Cash is an exciting and important topic, which has become the subject of extensive debate, especially of late. Cash is also the frequent target of criticism, with claims that it is inefficient, expensive, fosters the shadow economy and impairs the effect of monetary policy measures. Yet despite all of this criticism and the discussion over its future, at just under 80% of all point-of-sale transactions, cash remains the most significant means of payment for the German population. An analysis in which the costs and benefits of cash are considered on an equal footing is an essential foundation for a factual discussion about cash. While much attention is paid to the cost aspects, The benefits of cash are usually given less consideration in the relevant literature. This state of affairs led the Bundesbank to commission an external study analysing payment instruments in Germany – with a particular focus on cash payments – and evaluating their associated costs and benefits. The first part of the study, “Overview and initial estimates”, published in 2014, provides a critical overview of the literature on cost calculations and the significance of payment transactions in various countries. This module also provides an independent account of the importance and cost of cash and cashless payment instruments for the national economy. This second module of the study focuses especially on The benefits of cash. The authors describe the microeconomic, macroeconomic and societal benefits of cash. Against this backdrop, this study attempts to systematically capture the benefits, without providing a quantitative assessment. In addition, it goes into explicit detail about the aforementioned arguments put forward by critics of cash as well as the drawbacks and consequences of abolishing cash. To achieve an overall picture of the costs and benefits of cash, the costs generated by the use of cash are to be quantified in the study's planned third module.
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Costs and benefits of cash and cashless payment instruments (Module 2)
Malte Krueger & Franz Seitz
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© 2017 by Fritz Knapp Verlag GmbH, Frankfurt am Main
Layout: Regina Siebert, Hamburg
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“…the demand for currency may have properties nothing like what one would expect from textbook models of money demand.“
(S. Sumner, 1994)
This study investigates the benefits of cash in a general context, whilst, at the same time, placing a particular emphasis on the specific case of Germany. We distinguish between the microeconomic and macroeconomic benefits on the one hand and the benefits to society on the other. Furthermore, we explicitly address the arguments of cash critics, who are calling for cash to be abolished altogether. We find that cash has many positive features to offer and that, as a means of payment, it has unique features which make it difficult to be replaced by electronic means. The abolition of cash would have major drawbacks and could entail undesirable consequences. Ultimately, it should be left to market forces and to the general public to decide which payment instruments they wish to use.
Key words: cash, benefits, cash abolition, monetary policy
JEL: D12, D61, E41, G21, O33
Aschaffenburg University of Applied Sciences
Weiden Technical University of Applied Sciences
Würzburger Straße 45
Hetzenrichter Weg 15
The authors would like to N Bartzsch, E Gladisch, T Kronberger, H Hammes, A Hoffmann, S Hardt, S Sieber and C L Thiele for their valuable input and the support that they provided.
1Introduction and overview
2Benefits of cash: an overview of the literature
3Some general remarks
4.1Implications for monetary policy
4.2Role of cash in financial crises
4.3Consequences for a two-stage banking system (A bank is where the money is)
4.4Special role of foreign holdings
5.1Payment behaviour, risk and technology
5.1.2Data and definition of variables
5.1.4Interpretation and classification of the results
5.2Overview and control of spending
5.3Lower income groups and cash (payments inclusion)
5.4Data protection and privacy
5.5A potential electronic substitute for cash
6.1Fall-back solution for cashless payments
6.2Independence of foreign card providers
6.3Benchmark for card fees
6.4Alternative to a narrow oligopoly
6.5Welfare aspects of cash
7Criticism of cash
7.1The shadow economy argument
7.2The monetary policy argument
7.3The speed argument and security aspects
7.4Search for efficient prices
7.5Possible disruptions to the cash supply
List of figures
List of tables
Member of the Executive Board of the Deutsche Bundesbank
As the Bundesbank Executive Board member responsible for cash and cashless payments, a position that I have held for around seven years now, it goes without saying that I have been watching the public debate on cash unfold with particular interest. And I am not alone: interest in this topic appears to be steadily mounting in academic circles, throughout the business community and among the general public. The Bundesbank is contributing to the ongoing debate not only by conducting academic studies on the topic of cash but also by publishing articles across a variety of media.
As a subject of public debate, cash is being constantly examined from a wide range of angles and its benefit to the economy continually called into question. Cash, a multifaceted and, to some degree, highly emotionally charged topic, is coming under repeated criticism. Its detractors see it as inefficient, expensive and a tool for facilitating illicit transactions. They also believe that it impairs the effect of current monetary policy measures by preventing extremely negative interest rates from being enforced. Opponents of cash are therefore calling for it to be abolished altogether or, at the very least, for limits on cash payments.
