Cash is king – or not

The saying “Cash is King” has been around for decades. It can be taken to mean various things, inter alia the ability to enter a stock market profitably at a low, the ability to negotiate favourable settlement terms on a deal or purchase, or to denote a strong liquidity position in a business.

Today however, amidst the carnage of COVID-19, transactions involving the physical exchange of cash has become decidedly undesirable. I started out the lockdown process with two £10 notes in my wallet and still have the same two £10 notes today. I’m sure many readers share this experience.

The reason clearly is the general reluctance to handle notes that may have been touched by someone who was infected; in light of the World Health Organisation’s warning back in March that banknotes may spread coronavirus.

COVID-19 has further undercut the use of cash by forcing many retailers to close their doors and sell exclusively online for delivered goods. Indeed, there has been an explosion in the use of online shopping and delivery systems. Businesses like PayPal, Amazon and Instacart have seen huge spikes in demand. Beware the large retail chains that don’t provide a decent online service.

As a result, many businesses no longer accept cash. Even small businesses who until recently would only accept cash, now insist on credit or debit cards or other cashless payment means.

Even before COVID-19, businesses and private individuals were seeing the benefits of paying or receiving payments in a cashless form, whilst most countries were reporting a decreasing number of cash transactions. The reasons are well documented.

With customers now wary of using public payment terminals, digital wallets like Apple Pay and Google Pay, allowing a payment to be made without even touching a card to a terminal or entering a PIN, have grown in popularity. Businesses unable to accept payments from digital wallets may experience constrained growth in the post-pandemic world, while peer-to-peer contactless payments, even between different types of wallets, should become commonplace.

Let us examine developments in a selection of countries around the globe.

China

Last month, China rolled out the digital yuan, a currency that behaves much like normal cash, but exists only as code in a digital wallet, backed by the People’s Bank of China. The digital yuan is a public-private initiative, being tested by franchisees including McDonald’s, Subway and Starbucks. It is viewed as a “game-changer” in financial services.

Indeed, the Chinese are no strangers to paying for goods and services through their smartphone. Local tech giants Alibaba and Tencent pioneered digital merchant payments around 2014, where they now account for 90% of the $17 trillion mobile payments market.

Jason Wu, chief executive of digital savings company DeFiner, said its digital currency will allow China to “sidestep” a US-dominated financial system and a reliance on the US dollar. It may set China up to become the leader in a globalised digital economy for transactions.

Sweden

In 2009, three masked men alighted from a helicopter onto the roof of the Västberga cash depot and made off with some £5.5 million in cash. No surprise that Netflix is making the heist into a film! This, together with a wave of similar cash robberies, led to a national campaign against cash. Some 10 years later, Sweden is considered to be one of the forerunners of the move towards a cashless society. In 2018, just 1% of Sweden’s GDP was circulating in cash, compared to 11% in the Euro zone, 8% in the US and 4% in the UK. Earlier this year, Sweden’s central bank, the Riksbank, introduced a year-long pilot scheme with its own digital currency, the e-krona, and a clear rival to China.

Today many shops and cafes in central Stockholm display signs declaring themselves as cash-free zones. Merchants no longer ensure the work or suffer the costs connected to cash – counting bills, returning change, incurring fees for cash-in-transit service companies and high insurance premiums against robberies.

Swedish consumers also enjoy the convenience. Apart from the use of bank cards, two thirds of the population use the payment app Swish for transferring money to friends or family or for splitting the bill in a restaurant. Launched in 2012, Swish is Sweden’s most popular payments app, backed by Sweden’s main banks.

The Swedish company Biohax has repurposed old technology to enable its customers to purchase products using a microchip that can be inserted into their hands, under the skin. Since the company’s launch in 2014, around 5,000 Swedes have bought Biohax chips, enabling them to pay for travel, buy snacks at their gym’s vending machine or gain access to their office with a wave.

However, while one section of society is ready to embrace a future without cash, there are other parts who are resisting its disappearance. Issues relating to age, wealth and location of users have prompted a backlash against going cashless. This led to the Swedish parliament passing a bill in November 2019 to preserve cash.

UK

According to research conducted for The Daily Mail newspaper by Amaiz, half of small businesses have already banned cash or plan to do so soon. Cash machine operator Link has revealed that withdrawals have fallen 60 per cent year on year. Link says the decline in the use of cash they expected to see over the next five years will instead happen in five months. And Link chief executive John Howells said: ” We could be in a virtually cashless society in two years’ time.” ATM’s may soon become a curiosity “a bit like a BT phone box”. The Halifax bank says the numbers of over-65s signing up for online banking has jumped by 63%, and their use of contactless has also soared.

As a direct reaction to COVID-19, UK credit card companies have increased the upper limit for a contactless card payment from £30 to £45. What odds this limit will increase soon?

The UK has also seen blood spilled on the high street as a significant number of retailers, many having been household names for decades, have gone out of business. A recurring theme in many of these cases has been the failure to embrace effective online selling and an over reliance on high street presence with the ultimately unaffordable rentals. For the foreseeable future, a consumer-friendly online service combined with lower warehouse costs compared to those of a retail store is the way many UK businesses will go.

United States/ Canada/ Global

The US Federal Reserve reports that the cost of printing a $1 bill is 5.5 cents.

Facebook’s Libra is seen as a similar move to China’s digital Yuan. It is predicted that the digital token, backed by a basket of currencies, may gain traction with US legislators as the economy struggles amid the pandemic.

In Canada, some people have been shoving banknotes into washing machines to rid them of the virus – taking advantage of the fact that their “paper” money is made of plastic. This takes money laundering to a whole new level.

And lastly, one study estimated that in 2018, the global cost of printing paper currency was around $35 billion and this excludes the costs of distributing, collecting, destroying the paper currency and counterfeiting of currency notes.

Summary

So far, 20 countries are officially working on central bank-backed digital currency projects around the world, adding to a growing sense of an emerging competition. China is at the head of the pack but the competition is fierce.

And whilst we were always heading in the general direction of cashless pre-COVID-19, the virus has lent a substantial impetus to that journey. We are now not merely partway up the cashless mountain, we are heading at considerable speed towards the summit.