In recent months, the use of contactless and cashless payments has grown tremendously. This trend is reinforced not only by the fact that consumers can now make cashless payments in almost all stores, but also by the continuously rising sales figures in online retailing. In addition, more and more (young) people are turning to neo-banks and their fully digitized banking products, which often impress with ease of use and attractive cost structures. This raises the question of whether it is really necessary to keep cash as a payment method or whether it would not be more efficient to digitize the entire payment process. This post will look at the advantages of physical cash and whether these advantages are sufficient to justify the future use of cash.
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Cash payments are final transactions in which it is clear which party involved has the money at which point in time. This finality also makes it easier to set and adhere to budgets, as individuals can only spend money they actually own. Another much-discussed advantage of physical cash is the anonymity of the transaction, as no personal information of the payer is usually recorded. This can be seen as both an advantage and a disadvantage of cash. It is often argued that such anonymous payments are particularly conducive to criminal uses. However, this is not just about the actual transactions or the storage of illegally acquired assets. Rather, the lack of documentation also enables moonlighting and facilitates criminal acts such as tax evasion. However, whether the existence of cash actually leads to a higher crime rate is empirically doubtful. However, the much-heard statement that cash as an offline payment method is independent of middlemen is only partially correct. Even if no banking services are required in the actual transaction, a certain infrastructure is still needed to withdraw cash from an ATM or bank branch. In addition, individual assets are mostly deposited with banks, as hardly any individual holds all of his or her personal assets as physical cash. Cash not only affects individuals’ payments, but also influences the effectiveness of fiscal policy activities. Cash held outside the banking system can hardly be influenced by fiscal policy. Even the current negative interest rates have no direct impact on individual cash assets, as physical cash is not subject to any interest – positive or negative.¹
The abolition of cash cannot be achieved from one day to the next. Rather, a comprehensive infrastructure is needed to enable the secure use of cashless payment methods. Protecting personal information and other data is the top priority for maintaining trust in digital payments. On the one hand, institutions must be able to ensure that payments are actually instructed or executed by the person in question; on the other hand, they must ensure that the data does not fall into the hands of unauthorized persons. For this to be possible, extensive investment in the relevant technologies is required in order to continuously develop them and ensure appropriate security standards. Such investments concern not only the direct interfaces, but also the general infrastructure. Smooth operations are only possible if there are no significant failures. This can affect the Internet connection, for example, but also the power grid or the individual devices of the respective end users.² The transition to a cashless society is thus associated with significant costs. However, it should not be forgotten that high costs are also incurred when using cash. In addition to the obvious costs incurred in the course of producing and storing cash, there are also significant costs associated with transporting it, as it requires increased protection. One cost that is often forgotten in the public debate is the opportunity cost associated with using cash. Withdrawing money from an ATM or a bank branch takes time, as does the actual payment, and this must be taken into account when quantifying the costs. Finally, it must be taken into account that cash is generally not withdrawn at the time of payment but in advance, so that interest income may be lost here.³
The abolition of physical cash is probably more difficult than it appears at first glance, as abolition would have to be global to achieve the desired effect. If individual sovereign states or even monetary communities such as the EU were to stop the use of cash, it would be expected that those who prefer cash due to criminal activities, for example, would simply switch to other fiat currencies. It seems questionable whether cash still has any significant meaning at all in this context, or whether the majority of such transactions are not already being conducted via cryptocurrencies. In addition to the anonymity and lack of documentation, it is also more difficult to steal assets in the form of cryptocurrencies than is the case with cash. In addition, the high cost of storing large sums of money is eliminated. The security aspect or higher protection against theft is also relevant for individuals who make larger transactions.
Should it come about that physical cash is no longer supported as a means of payment, this can probably be attributed more to the lack of use within society than to a ban by legislators. The superfluousness of the existence of cash would therefore lead to its abolition as a payment method. At present, however, it does not seem very realistic that this situation will occur in the near future. Especially in unstable economic situations, many people still prefer cash, which they consider to be relatively safe. During economic crises, one repeatedly sees images of long lines in front of ATMs and banks, as people still want to increase their cash holdings in order to enhance their own sense of financial security. This observation can also be taken as a vote of no confidence in the banking system. Cryptocurrencies and physical precious metals such as gold and silver are not really suitable for making smaller purchases to cover everyday needs, so cash is still the preferred alternative here.
One area of daily life from which the use of cash as a means of payment has almost completely disappeared is business transactions. Anyone who has come into contact with accounting in any form as part of a business activity will be happy about the possibility of digital transactions, as these significantly reduce the effort involved and also enable a better overview and better documentation. It remains to be seen whether this development will also transfer to the everyday lives of consumers.
It is quite conceivable that cash will cease to exist as a payment method in the future, as alternatives such as cryptocurrencies or digital currencies offer comparable advantages. At the same time, it can be said that there are hardly any significant reasons why states or central banks should currently ban the use of cash. The most likely scenario therefore seems to be that the importance of physical cash will steadily decline and that the lack of use within society will ultimately lead to this form of payment no longer being offered. Before this point can be reached, however, extensive investment in digital infrastructure and cyber security will be required. Once a sufficient infrastructure standard has been achieved and the majority of the population is familiar with digital payment methods, it is conceivable that an environment will establish itself in which cash is no longer used as a means of payment.
¹ Krueger, M., & Seitz, F. (2016). Pros and cons of cash: the state of the debate. Credit and Capital Markets, 51(1), 15-40.
² Kumari, N., & Khanna, J. (2017). Cashless payment: A behaviourial change to economic growth. Qualitative and Quantitative Research Review, 2(2), 82-103.
³ Krüger, M., & Seitz, F. (2014). Costs and benefits of cash and cashless payment instruments: overview and initial estimates. Study commissioned by the Deutsche Bundesbank. Frankfurt.