And yet, despite the criticism levelled at it, the demand for cash remains as high as ever – as reflected, inter alia, in the stock of euro banknotes in circulation. The total value of banknotes in circulation within the Eurosystem has gone up from roughly € 220 billion at the end of January 2002 to around € 1,100 billion at the end of March 2017. A comparable increase can also be seen in the stock of banknotes in circulation in Germany. However, not all banknotes issued by the Bundesbank remain in Germany. Based on the Bundesbank’s estimates, only around 10% of the banknotes in circulation in Germany are being used for everyday transaction purposes, with the lion’s share of the banknotes issued either being hoarded in Germany or migrating to other European countries and beyond. This is driven by tourism, a large number of foreign workers – some of whom also send money back to their home countries – and close trading and financial links with other countries. Furthermore, given the status it enjoys as a stable currency, the euro is a popular store of value in non-euro-area countries as well.
Looking at the payment habits of the German public, it is clear to see that cash remains the number-one means of payment, with around 80% of all point-of-sale transactions being settled in cash. So far, none of the alternative payment forms currently under discussion have been able to fully replicate those properties that have made cash so successful. But what are those properties? And how does cash benefit the general public and the economy as a whole? These are some of the very interesting questions that ought to be at the heart of the debate on the “war on cash” but have long since failed to be adequately addressed.
In order to focus the discussion on, let’s say, limiting cash payments, examining the benefits and drawbacks of this means of payment is essential and therefore thrusts it further into the public and academic spotlight. A great deal of attention is being paid to the costs of cash and to its use for illicit activities, while little or no regard is being given to its benefits. Of course, it could be argued that the benefits of cash are obvious, otherwise it would not have become the public’s payment instrument of choice. But this is precisely why arguments in favour of cash should not simply be brushed aside. In any evaluation of payment instruments, it is vital to give equal attention to both the costs and benefits.
This state of affairs led us to commission a study analysing payment instruments in Germany – with a particular focus on cash payment instruments – and evaluating their associated costs and benefits. While the first module of the study included a literature overview of existing cost studies and an assessment of the significance of payment instruments for the economy, this, the second module, explores the benefits of cash in detail. The authors describe the microeconomic, macroeconomic and societal benefits of cash. Against this backdrop, this study attempts to systematically capture the benefits, without providing a quantitative assessment. In addition, it goes into explicit detail about the aforementioned arguments put forward by critics of cash as well as the drawbacks and consequences of abolishing cash.
I would like to draw particular attention to the section of the study that addresses the implications of abolishing cash for our two-stage banking system. The special role of cash as a broadly accepted means of redeeming banks’ liabilities to non-banks, including consumers, is underlined here. Viewed from this perspective, cash is currently the only means of payment that allows consumers to convert their claims on banks into central bank money.
The driving principle behind the Bundesbank’s business policy is to support both consumer sovereignty and the principle of contractual freedom. With that in mind, we do not issue any recommendations for or against the use of cash – it is up to the public to decide which method of payment they prefer.
Sole responsibility for the findings of this study lies with the authors. Consequently, neither the methods used in this study nor its findings reflect the views of the Bundesbank. We would like to thank the authors for the valuable contribution that they, by conducting this study, have made to the debate on cash.
I hope that this study illustrates the benefits of cash to you, dear readers, and leaves you in a position to contribute to an objective debate on the costs and benefits of cash.
Owing to the discussions that have been ongoing for some time now both nationally and internationally with regard to the complete or partial abolition of cash, the placing of restrictions on cash payments or the more general attempts to make cash payments unattractive, the advantages and disadvantages of cash have generated substantial public interest. Therefore, modules 2 and 3 of the study on the “Costs and benefits of cash and cashless payment instruments”, commissioned by the Deutsche Bundesbank, will focus on the costs and benefits of cash. This part, module 2, will focus on the benefits.1 These benefits will be analysed at both the microeconomic and the macroeconomic level, as well as in terms of societal aspects.2 The line of reasoning is primarily of a qualitative nature. In general, no attempts will be made to quantify the identified benefits.
Given that cash is still used intensively, one could, in principle, simplify matters by arguing that the revealed preferences of the general public clearly show that cash is deemed to be useful, otherwise nobody would use it. Moreover, a well-established institution, such as cash, which has proven to be successful and been developed further over hundreds of years, should not be abandoned without very careful consideration. At the same time, we do, of course, need to take a closer look at the efficiency or inefficiency of cash and new methods of payment.
