Cash Is Dead, Long Live Cash

• Author: Alan Wheatley

Cash Is Dead, Long Live Cash Finance & Development, June 2017, Vol. 54, No. 2

Alan Wheatley

Virtual payments are fast displacing cash, but not completely and not everywhere

Fewer Nordic banks are using cash in their branches. India recently scrapped 86 percent of its banknotes. Korea plans to stop minting coins by 2020. Online payments are booming. The march toward a cashless society, it seems, is unstoppable.

Young people especially, as well as the better off and better educated, are increasingly at ease paying by card or mobile phone. In the Netherlands, for instance, the number of card transactions surpassed cash (NFPS 2016) for the first time in 2015.

But wait. In other advanced economies, including Austria, Germany, Japan, Singapore, and Switzerland, cash is still king and shows no sign of abdicating. Globally, perhaps 85 percent of all payments are still made in cash.

“The cashless society, as appealing as it may sound, is probably just as elusive as the much vaunted paperless office,” according to Yves Mersch, a member of the European Central Bank’s (ECB’s) executive board.

There is no inherent reason cash should survive if more efficient means of payment evolve. Cowrie shells were also a useful medium of exchange once. Banknotes did not come into use until the printing press had become sufficiently widespread and dependable.

“Today we can say the same thing about modern communication technology as about the printing presses in the 17th century. Access to the Internet is widespread, and computers, smartphones, and tablets are household items. Thus, the conditions are ripe for launching more electronic payment forms,” Cecilia Skingsley, deputy governor of Sweden’s Riksbank, has said.

Sweden is blazing the cashless trail. Cash is now used for only 15 percent of transactions at the point of sale. Because cash distribution costs in the sparsely populated country are high, fewer than half of Swedish banks still handle cash. Uniquely, cash in circulation fell by nearly 15 percent between 2007 and 2015. Even homeless sellers of Stockholm's street magazine accept mobile payments.

Network effectsSuccessful digitization of retail payments depends on economies of scale and network effects. In the case of technology-friendly Sweden, consumers and merchants alike have been happy to desert cash. The trend has been reinforced by a long tradition of cooperation among Sweden’s biggest banks, which jointly run the country’s payments infrastructure. So a new service enabling real-time payments was immediately able to reach most of the population.

“But if you look at some bigger countries, say Germany or the U.S., you have so many more important players that it’s simply more difficult to create this atmosphere of cooperation,” Björn Segendorf, of the Riksbank’s Financial Stability Department, tells F&D.

The more people use a particular platform, the more attractive it becomes—like Facebook. The M-Pesa mobile payment service took off in Kenya because there was one dominant mobile operator, Safaricom, in a country where few people...