By : Colin Gordon
October 20, 2015 08:30 AM
Cash demand keeps on growing, despite factors that ought to be suppressing the appetite for notes and coins. In the UK for example, cash in circulation by value has tripled in the last 20 years, exceeding aggregate spending in the economy.
While cash demand has clearly increased, what might influence this growing trend in the future? It’s a question tackled by the Bank of England in its recent quarterly bulletin, in which it lists some broad themes that may affect future cash demand and in each instance why cash will continue to be a dominant payment method.
Different ways to pay
A significant amount of cash use is for high volume, small value payments. Innovation in this area is set to exert some degree of influence on cash demand. The use of cash for consumer payments versus the progress on mobile wallets, Apple Pay and contactless is expected to drive down demand for paper money, however it is also argued that these emerging payments methods are more likely to compete with current electronic payment methods rather than paper money.
Some local currency alternatives have popped up lately, such as the Brixton Pound in south London. These schemes are small and “unlikely to have a significant impact on demand for cash in the long term,” says the Bank.
However, digital currencies like Bitcoin could have a much more important part to play. While currently used for only “a tiny proportion of transactions ... the underlying technology has the potential to be more widely used in the financial system,” according to the report.
Retailer and bank preferences
As much as the focus is on consumer demand, it’s important not to ignore supply factors. “Changes in the future demand for cash will also be influenced by consumers’ ability to access it, and where they can spend it,” says the Bank’s bulletin.
Currently there are just over 70,000 ATMs in Britain, which makes it “easy to access cash.” However, any change in these distribution channels could have the effect of deterring people from using cash.
“For example, a reduction in the number of ATMs, or a move to charging for withdrawals would increase the cost and effort incurred,” the Bank argues. “Alternatively, a move to cashless bank branches (as seen in Denmark and Sweden) would make it harder for businesses to deposit cash takings, and may influence them to phase out accepting cash.”
What counters this argument is the recent growth in the UK’s ATM estates. This clearly indicates the financial sector will continue to satisfy consumer demand for convenient and secure access to cash at the self-service channel.
If consumers use cash less it could lead to higher average transaction costs for retailers, but again the Bank does not think this likely to be a major factor for the foreseeable future.
Cash is actually still cheaper for merchants, with a British Retail Consortium survey last year showing it is eight times cheaper than a debit card transaction and 30 times cheaper than a credit card transaction.
Socio-economic or geopolitical changes
Changes or anticipated changes to GDP, interest rates, exchange rates and inflation could influence cash demand for UK banknotes. But the Bank report syas that this would only really affect overseas demand for UK notes, rather than a factor that influences wider cash demand.
No matter what alternatives are available, consumers will continue to use cash.
As the Bank bulletin sums up: “Despite the advancements in technology, cash continues to offer a unique set of attributes as a medium of exchange that sets it apart from the alternatives.”
The Bank of England’s own survey in 2014 found people prefer cash because it is fast, convenient, universally accepted, and makes budgeting easier.
“Using cash for transactions also provides immediate final settlement at no visible cost to the consumer, and with no reliance on technology and central infrastructure. Finally, cash is entirely anonymous, enabling transfers of value without any record being kept,” the Bank adds. “Thus far, no single payment method has offered or improved upon this complete set of attributes.”
The push and pull factors on cash may be changing, but the report makes it quite clear that the Bank of England believes cash is here to stay.
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