The Death Of Cash Is At Least 190 Years Away

As with stock markets, past performance is no indicator of future performance.  The change could well become much steeper or even exponential especially with such significant disruption as mobile payments affecting the domain, with innovations like Square and other intiatives, mobile payments are becoming not only secure but simple and 'on trend'. It must be remembered that the actual cost of cash and the associated  risks are very high.  In the example given the customer has had to get the cash - possible several thousands pounds - from his bank, incur all the associated costs, has placed himself at physical risk by having the cash on his person, then hand cash to a dubious courier.  May be it is time the industry 'got real' on the cost of cash and made it transparent to the consumer how unattractive and risky cash transactions are.

@ChrisF: TY for your comments. Let me assure that these are not past performance but clear and present trends. Having launched COD less than a month ago, the airline has probably heard about mobile payments and the like for several years. To avoid an even longer post, I consciously refrained from repeating my oft-expressed belief that only third-parties like banks and the digerati seem to attach a lot of costs to cash usage. Even if some of the underlying risks and issues with cash usage are genuine, they don't translate to transaction costs as long as the two key players in the transaction - buyer and seller - treat them as overheads of doing business. (And it's not as though a failed electronic payment has no cost for the payer.) I started leaning towards this view when I realized that I haven't come across a single merchant who refused to accept cash whereas so many of them - including cabbies in many cities in the world - go to great extent to avoid accepting card payments. My belief was further reinforced when I learned that the airline incurs the same cost for processing COD or card payments.

Just as friction in online payments is driving shoppers to go back to cash & cheques in India, this Fed article explains how online identity theft is forcing people in the USA to go back to filing their tax returns the old-fashioned way, printing and mailing them. Looks like we're still far from striking the right balance between security and convenience for online transactions. 

There is a very good reason that there is more cash than ever before. It is mainly all about dodging taxes, according to American Economist, Paul Krugman.

http://krugman.blogs.nytimes.com/2013/07/09/caches-of-cash/?emc=tnt&tntemail0=y   

A quick scan through Paul Krugman's NYT article and the 100+ comments below it exposes many more reasons for rising cash volumes: Lack of incentive of moving cash to CDs, fixed deposits and savings account due to low interest rates; high surcharge on credit card payments; ePayment friction; merchants' reluctance to accept credit cards; perception of better budgetary control by using cash; "Cyprus Syndrome", and so on. None of these relates to tax evasion. 

So, while tax evasion has been the traditional driver for earning and holding money in cash, it's no longer the sole - or even the main - factor for rising cash volumes. In fact, I strongly suspect that big ticket tax evasion has actually moved away from cash into realtime electronic payments between a web of shell corporations in dozens of offshore locations all over the world. 

This is a prediction based on the status quo continuing to dominate cash and payments behavior, which is already a poor underlying assumption. Considering that cash is such a new vehicle historically speaking (first used in 1661 by the Dutch, and wasn't mainstream until the 1780s) I think the proposition that cash will still be around in 190 years is either hubris or ignorance.

The reality is that the modality of payments is always what has influenced the use of currency exchange - we're seeing the fastest ever evolution of payments around mobile that we're likley to ever see in the recent history of finance. To assume that we're not going to see a change in the velocity or intensity of cash use under these circumstances is... well, just silly.

I don’t agree with your assessments regarding cash.  If I may ask, how did you come up with 190 years as a figure?  Why not settle on 200 years, as a rounded-up approximation? 

Exact calculations for the 190 year figure can be found in the first paragraph. It's not a rounded up or down approximation.

There was a 25% decline in cash use in Australia in just 3 years. Using the same methodology (CAGR of -8.33% decline) identified in your initial paragraph, all cash use globally will have ceased within 10 years.

http://www.zdnet.com/cheque-cash-use-in-steady-decline-rba-1339312196/

Yes I see where you are coming from. However, it is an awfully extravagant assumption that the rate of decline will approximately occur in this manner, over the next 190 years, wouldn't you think?  The internet, mobile phone, tablets, iPads, eye glasses as computer wear, laptops, and even the latest Apple product; the purported iWatch, as well as NFC in all mobile devices, are collectively going to have an absolutely massive impact on all manner of bank transactions.  The banking industry will be utterly unrecognisable in about 10 years’ time, to what we are currently accustomed.   