The inclusion of benefits in the evaluation of payment instruments complicates the matter somewhat, especially as we are assessing a large number of qualitative and non-pecuniary factors, and externalities and network effects also play a role. This creates problems, especially when, as would seem meaningful, all parties involved in the payment process are included in the analysis. Cash, for example, is appreciated by consumers owing to its anonymity, whereas electronic payment systems allow retailers, in particular, to better assess the shopping habits of their customers.
At the same time, however, it is essential to take the benefits into account in order to provide a balanced assessment. Incorporating the benefits can have a marked impact on the relative evaluation of the individual payment methods (see Shampine, 2012).
Furthermore, while there are zero-sum games (“what one person gains, the other loses”) with sectoral costs within an accounting framework, this is rather the exception in terms of utility at the micro and macro levels. When benefits are included, excess burdens have to be taken into account and market prices become distorted. At all events, lower usage of cash should not necessarily be equated with greater (economic) efficiency (National Forum on the Payment System, 2015a; van Hove, 2016).
The assertion that cash is inefficient is often based exclusively on cost considerations and a purely partial-analytical or business perspective (eg Bloching, 2007; Guibourg & Segendorf, 2007). Benefit aspects are not taken into consideration. Moreover, the empirical evidence is by no means clear-cut. Even in the more business-oriented approaches with regard to costs, cash payments are not necessarily more expensive than cashless alternatives. In Germany, the cost of cash transaction is even lower than that of debit and credit cards. In terms of cost per turnover, debit cards are cheaper than cash, whereas credit cards are more expensive (Krueger & Seitz, 2014, Chapter 3; Thiele, 2016). In a study commissioned by the ECB covering several countries (Schmiedel et al, 2012), the findings did not reveal a uniform picture: in some countries, cash is the cheapest means of payment, whereas in other countries, cashless payment instruments are the cheapest.
Against this backdrop, this study attempts to systematically capture the benefits of cash, without providing quantitative estimates. It is structured as follows: Section 2 contains a brief overview of the literature and Section 3 presents a number of general remarks about cash and its benefits. Then, in Sections 4 and 5, the benefits of cash are discussed at the macroeconomic and microeconomic level. Section 6 broadens this perspective by incorporating societal aspects. Following on from this, Section 7 is dedicated to a critical discussion about the arguments put forward by those in favour of abolishing cash. Finally, Section 8 briefly summarizes the results and findings and draws a number of conclusions.
If only costs are taken into consideration when comparing various payment instruments, it is implicitly assumed that the payments are otherwise completely identical (homogeneous). As every active user of payment instruments can testify, however, this is by no means the case. Payment instruments differ in terms of key characteristics, such as convenience, speed, traceability of the payment, etc. In the context of this study, we talk about the “benefits” of the different payment procedures.
While there are already numerous studies available on the costs of cash payment transactions (see Krueger & Seitz, 2014, Chapter 3), the benefits of cash are generally somewhat neglected in the literature. Garcia-Swartz et al (2006 a, b) calculate as part of a cost-benefit study – using two case studies from the grocery sector and electronics specialty stores – the marginal benefit (in monetary units) for consumers (“privacy”), the central bank (seigniorage, fees) and commercial banks (fees) for various (cash and cashless) transaction amounts in the United States and Australia. These are compared with the corresponding marginal costs. The benefits of the anonymity of cash payments and the protection of privacy are captured via “loyalty card discounts”. According to the authors, these discounts represent the implicit benefit gained as a reward for disclosing private information. They raise the question as to whether an additional electronic payment (eg by debit or credit card) would, in net terms, cost society more from a cost-benefit perspective than an additional paper-based payment (eg in cash). One of the important conclusions drawn by the authors is that it is essential from a welfare perspective to consider the costs and benefits of a payment instrument for all parties involved in the transaction. They do, however, also highlight the difficulties faced in quantifying the benefits. For this reason, and also with reference to other studies, a follow-up study (Stewart et al, 2014) focuses purely on the costs, without taking benefits into account: “In all cases, estimating the benefits of payments has been beyond the scope of these studies given the difficulties of defining and measuring these benefits.” (Stewart et al, 2014, 5). “The study does not measure the benefits associated with different payment instruments nor whether the structure of the market promotes innovation. Both these factors need to be considered when drawing policy implications from these numbers; increased use of the lowest-cost payment system or less use of the higher-cost systems does not necessarily imply better outcomes.” (Stewart et al, 2014, 12).
Simes et al (2006) adopt a similar, albeit much less detailed approach than Garcia-Swartz et al (2006 a, b) for Australia. Anonymity for the consumer, for instance, is mentioned as a benefit of cash, but is not incorporated in the analysis in quantitative terms. With regard to the benefits of cash, the focus is therefore solely on the benefits for central banks and commercial banks in the form of fees and seigniorage. The background to the study is the question whether, for allocative reasons, further regulation of the payments market is necessary (eg in the form of interchange fees).
