of years of purchases that you probably didn’t know Google had yanked from the depths of your digital life. Like many, I’ve long used Gmail like a cabinet or shoebox to keep track of receipts. But I was unaware that I had consented for the Google bots to scan my inbox, identify specific emails, and assemble a dossier of my purchases…
Data breaches are also a growing problem. Internet scams targeting vulnerable people such as the elderly have mushroomed since the beginning of the pandemic. Cyberattacks have increased by 400% a day, according to the virtual private network service provide NordVPN. The high-profile companies targeted include Zoom, whose security system was found seriously wanting as millions of locked-down users flocked to its app in March and April, and even Google itself, which suffered a significant cyberattack in December.
5. Cash = security. The fact that a company as systemically important to the Internet as Google can also be compromised is a reminder that the more we depend on the Internet for everything we do, the more fragile our lives become. It’s not just companies that are at risk. On Sunday, the Reserve Bank of New Zealand reported that its data systems had also been breached by a hacker who may have accessed commercially and personally sensitive information.
Three years ago, hackers managed to siphon off over 300 million pesos ($15 million dollars) from Mexican banks by exploiting weaknesses in Mexico’s domestic money transfer platform. Since then, some of Mexico’s commercial banks have suffered periodic system failures that made it impossible for customers to withdraw money from ATMs or access their online accounts. The recent travails of TSB users in the UK have shown that banks are still struggling with their digitalisation efforts due to the complexity of their legacy IT systems and infrastructures.
One of the great things about physical cash is that it does not crash. This is most likely the reason that many economies, including the U.S., the Euro Area, Mexico and India, saw a sharp spike in demand for physical cash as they entered lockdown. The surge of paper euros and dollars is a sign of hoarding, not of increased payments. It is a reminder, says Scott, that at times of acute financial instability people “will often use cash to exit the unstable and failure-prone banking system”, in much the same way that people rush to hoard cash at news of an impending hurricane.
Even as many global central banks rush to develop their own digital currencies (CBDCs), which threatens to open up a whole new can of worms, they insist that the digital currency will be a supplement to cash and not a replacement. Stefan Ingves, the governor of Sweden’s Riksbank, one of the pioneers in this area, said that doing away with cash altogether would create a problem in times of crisis:
“If the power supply is cut it’s no longer possible to make electronic payments. For reasons based purely in preparedness we need notes and coins that work without electricity.”
Whether central banks will actually honor their word, it’s too early to tell. Perhaps cash will become a pure public utility and banks will be forced to continue providing access to it, even as fewer and fewer people use it, as has already happened in Sweden. If so, cash should still have an important — albeit diminished — role to play in the economy of the future.