No, if anything, the awful extravagance in the assumption is in the other direction. Like I've said, "Mainly because the movement between cash and noncash modes of payment is not as unidirectional as it is often made out to be". My prediction is not based on continuance of the status quo - I don't know which part of my line "Just as electronic fund transfers and card payments have been replacing cash in some facets of life, cash has also been edging out electronic payments in some others." is unclear. For all the hype around mobile money, their actual performance to date doesn't warrant expecting them to radically transform the payment landscape. Even the app from Starbucks - easily the most popular form of mobile money - is used by only 1 out of 25 of its customers (click here for my calculations). And, it's not as though mobile money is new - we've been hearing about it for years. 

Ketharam,

Given the average lifespan of a fiat currency is 27 years, I think you are employing some extremely wishful thinking here...

There is absolutely nothing historically that would support your theory, putting aside the rapid change of payments today due mobile, etc.

BK

Brett, that 27 years article has some extremely misleading data behind it. Most of the short lived currencies are temporary ones instituted during wartime (there are 10 entries for each of the Confederate states individual dollars, for example). There are numerous duplicates for regional versions of the same currency - usually issued when a power was collapsing from war, so naturally short lived.

And of course, past performance is no guarantee of future performance.

Anon,

That may be the case, but given that hard currency is at best 250 years old as a general phenomenon, the concept that it will survive another 200 years in the face of such brutal competition from technology that enables frictionless payments is absurd.

Do you really think that the inhabitants of planet earth in the year 2200 will still be carrying out USD notes?? That's just crazy talk. 

Brett

@BrettK: I read the article you've referenced. Not being an economist, I can't claim to understand much of it. But it seems that the frailties of fiat currencies afflict cash and mobile money equally. In other words, if it's crazy to expect USD banknotes to be around in 2200, it's no less crazy to expect USD based mobile money to be around by then.

Ketharaman,

Are you telling me colonists on Mars and on the Moon in 2200 are going to be using USD currency??? Seriously, whatever are you smoking? 

I guess they'll still be watching cable TV, reading hardcover books and watching VCRs too yes?

Your proposition is that the entire world in every other arena is exploding digitally and technologically (transport, media, energy, publishing, manufacturing, etc), but that money will buck that trend continuously for the next 200 years because its... paper? Dude, get a grip. Change is what happens. Embrace it!

BK

"Talk about the death of cash goes back thousands of years" as Ron Shevlin says in his article I've referenced in the first paragraph of my post and I agree. Seeing as I've no commercial interest in cash or noncash methods of payment, (1) Several ePayments and mPayments have entered the market in the past decade, but volume of cash in circulation has only increased in the recent years (2) I don't have a compelling reason to believe that "it's different this time" (3) While cash might be broken in a few ways, alternatives are not without issues of their own. 

It hardly matters what I'm smoking but I'm certainly not drunk on the Kool-Aid of mobile money or something else rendering cash obsolete anytime soon.

There have always been an abundance of people willing to question the need for change when major, embedded behaviors are threatened with disruption or replacement.

A great illustration of this is an article written by a Wall Street Columnist (Michael Silverstein) in April of 2009 entitled "Will Cars Ever Replace The Family Horse?" - basically looking at the clean energy problem, but from an illustrative perspective arguing that cars will never likely replace the strong, predictable transport economy of the late 19th Century, i.e. the horse:

"Let’s be honest here, these late nineteenth century heavy thinkers would conclude. Automobiles were a rich man’s toy. They would never be manufactured at a cost that would make them practical to the ordinary person. All the numbers and simple common sense made clear that an auto-based culture was a pipe dream. A nice pipe dream, perhaps, but one that must not guide national economic policy..."

Just because a system has worked well in the past, is never a protection from a better system that works more efficiently, faster, cheaper, etc in the future. Disruption in the print, media, music, retail industries right now are significant, but were once considered fancifal by commentators like Clifford Stohl from newsweek:

"Visionaries see a future of telecommuting workers, interactive libraries and multimedia classrooms…Commerce and business will shift from offices and malls to networks and modems… Baloney. Do our computer pundits lack all common sense? The truth is no online database will replace your daily newspaper, no CD-ROM can take the place of a competent teacher and no computer network will change the way government works…" - Newsweek, Feb 27th 1995 

This is the point we are at with cash. Is there absolute proof that technology and consumer behavior will erode the use of physical cash? Yes, if you are prepared to look for it. However, if you don't want to see it, you'll just as likely to find a compelling argument why the automobile will never replace the family horse, the telegraph will survive the onslaught of the telephone and why books will always be sold through a bookstore. 