In Banque Nationale de Belgique (2005) a survey is used to compare the (nonquantified) benefits of cash for retailers and consumers in Belgium with the (quantified) costs. General acceptance, the ease of use between individuals, anonymity and privacy protection, the ability to keep track of spending and prevent the build-up of excessive debt, and social integration are highlighted as being the main benefits. The study notes that various payment instruments offer specific advantages, which would suggest that consumers should be free to choose between different means of payment.
A critical general assessment taking due account of qualitative factors, benefits and social welfare considerations can be found in Shampine (2007, 2009). Particular emphasis is placed on the fact that it is practically impossible to determine every benefit and cost component (and the triggered external effects) for each party with any accuracy. Consequently, the results, including the ranking of the payment instruments, respond very sensitively to minor changes in the assumptions underlying the estimates. Estimating cash demand functions to determine the consumer surplus is also problematic given the limited data. Lam & Ossolinski (2015), for example, find a wide dispersion of results when estimating the willingness of Australian consumers to pay for card payments on the one hand and cash payments on the other. While, for example, 60% of the respondents were unwilling to pay a surcharge of 0.1%, only 5% of the respondents said that they were prepared to accept a surcharge of over 4%.
This section aims to address some of the features unique to cash, which should be taken into consideration when assessing the potential advantages of this form of payment.
First of all, it should be borne in mind that cash boasts a number of features which make it very difficult to develop a perfect electronic substitute (for more details, see Lepecq, 2015).
•Cash can be used anonymously;
•Cash can be used without the further involvement of service providers;
•The payer and the payee do not need to be online in any way, shape or form;
•Cash can be used for both small and large payments;
•The payment is simple, convenient and quick;
•Users do not receive proof of payment;
•The payment is definitive and final (it cannot be annulled and there is no way to lodge a complaint);
•Cash is relatively secure against counterfeiting.3
At present, there are no electronic payment instruments which offer all of these features. It is also hard to imagine that a payment instrument of this kind will ever exist.
What functions does cash fulfil? These are derived from the general functions of money, which are the medium of exchange function, the store of value function and the unit of account function. It can generally be observed in all developed countries that the role of cash as a means of payment for “official” domestic purchases of goods and services has declined (see Figure 1 for the case of Germany and Bagnall et al, 2016, for an international comparison). Accordingly, the significance of cashless payment instruments, especially card payments, has increased in this respect.4
Figure 1: Share of cash and cards in retail trade
Source: EHI Retail Institute, own chart.
On the other hand, cash demand and the (net) issues of cash in the euro area and in Germany, for example, are steadily increasing, and also by a sizeable amount (see Figure 2). Consequently, other motives behind holding cash must have gained in importance. This could, on the one hand, be due to an increase in transaction demand in the domestic shadow economy (see section 7.1) or to a rise in foreign demand (see section 4.3). On the other hand, the store of value in the form of cash (hoarding) is likely to have gained in importance against the backdrop of subdued economic developments in some countries and very low interest rates (Deutsche Bundesbank, 2016b, 36).5 An increase in uncertainty and the fear of financial crises may also be factors in this development. The reasons behind this reflect security and precautionary motives (Arango et al, 2016; Alvarez & Lippi, 2009) as well as liquidity considerations (see Tanguy et al, 2015, for an overall assessment).
Figure 2: Circulation of euro banknotes
Source: Deutsche Bundesbank.
Notes: Year-on-year change.
Cash is secure central bank money without any risk of default. It also has a very high degree of liquidity. Arango et al (2016) show that it can be optimal for consumers to hold a cash reserve for precautionary reasons. They verify their results, inter alia, for the case of Germany using payments diaries, which were kept as part of a study on payment behaviour. Alvarez & Lippi (2009) use a dynamic variant of the Baumol-Tobin model by expanding it to include random ATM cash withdrawals (at a low cost or free of charge). This results in a rationalisation of a precautionary cash reserve, as consumers also make cash withdrawals even when they already have cash in their wallet. This precautionary motive is all the more pronounced the greater the ratio between the average cash holding at the time of the withdrawal and the overall average cash holding. In the standard Baumol-Tobin model, this ratio is zero.
In the state-of-the-art monetary models on cash demand, eg cash-in-advance models (Lucas & Stokey, 1987), money-in-the-utility-function models (MIU) (Woodford, 2003, Chapter 2) or search models (Williamson & Wright, 2011), the velocity of circulation of cash is constant if foreign demand and store of value motives are left out of the analysis.6
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