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« Keeping an eye on the competition | Main | BarCampBank biometrics »

The future of the future of cash

By Dave Birch posted Jul 4 2008 at 11:18 AM

[Dave Birch] I've just read a very good report on the future of cash by AGIS Consulting. The report, by Guillame Lepecq, looks at the dynamics of the European cash market in some detail. Starting by noting that there were nearly 700 billion euros in "circulation" at the beginning of this year (compared to 750 billion U.S. dollars) and that euro notes and coins still account for four in five retail transactions in the eurozone, the report looks at the evoluation of the "cash cycle" and develops an informed perspective on the future of cash by looking at different scenarios for cash replacement. Guillame concludes that the growth of cash (ie, the increase in M0) has been driven by three factors: These are hoarding, internationalisation and low-value transactions, each of which is discussed in more detail below.

Hoarding. Only a small amount of cash is actual in circulation (being used for transactions). As Ian Grigg has previously pointed out on this blog, most euros are actually being used as a store of value, with their economic imperative being more about competition than efficiency.

Internationalisation. The euro has become a global currency, in the sense that 500 euro notes are under mattresses in Eastern Europe, the Baltics, Russia, Africa and so on. You can fit much more in a suitcase in euros than in dollars, and they're acceptable around the world.

Low-value transactions. Cash remains the most effective mechanism for low-value payments, and will remain so until POS infrastructure is built out to orders of magnitude more points (in essence, until it reaches the individual, which will be achieved through the use of mobile phones). Of course, the reason why it remains most cost-effective at retail POS is because retailers do not pay the full cost. That's why they like it so much...

The BRC's Cost of Collection survey includes results from 17,000 shops, large and small, multiples and independents, with a sales turnover of £131bn a year, over half of total UK retail sales. It shows cash is the most cost effective way for retailers to accept payments and highlights the huge extra costs card companies impose on retailers for processing card transactions.

The BRC says customers do not realise how much retailers are charged for processing card payments. On average, a retailer is charged two pence for processing a cash transaction while the charge for a credit card is 34 pence and, for a debit card, eight pence. These costs are too high for retailers to absorb and are inevitably passed on to customers in the form of higher prices.

[From - British Retail Consortium - - News ]

When I have to find cash to pay the bus, it's me that has to drive to the ATM, get money out and then buy something I don't want in order to get the change I need. No wonder the bus company prefers it.

The report also identifies three key attributes of cash that make it -- still -- the dominant payment system. Universality, trust and anonymity. I'm curious about the location of anonymity in the customer mindset and I'm going to post some more about this shortly, so I'm only looking at the first two here.

Universality is certainly a big barrier to competition but I think that the mobile phone -- as noted above -- is going to change all of that. Once people can both make and receive payments using their phones, the universality of the phone will match the universality of cash (in fact, they will become the same thing) and the idea that only p-money (physical money) is universal will seem quaint.

Trust, on the other hand, may not be such a big barrier. It's not clear to me how to disentangle trust in the medium of exchange from trust in the store of value, since people clearly use cash for both, but it is clear that a great many other tradable items can easily usurp cash once technology has acted to shift them from being a store of value into a viable medium of exchange (remember the tally sticks!) for their age. A couple of months ago we were discussing Nick Szabo's classification of commodity derivatives as a kind of near-money, but there are plenty of exant near-monies already in use around the world, including mobile phone minutes in a great many developing countries. If I lived in Zimbabwe, it would take me years to learn to trust cash more than Vodafone minutes.

These two factors will, I think, change the way that we think about the future of cash, because they move us away from the previous generation's essential question "can we replace cash with cards?" and allow us to ask much more interesting questions about the future of cash. These will be more along the lines of "when phones replace cash, will we still think of cash as being the physical implementation of central bank money?". To me, anyway.

These opinions are my own (I think) and presented solely in my capacity as an interested member of the general public [posted with ecto]

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