I don't really have to convince doubters of the fact that cash use will decline because all I have to do is wait and the evidence will become apparent in just a few years. The question to ask in all this is why defend cash at all? That answer is instructive, because there are only two reasons why you would defend cash:

1. It's a perfect system and can't be replaced (unlikely), or
2. The fear of change of this system is a threat for some reason

Cash is not a perfect system or we wouldn't have mobile money, paypal, bitcoin and electronic transfers at all. Thus, we're already been working to replace cash systemically and have been for over three decades now. Today 90% of transactions around the world are done electronically - therefore, the battle for the dominance of cash has already been lost. It will just take a little more time for you to see it in your wallet - but it is inevitable.

I'm afraid that the tales of the death of cash are only going to get more believable, and it won't take anywhere near the 190 years that has been postulated above. 

Hi Ketharaman, you are entitled to your point of view, although I thoroughly disagree with you about the speed in which a cashless society will occur. It will most definitely not be in 190 years. Let’s clear that idea away fairly early. When will we see it occur? Nobody can give you a date but it will happen, given a plethora of public debate before it will be phased into existence in orderly stages by democratic governments.  If I were to make a guess as to which group of nation-states will be among the first to become cashless, I would probably nominate Sweden, South Korea, Nigeria, Canada and New Zealand, based on media reports.   

Have a listen to what economist Robert Reich and author David Wolman have to say about this matter.   http://www.youtube.com/watch?v=jxjlwu5xOAY

One issue which is of vital importance to me and most other people is the contemporary issue of privacy, and its interface with a future cashless society.  When we think about this issue, we have a rollcall of names to ponder.  Edward Snowden, Bradley Manning, Daniel Ellsberg and Julian Assange of Wikileaks are all names that most people are aware of.  The entire world has to have a long-running debate on the issue of privacy, before we can approach the issue of a cashless society with greater confidence. 

Thank God for Edward Snowden, for he has given everybody a flickering chance to reconsider the role of privacy in our lives and in the lives of our families, our working lives and in our communities, before the inevitable progression to a cashless society is a working reality.  On the issue of privacy, all democratic societies truly need to develop the legislative protection of all genuine whistle-blowers and the protection of all journalists. 

You cannot have a functioning democracy without privacy, and the proper supervision of intelligence gathering.  I am not for a moment suggesting that the CIA, FBI, NSA, MI5, MI6, and Australia’s ASIO, etcetera, are to be weakened to such an extent as to render them incapable of protecting us all from foreign and domestic terrorist threats.  That would be completely irresponsible.  It is all a question of getting the balance right.  All security establishments need to be overseen by independent courts, and select intelligence committees of the Parliament or Congress.  These bodies need to have the power to do their supervisory work.  In the end, there needs to be more public debate, transparency and accountability of the executive branch of government, and for the mass media to be thoroughly involved on reporting the issue for the common good.  The issue of privacy is one of our first order issues that are in the public interest.     

 If anyone is looking for a superb summary of why privacy is important to individuals, why it is a universal human right, why it is important for the workings of democracy, and why thinking that ‘I am not doing anything wrong so I am not worried about being monitored or recorded’ is a foolish attitude, then look at this interview of investigative journalist and lawyer Glen Greenwald, on an independent media outlet in the United States. It will definitely make you think more clearly about privacy, and why it is so important. 

http://www.youtube.com/watch?v=dK9gsojs9Fc   

I'm going to have to disagree with some of the recent posts.  Whilst I can't say for certain when cash will disappear, but it will not be within my life time (I have just turned 33).

You are asking people to stop using something that is so engrained in them it's almost genetic.  Just because you say you don't need to use this you can use this instead, doesn't mean they will.   Hay look at racism and sexism, we all know it's wrong, yet it is still prevalent as you cannot change people's minds just because you say so.

