cash to remain king

london — Even though more people now use cards, mobile phones or even facial recognition technology to pay street performers, buy pizza or donate, hard cash is showing no signs of dying out, central bankers said.

The Bank for International Settlements (BIS) said cryptocurrencies and the debate around them — such as whether cash will be replaced by virtual substitutes — are part of a broader debate about the nature of money.

The payments sector has argued that the use of cash is falling and therefore they don’t need to provide as many ATM machines or bank branches.

But in the BIS’ latest quarterly review, researchers took a closer look at whether cash is becoming a relic of the past as some claim.

“Some of the breathless commentary gives the impression that cash in the form of traditional notes and coins is going out of fashion fast,” said Hyun Song Shin, BIS economic adviser and head of research said.

“Despite all the technological improvements in payments in recent years, the use of good oldfashioned cash is still rising in most, though not all, advanced and emerging market economies.”

Cash in circulation has actually risen in recent years, from 7 per

cent of GDP in 2000 to 9 per cent in 2016, although it has fallen in Sweden and a few other places.

“The resilience of cash as a social institution reminds us of the importance of understanding the economic functions of money, beyond just the innovations in technology,” Shin said.

Still, debit and credit card payments are rising as well, from 13 per cent of GDP in 2000 to 25 per cent in 2016. People hold more cards and are using them for more and smaller transactions, Shin said. When it comes to abandoning cash, Sweden is going it mostly alone.

While cash in circulation in the Nordic region’s largest economy has dropped rapidly in recent years, the amount of notes and coins has risen in most of the rest of the developed world since the global financial crisis.

Data from the BIS’ Committee on Payments and Market Infrastructures for almost 50 countries showed that overall cash in circulation rose to an average of 9 per cent of gross domestic product in 2016, from 7 per cent in 2000. In Sweden, on the other hand, it slumped to just 1.4 per cent from 4.4 per cent. That’s the lowest level among all the countries surveyed.

As shops, banks and restaurants

Despite increased use of electronic payments around the world, there is scant evidence of a shift away from cash BIS report

increasingly stop accepting cash amid Swedes’ growing love affair with digital payments, others are sounding the alarm. The central bank argues that the country may be going cashless too fast and has called for legal changes to safeguard the payment system. It’s also considering whether there’s a need for an official form of digital currency, an e-krona. Lawmakers are at the same time investigating whether measures are needed to safeguard the population’s access to cash.

But many other developed countries are moving in the opposite direction. In Japan, cash in circulation as a percentage of GDP increased to 20 per cent in 2016 from 13.5 per cent in 2000 and in the US, it gained to 8.1 per cent from 6.0 per cent. In the euro area, it rose to 10.7 per cent from 5.1 per cent in 2002.

To be sure, some major countries also saw a drop, including China and India, where cash fell to 9.2 per cent and 8.8 per cent. “Despite increased use of electronic payments around the world, there is scant evidence of a shift away from cash,” the BIS said in the report.

“As the appetite for cash remains unabated, few societies are close to ‘cashless’ or even ‘lesscash.’ In fact, demand for cash has risen in most advanced economies since the start of the great financial crisis.”

That resurgence appears to be driven by so-called store-of-value motives (reflecting lower opportunity cost of holding cash) rather than by payment needs, BIS said. That means as interest rates fall — and even go negative some places — there is more incentive to hold cash.

The report also showed that demand for large-denomination notes has outpaced that for smaller denominations following the global financial crisis, which suggests that cash is being “increasingly used as a store of value rather than for payments,” BIS said.

But not so in Sweden, where demand for all notes have decreased since 2007.

While the value of withdrawals from automated teller machines increased to 20 per cent of GDP in 2016 in the countries surveyed by BIS, from 12 per cent in 2007, it now stands at just 2.5 per cent in Sweden. — Reuters/Bloomberg