Cash: resilient or redundant?

17 November 2022

Sweden’s economy is on course to become fully digital next year as cash transactions are consigned to history. Elsewhere in the world progress towards the cashless society is uneven but post-pandemic is set to be further accelerated by resurgent inflation, reports flow’s Clarissa Dann

Recent interest in how King Charles III will be depicted on new British coins and banknotes serves as an indirect reminder that the cashless society could take several more years to arrive in the UK – if it arrives at all.

Contrast this slow progress with Sweden, ironically the first European country to issue banknotes but today in the vanguard of the move towards dispensing with physical cash. Sweden’s economy is on course to become fully digital by March 2023, which Deutsche Bank Research analyst Marion Laboure highlighted in her July 2020 paper ‘A Cashless Society: One Small Step for Sweden, One Giant Leap for Payments’.1

She points out that Sweden has always been a pioneer in new payment technologies; this was the first country in Europe to introduce banknotes in 1661 and in 1668 the Riksbank became the world’s first central bank. By the late 1980s/early 1990s, Swedish banks had begun to introduce card payments, the most important and popular method of retail payments today for low-value, high-volume transactions.

Two years on, in Towards the End of Cash?’ (1 November 2022), Laboure reports on how Sweden’s use of physical cash has been in steady decline since 2007. Earlier accelerators of money digitalisation that preceded the Covid-19 pandemic included high-profile cash thefts such as the 2009 Västberga helicopter robbery.2

Anders Ohlsson“I don’t think people in Sweden know what the different coins look like”
Anders Ohlsson, Head of Corporate Cash Management Sales, Nordics, Deutsche Bank Corporate Bank

“Card payment only” signs are increasingly commonplace in Swedish retail outlets and as of Q2 2022 cash in circulation represented only 1.25% of GDP in Q2 2022. According to a 2020 survey by the Riksbank, over the 10 years to 2020 the proportion of Swedes still opting to pay for a purchase with cash fell from around 40% to below 10%.3 “I don’t think people in Sweden know what the different coins look like at the moment,” reflects Stockholm-based Anders Ohlsson, Head of Corporate Cash Management Sales, Nordics, Deutsche Bank Corporate Bank.

A 2021 survey conducted jointly by market researcher the Orgio Group and the Payments Investigation, 4 found that only 8% of Swedes had used cash in their most recent purchase, against 77% who had paid using a bank card (debit card). This trend toward digitalisation was further supported in 2020 when – like many other central banks around the world – Sweden responded to the pandemic by increasing contactless payment limits, which doubled from krona (SEK) 200 to SEK 400 (US$36.5).

Not extinct yet

When cash was king (and queen): six full UK sovereigns and two half sovereigns, dating from 1885 to 1913 denoting the sovereign’s head (Photo by Neil Bussey)

With Sweden as the pacesetter, China and Brazil are among other countries seeking to phase out cash. In China, currency in circulation declined from 11% of GDP in 2012 to just over 8.5% in Q2 2022 and more than three in four Chinese consumers now prefer digital payments to cash. China is also the world’s largest mobile payment market and a leader in peer-to-peer (P2P) payments. The progress of digitalisation has been encouraged by the widespread use of quick response (QR) codes through Alipay and WeChat Pay. “Simplicity and security have made these two payment platforms increasingly popular,” says Laboure.

Yet as she reminds readers, the trend is far from global. Sweden and China are two of only a handful of countries where cash in circulation has declined in the past 10 years. So, while the trend towards a cashless society extends to many other countries worldwide and central bank digital currencies (CBDCs) are set to progressively displace cash, it will continue to be used for many more years as a store of value and as a means of payment.