Agreed that in hindsight cars were always going to be take over the horse as it offered cheaper and faster transport and was less likely to need to be replaced as often.  Cash is a very different beast...

Cash does not rely on mobile signals, a topped up battery, an understanding of financial trading, it is just cash.  People teach their children the value of money through cash, you are even taught to count through the use of money.  Yes, yes I know the use of electronics is changing the dynamic but you cannot teach the value of money on a screen. 100 pennies will seem like a lot to a child when placed in front of them, on the screen it's just pixels.

Cash will die, the cost of making it and the resources to make it will dwindle.  But with the ensuring energy crisis electricity will go the same way too.  Also what we think may naturally succeed cash, may not be what succeeds it at all. 

Enjoy the ride, enjoy the choice, just don't place any bets on what the next big thing will be.



For the kind of transactions I do with cash, it's the best, fastest, and the cheapest method of payment as on date. If credit card MSC / MDF gets legislated down to 0.3% as EU is proposing to do, then merchants might find cash costly but, at current interchange levels, I haven't come across a single merchant refusing cash as being too costly and welcoming noncash payments in its stead.

The 190 year figure hasn't come out of the hat. It's the outcome of a number crunching exercise that's based on hard facts and figures. While anything can happen in future - electricity could disappear, for example, as @FinextraM points out - but, based on what we know today, the 190 year figure can't be taken lightly.

Not sure what problem mobile money solves but PayPal, BitCoin and EFTs originated for reasons completely unconnected with imperfections in cash. In fact, cash is making a comeback in some of the usage scenarios that were the traditional forte of electronic payments, as I've highlighted in the example of e-ticket in my post.

Ketharaman,

The trend towards declining use of cash  is certain. However the rate of decline you have assumed is uniform..It need not be so..if you take a phase transition approach..there comes a tipping point till when the steady decline may be appropriate and at such point the decline can much faster..even exponential in its rates.

How will we know the tipping point or when can we expect ? Often the tipping point occurs when the external infrastructure is adequate enough to engender a behavioural shift in the people.

In our personal lives, what is our attitude to making a cash payment.. I find it a chore that I need to go and get cash out for certain transactions and when inconveniently located I have to pay a fee to withdraw Cash so that I can use it to spend for certain of my expenses.. I would always prefer paying by card / digital means than cash.

Digital spend of cash also has the advantage of being able to use the data to drive insights and value to the customer ... When banks / service providers are able to provide adequate tools to allow customers to analyse their spend and draw insights not just on their transactions with their bank but on their spend overall ... and when us as customers we get used to the ease and advantage of these self-servcie analytics.. the preference will shift faster to non-cash means..

These are not hypothetical but already happening in small ways though..

Again we will know when the tipping point is nearing / occurred when people are actually charged for making a cash transaction in much the same way we incur (implicitly or explicitly) a charge of card payments.

In a nutshell there is nothing inherently superior about Cash as an instrument facilitating exchangge of value and current day solutions / infrastructure are not broadbased enough or penetrated deep enough .. yet... all the activity we are witnessing now and will see over the netx few years  will create the necessary infrastructure..

my hypothesis is that the cashless society could be a reality localised to certain cities or even some countries over the next 30-50 years..

@JayakumarV:

Up until recently, you couldn't book an eticket with cash. Now you can, as I've pointed out in my post.

Like you, even I like to pay by credit card - wherever I can. Unfortunately, it takes two to tango. So many merchants in so many parts of the world don't accept credit cards because they can't get a merchant account and / or find the MDF / MSC too expensive. According to iZettle, the number of such merchants is around 30M in Europe. That number could fall if MDF gets legislated down to 0.3% as EU is proposing to do. That said, hitherto card users could switch to cash if merchants start levying surcharge for accepting card payments as they're increasingly being permitted to do.

For every cardholder who loves spend analytics, I know at least one other who hates the loss of privacy inherent to the process of gathering spend data.

Lastly, cash is the most primal form of wealth and, although it could vary from one culture to another, I don't expect too many merchants to spurn wealth by refusing cash. 

So the scale could tip in the other direction as well.

