Commentary: The surprising resilience of cash transactions

Commentary: The surprising resilience of cash transactions

Digital payments may be on the rise but reliance on cash remains strong. The future will be "less cash" rather than cashless, argues Tufts University’s Bhaskar Chakravorti.

India digital wallet payment
An Indian visitor gives a thumb impression to withdraw money from his bank account with his Unique Identification card in Hyderabad in January. (Photo: AFP /Noah Seelam)

BOSTON: On Jun 27, the ATM turns 50. It was once described by central bank officers as the “only useful innovation in banking”. But today, the cash that ATMs dispense may be on the endangered list.

Cash is being displaced in so many ways that it is hard to keep track. There are credit cards and electronic payments, mobile payments services, cryptocurrencies that operate outside the purview of central banks and localised digital wallet apps such as India’s Paytm and Bangladesh’s bKash. These innovations are encouraging cashlessness across communities worldwide.

It is reasonable to expect cash to follow the path of other goods that have been replaced by digital alternatives, such as photos, music and movies. The key question then is, will cash – and the ATMs that dispense it – disappear from our neighbourhoods?

Cash will likely become less popular, thanks to the high cost of using cash and the growing array of alternatives. But I expect it will remain with us forever. The future will be “less cash” rather than cashless.

An advertisement board displaying a QR code for Paytm, a digital wallet company, is seen placed ami
An advertisement board displaying a QR code for Paytm, a digital wallet company, is seen placed amidst vegetables at a roadside vendor's stall in Mumbai, India on Nov 19, 2016. (File photo: REUTERS/Shailesh Andrade)


As of 2013, about 85 per cent of the world’s transactions involved cash.

Reliance on cash is quite uneven across the world. While Singapore, the Netherlands, France, Sweden and Switzerland are among the least cash reliant countries, in Malaysia, Saudi Arabia, Peru and Egypt, only 1 per cent of transactions are cashless. Even some highly advanced countries, such as Japan, are still highly reliant on cash.

Concerns about social equity offer one motivation for lawmakers to push for cashless alternatives. My colleague Benjamin Mazzotta and I have studied the costs of cash across a wide range of countries, with a particular focus on the US, Mexico, Egypt and India.

Our research shows that the poor and those with less access to institutions bear a disproportionate share of these costs of using cash. In the US, for example, cash usage imposes a regressive tax on consumers, with the highest impact on people who do not have an account with a bank. The unbanked pay US$4 (S$5.50) higher fees per month for cash access on average than those with formal financial services. Such fees include payday lending and cheque cashing.

A Bank of America ATM kiosk sits in a parking lot in Medford
A Bank of America ATM kiosk sits in a parking lot in Medford, Massachusetts in the US in January. (File photo: REUTERS/Brian Snyder)

Poorer consumers also have to spend far more time getting cash. On average, Americans spend 28 minutes a month travelling to get cash, but that time is not evenly distributed. People who do not use a bank spend about five minutes longer getting to the place where they can get cash, and unemployed people spent nearly nine minutes more.

In the meantime, other scholars have argued for the benefits of a “less cash” society. Ken Rogoff at Harvard has argued that eliminating higher-denomination banknotes can prevent currency from being used to fund illegal activities.


A combination of public and private initiatives are currently chipping away at the global predominance of cash, with some countries moving more quickly than others.

Sweden, already high on the cashlessness scale, may become the first country to come close to a truly cashless state. Sweden’s history in banks promoting cash alternatives dates back to the 1960s, with digital bank transfers used to pay wages.

Cards also became more popular in the 1990s, when banks also started charging a fee for cheques. The app, Swish, developed by the major banks, is widely used today for digital money transfers by nearly half the population. Many businesses discourage use of cash, and retailers are legally allowed to refuse cash.

Cash withdrawals have fallen by about one third over the last five years in Sweden, where 97 percent
Cash withdrawals have fallen by about one third over the last five years in Sweden. (Photo: AFP/Jonathan Nackstrand)

In several other countries, governments are experimenting with innovative digital alternatives. In 2012, the Royal Canadian Mint launched the MintChip project, recently handed over to the private sector. The plan is to store cash on computer chips, enabling the transfer of money between chips through encrypted messages.

In some countries, the private sector has led the way, creating “less cash” societies in the unlikeliest of places. Somaliland, one of the poorest countries in the world, stands at the forefront of a mobile payment revolution with its mobile money service Zaad. At more than 30 mobile payment transactions a month on average, the average citizen of Somaliland is far ahead of the rest of the world’s average of 8.5 such transactions per capita per month.

Perhaps the most dramatic nudge toward “less cash” was experienced recently in India. Last November, the Indian government made a high-risk, high-stakes move by demonetising the 500 and 1,000 rupee banknotes, in effect voiding 86 per cent of cash in circulation. Their initial aim was to root out corruption and illegal activity funded by cash. New banknotes were issued, so consumers had to go to a bank and exchange their demonetised currency.

In a country that is almost 90 per cent reliant on cash, this move led to disrupted enterprises, unpaid wages and long lines at banks. Mobile wallet players were the unqualified winners of the decision, with market leader Paytm claiming a 435 per cent increase in traffic and a 250 per cent increase in overall transactions and transaction value.

long queues at India bank
People in Kolkata queue outside a bank to deposit and exchange 500 and 1,000 currency notes on Nov 10, 2016. (AFP Photo/Dibyangshu Sarkar)

However, despite the surge in mobile payments, cash in India remains resilient. In March, five months after demonetisation, cash withdrawals were actually 0.6 per cent higher than a year earlier.


What explains the resilience of cash, despite its costs and a growing array of alternatives?

Cash is unique among payment instruments in that anyone can transact, any time, any place, with no third parties involved. With this freedom comes strong privacy protection.

Currency neither knows nor cares who holds it or when and where a transaction occurred. People have a visceral sense of security when they have cash with them.

These thresholds of security will evolve as our societies become more digitally native. However, old habits and perceptions take a long time to turn over.

Some merchants will resist the costs of new equipment or fees that accompany cash alternatives. Cash is also considered more convenient and versatile, while with digital transactions there is always concerns about hacking and fraud.

So, no matter where we are in the world, let us celebrate the ATM’s half-century of service. The human connection with cash will be hard to break.

Although cash may become less popular, rest assured that there will always be someone who will stop you in the street asking for directions to the nearest ATM.

Bhaskar Chakravorti is Senior Associate Dean of International Business and Finance at The Fletcher School at Tufts University. This commentary first appeared in The Conversation. Read the original commentary here.

Source: CNA/sl