Making a case for cash

In a world of mobile wallets, debit, credit and prepaid cards, not to mention bitcoins, cash may seem un-cool. But in a recent report, Cash Essentials – Beyond payments , Guillaume Lepecq, founder of AGIS Consulting, brings out the various dimensions of cash, and shows that other instruments do not match the many attributes of cash.

Would you think there are vested interests at play in promoting cashless societies?

Several groups have an interest in displacing cash. One, a number of companies offer alternative payment solutions and are eager to capture some of those transactions. Two, cash protects consumers’ privacy and freedom. For various reasons — marketing, tax evasion, or even security – organisations may prefer to restrict this freedom.

Lastly, some say that eradicating cash will enable central banks to apply negative interest rates. But if banks start applying negative interest rates, then savings will start flowing out of the bank system.

Who may be some groups of people for whom cash may continue to play a key role?

Cash is probably the most widely used product in the world. If I were to highlight three groups, it would be women, as they suffer more from financial exclusion than men. For these vulnerable groups, cash is the only alternative. Two, victims of disasters find that cash has demonstrated its robustness and resilience in times of emergency. Three, counter-intuitively, millennials prefer cash and recent research highlights this. (Millennials refers to those born from early 80s to early 2000, who came of age in the new millennium)

Cash means privacy and opens up tax evading transaction possibilities. How can these be handled?

Cash payment is certainly anonymous, but in many countries regulations aim to curb tax evasion and money laundering. There are caps on payments in cash and certain transactions may not be settled in cash. Just the bulkiness of cash is a limitation — $1 million in $100 bills weighs 10 kg. Cash is not the only way to do private transactions — bitcoins, anonymous prepaid card, gold and foreign currency also serve the purpose. Billions of people are using cash the right way, a few may not be.

Has the global financial crisis (GFC) changed people’s perception of cash?

The GFC has reminded us that cash has numerous functions. One function is the store of value. A significant share of cash is hoarded. Another is the contingency role. The collapse of Lehman Brothers and the GFC has led to an increase in demand for currency, not only in the US but in countries such as Australia which were relatively immune.

Is there a divide between developed and developing economies in cash usage?

The main divide is the development of banking infrastructure. Developed countries have a dense network of bank branches and ATMs which facilitate circulation and velocity of cash. However, we have seen considerable innovation in developing countries, which could well leap-frog technologies — M-Pesa in Kenya is often recognised as one of the key innovations in payments. It is essentially a cash transfer system using mobile phones and a network of over 60,000 agents.

Transporting cash comes with costs. There is also the issue of counterfeits. Is this why other payment modes are preferred?

The cost of payments is significant. The European Central Bank estimated it averages 1 per cent of GDP. Worldwide, this amounts to roughly $760 billion per year — larger than the airline industry. The overall cost of cash is in line with its share of the market as a payment instrument. And cash is, often, the most efficient payment instrument, particularly for low-value transactions.

Your views on moving to bitcoin and other such non-cash currencies.

We are seeing great innovation in terms of new payment instruments: cards, contact-less, mobile payment and crypto currencies. Digital currencies may have a future but they also face several significant challenges. They are unregulated in some cases, depend on infrastructure and are complex to use and lack convenience. In any case, I do not believe digital currencies will replace cash.

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