Well Friends, with the pace of changing scenario in banking and marriage of 4 powerhouses: Retail, Social Media, Banking and Telecommunication; I foresee death of cash within this century itself. I have witnessed Kenya as an example; wherein even school/university fee is paid by m-Pesa [Mobile Money]. People pay each other over m-Pesa. The pace is different in different countries and cultures, but death of cash is inevitable....say within max another 30-40 years.

Telecom companies permeating into 'pseudo-financial' business is a big risk to banks and hence banks would do anything to 'safeguard' their positions. Card fee would continue to drop, alike call-charges in telecom. Eventually, it might end-up risky and expensive to get and carry cash.

In my housing society, cash is already a historical item. We pay for news-paper, milk, laundry and even car-wash through a card...provided by the housekeeping service provider. That card can be pre-loaded over the net.

So...let all of us stand for 2 minutes...in silence...!! RIP Cash...

@RiteshA:

Countless articles have been written about why the success of M-PESA is unlikely to be replicated in too many parts of the world, not even in South Africa. Here's one from FT if you're interested: http://blogs.ft.com/beyond-brics/2012/05/28/mobile-money-kenya-good-india-bad/.  

The on-the-ground situation is no better: The same Vodafone that is involved in M-PESA in Kenya has tried launching its equivalent M-PAISA at least twice in India and has withdrawn it both times. And, let's not forget that M-PESA was launched as far back as 2007 and the lack of another example in these six years only proves the point.

So, I'm sorry if I'm not drunk on the Kool-Aid of TELCOs posing a threat to banks, a topic on which I'd written a separate blog post: 

Banks Have Nothing To Fear From TELCOs

The real change is the one you've described in your housing complex. I've seen a similar prepaid card initiative fold up in a neighboring housing complex a couple of years ago when the system went kaput and there was no money budgeted for AMC. But, that's no reason why the one in yours shouldn't be successful. 

The calculations in my post about "Zero Cash Day" were based on the (falling) share of cash as a method of payment. I'd ignored reports stating that the absolute volume of cash in circulation has actually been growing over the past few years, assuming that the trend would be short-lived. Looks like my assumption is wrong: According to this gtnews article, the rise in the number of banknotes is expected to continue "through to at least 2022". Nothing temporary about that. The article also describes some new technology designed to help help retailers and other businesses cope up with the rising volume of cash. Quite frankly, a lot of that sounded more innovative than mobile payments, at least in as far as they solve real world problems.

Talking of which, Vodafone India finally launched M-PESA and I signed up for it around 10 days ago. At the time of signing up, I'd submitted at least 3 different types of documents for Proof of Identity. Today, I received an SMS saying that I need to submit some more KYC documents before my account would be activated. With so much friction in onboarding, I'm not sure if M-PESA will ever gain mainstream adoption in India.

Ketharaman,

I love your optimisim on the cash front, even if it is grasping at straws. 

BTW Blockbuster is closing all their remaining stores:
http://www.chicagotribune.com/business/breaking/chi-blockbuster-to-close-all-stores-20131106,0,2509893.story

10 years ago you would never have predicted that based on the data. You would have said I was crazy if I had suggested that the internet would kill video stores like Blockbuster, or bookstores like Borders. But it did...

The problem with your analysis is it is predicated on consumer behavior around payments not fundamentally changing. In the thousands of years of commerce, payment behavior has been constantly changing. The assumption that cash is impervious to these changes is like suggesting that Blockbuster is wrong to be closing those stores!

Consumer behavior is the killer app - if you don't respect it, it will kill your business. You, my friend, are more enamored with cash as a concept than you are with the underlying reason for cash - in that it enables you to buy stuff. Once the value ecosystem around buying stuff changes, the method of payment will shift - as it always has historically. To suggest otherwise would suggest you believe consumers who are constantly adapting and changing, will suddenly buck those historical precedents and do something totally uncharacteristic.

This is not about "The End of Cash" - it is about why we use cash, and the underlying assumption that our current method of paying (with cash) can not be improved upon. 

That, my friend, is just crazy talk...

BK 

Let’s face it.  Cash is something that is a part of custom and tradition, and it will be some time before it has finally bitten the dust.  People who are most disinclined to change are the elderly, those involved in crime, and the stubborn.  It will take many years before this issue can finally be ‘put to bed’. 

