Cash Is Still King
Bank notes and coins—physical cash—don’t appear to be dying some kind of slow death, according to research from the Bank of International Settlements (BIS) and the situation in Canada—a country very fond of its credit cards and payment innovations—supports the global trend.
“Despite all the technological improvements in payments in recent years, the use of good old-fashioned cash is still rising in most [though not all] advanced and emerging market economies,” said Hyun Song Shin, economic adviser and head of research at the BIS, in a statement.
The BIS, the central bank for central banks, headquartered in Basel, Switzerland, released its quarterly report on March 11 and said cash in circulation has risen from 7 percent to 9 percent of GDP. It has fallen in a few places such as Sweden—where retailers are allowed to refuse payment by coins and bills.
Store of Value
Shin, a former economics professor at Princeton, also said: “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.”
One of those functions of money—which the cryptocurrencies currently fail to provide—is as a store of value. Since the financial crisis that began in late 2008, interest rates have been hovering around historic lows—negative in many parts of Europe. Thus the demand for cash is strong and holding it can be preferable to keeping it in a savings account.
The most popular cryptocurrency, bitcoin, is simply worth what buyers and sellers think it is worth. It has no intrinsic value, unlike a fiat currency which is backed by a government and taxpayers and tied to economic fundamentals. Bitcoin has proven to be too volatile as a store of value.
The store of value aspect is also seen in the growing demand for large-denomination bank notes, which has outpaced that of small-denomination bank notes, according to BIS research. Especially in an environment of negative interest rates, large-denomination notes are highly sought after as stores of wealth. But central banks have been reducing the supply of such notes, which are also associated with the underground economy.
At the unveiling of Canada’s new $10 note in Halifax on March 8, Bank of Canada Governor Stephen Poloz said, “Even though people have more ways than ever to make electronic payments, the number of bank notes in circulation continues to climb.”
Bank of Canada data shows that the amount of $5, $10, $20, $50, and $100 notes in circulation has been steadily climbing since 2011. The growth of cash generally grows in line with the economy. However, the amount of $1,000 notes has been declining since 1999.
Based on 2016 Payments Canada data, cash is still the most widely used payment method in terms of number of transactions, but only represents 13 percent in terms of total value of transactions. But that percentage of transactions being cash—31.2 percent—might be plateauing as credit card use keeps growing along with online transfers and fintech solutions.
Canadians love their credit cards—they’re the second largest user of credit cards per capita in the world, albeit a long way behind South Koreans.
The BIS notes that the prevalence of point-of-sale terminals in Canada and China increased most since 2007 among the 24 countries that make up its Committee on Payments and Market Infrastructures. Credit cards are increasingly being used for smaller transactions.
In Canada, credit cards offer convenience and rewards resulting in continual growth and expansion into almost any case for making a payment.
The downside is as of the third quarter of 2017, Canadians held a record $1.71 of household debt for every dollar of disposable income.
In a separate report, the BIS warned of the threat to Canada’s much-lauded banking system due to its credit-to-GDP and debt-service ratios passing critical thresholds, which point to financial vulnerabilities.
On March 12, Equifax Canada noted that Canadian consumers owe over $1.8 trillion in household debt, including mortgages. That’s a 6 percent rise from a year ago.
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By Rahul Vaidyanath