Criminals love cash for obvious reasons.  Whether it is cash robberies, graft and corruption, illegal forms of tax avoidance, counterfeiting cash, paying people anonymously through ‘under the table’ payments and money laundering; they adore the stuff.  Organised crime is built on a mountain of cash.  Having cash rooms, using car boots, locked and secure brief cases, and stuffing as much of it in your pockets; are all prerequisite to criminal operations and hiding one’s treasure from the authorities. 

My desire, indeed impatience for a cashless society, is partly based on increasing security and convenience for all of us, as well as getting rid of, or minimising as much of this criminal behaviour as possible.  Once cash has truly bitten the dust will be when taxation authorities, intelligence services and police forces, will throw their hats in the air in jubilation.  Both these authorities and the broad mass of community members will be relieved when they will exert a far greater degree of control and conformity to the laws of a democratic nation-state, for all nonconformists.  The black market, white collar crime and blue collar crime will be far more restricted and diminished, as a result of expunging notes and coins.   

Let us also not forget that the cost of cash, manufacturing, designing, supplying, counting, storing, and transporting it, will only get more expensive as time moves onwards.  Come on now, you know it is going to go.  It is simply a matter of time.  I am not hung up as to making a precise prediction as to when it will be eliminated, because I don’t feel any pressure to do so.  If it is gone in my life time, hooray!  If it is going to be eliminated in 50 or 100 years from now, is testament of the hold of cash on people.  We have had cash for several thousand years, firstly as coins and then as notes.  I am not lying awake at night stressing as to when cash will be no more.  It will happen when it will happen. 

@BrettK:

While I love all your theories about the purpose of cash, consumer behavior and so on, I can't ignore ground reality, which is that the volume of cash in circulation been rising and will continue to increase at least until 2022.    

BORDERS and BLOCKBUSTER are just two companies. Their fates don't say too much about the popularity of brick-and-mortar-stores versus online stores or physical goods versus digital goods. The last decade has probably seen more Internet companies shutting down than traditional ones. For all the hype, ecommerce has still not even managed to grab a 10% share of retail sales in the USA (and much less in many other developed nations) despite being in existence for almost 20 years. A pure play Internet company like Warby Parker has felt the need to set up physical stores. 

There's no denying that consumer behavior is all important. The very fact that cash is still around despite so many shifts in consumer behavior over the centuries actually proves that cash is able to cater to the preferences of a wide variety of consumer behavior patterns. For example, it has even entered ecommerce and etickets via Cash on Delivery payment mode. I see no reason to believe that cash will suddenly lose its versatility as buying ecosystems change going forward. 

@JohnC:

In this day and age of realtime wire transfers across offshore locations and huge fines slapped on banks for money laundering via noncash payment methods, I tend to think that a lot more criminal activity happens via electronic payments than cash.

The central theme of this post is whether and when the Zero Cash Day will arrive. While you may not lose sleep over it - neither do I, for that matter - there are many others who probably will.

This NYT article provides a new reason why people are turning to cash:

http://www.nytimes.com/2014/02/03/business/newly-wary-shoppers-trust-cash.html

It's now over two years since I wrote this post, and, to quote from this article by Gareth Lodge of Celent, 

"cash is by far the most dominant, as at 50% share, it’s obviously the same size as all the other payment types …combined. So cash isn’t dead, and not even mildly under the weather!"

Cash is predicted to go in Australia in ten years time, according to an Australian National University economics academic. Professor Rabee Tourky, who is the director of the Australian National University's Research School of Economics, thinks that in future the idea of Bitcoin will be used by the Reserve Bank of Australia in conjunction with the Australian government to create a national digital Australian currency, with the possible name of 'Ausbit'.

Google 'The Age' which is an Austrlian newspaper, and search for 'Cash Notes Gone in a Decade'.

It is also aparent that the Reserve Bank of Australia has done some inhouse confidential discussion about digital currencies such as Bitcoin. 

Go to the RBA website at www.rba.gov.au and then search for the 'Freedom of Information Disclosure Log' and look for 'RBAFOI-131419', which was released on the 30th April 2014.

Alternatively, go to www.rba.gov.au/foi/disclosure-log/ and look down the left-hand-side of the page for 'RBAFOI-131419'.  

When all else fails, cash prevails. Even at the mobile payments prima donna Starbucks. http://ow.ly/i/ax0dL