Indeed, as a store of value in the Eurozone, the US and Japan cash usage as a percentage of GDP continues to increase. “Cash is king when there is a crisis, such as a financial shock or pandemic,” says Laboure, citing as an example the increased use of banknotes over the three months after the collapse of Lehman Brothers in late 2008, reaching a (then) all-time high. India’s central bank, the Reserve Bank of India recently reported that six years on from the country’s abolition in November 2016 of 500- and 1,000-rupee banknotes in a government bid to reduce dependence on paper currency, the amount of cash in circulation has risen by more than 70% 5.

Deutsche Bank Research’s own proprietary survey of 3,600 individuals across the UK, US, China, Germany, France, and Italy found that one in three Americans and Europeans still ranks cash as their favourite payment method. More than half of the people in developed countries believe that cash will always be around; an opinion that has remained steady both pre- and post-pandemic.

Figure 1: Currency in circulation as a percentage of GDP for selected countries

Source: Deutsche Bank, Haver Analytics

End of an era

Having established that cash isn’t about to disappear just yet, the report also examines a recent added driver of the cashless society alongside the pandemic. It observes that the decade following the global financial crisis was characterised by low inflation and low-to-zero (and even negative) interest rates, which has been associated with a rise of cash in circulation.

This era has ended abruptly as a result of the global inflationary spike. The US Federal Reserve began responding with interest rate hikes in late 2021; its latest increase of 0.75% basis points (bps) announced on 1 November was the sixth consecutive hike and took the target range for the federal funds rate to 3.75%-4%, the highest since 2008.

Marion Laboure, Research Analyst, Deutsche Bank Research“High interest rates will likely contribute to a significant reduction in the amount in cash in circulation”
Marion Laboure, Research Analyst, Deutsche Bank Research

Other central banks have started raising their respective interest rates, with the Bank of England following the Fed’s lead on 2 November with a 0.75% hike in its benchmark rate to 3%, The Reserve Bank of Australia (RBA) began increasing rates more swiftly and steeply than many anticipated in early 2022 and the European Central Bank (ECB) commenced what is expected to be a series of rises in July.

Rising interest rates are an incentive for consumers to either save or deposit money. A Deutsche Bank Research analysis of interest-rate hiking cycles in the US and UK, focused on the period 1960 to 1983, identified a strong negative association between the level of central bank interest rates and cash in circulation. The report concludes that while further work is required to establish there is a causal relationship between cash in circulation and interest rates, historically high central bank interest rates have contributed towards a decreasing amount of cash in circulation.

The European Central Bank (ECB) has warned that high inflation is a long-term challenge. Historical evidence suggests that once inflation spikes above 8% – and the eurozone’s September 2022 rate rose to 9.9% from 9.1% in August – it takes two years to fall back below 6%. This suggests that higher inflation will persist, and interest rates remain elevated over the next year as central banks attempt to bring inflation back to target.

This in turn “will likely fuel the transition to digital payments,” predicts Laboure, with a growing number of central banks already at work developing alternatives to physical cash.

The dawn of digital cash

Momentum towards the era of digital cash is such that the question of if it will eventually arrive has seen the emphasis shift to when and how. Nine in 10 of the world’s central banks are at least in the early stages of developing a CBDC and 62% are experimenting at the proof-of-concept stage. As the Bank of International Settlements (BIS) puts it, “Interest in CBDC has grown in response to changes in payments, finance and technology, as well as the disruption caused by Covid-19. A 2021 BIS survey of central banks found that 86% are actively researching the potential for CBDCs, 60% were experimenting with the technology and 14% were deploying pilot projects.”6

The share of countries developing a CBDC or running a pilot nearly doubled from 14% to 26% between 2020 and 2021, while 76% of nations working on a retail CBDC are exploring interoperability with existing payment systems. This would encourage the coexistence of central bank and commercial bank money and accelerate the widespread adoption of CBDCs, explains Laboure in her report.

Central banks in nations representing about one-fifth of the world’s eight billion population are likely to issue general purpose CBDCs in the next two years. Emerging market economies (EMEs) will lead the race in creating CBDCs, ahead of advanced economies according to the BIS, with the Bahamas, the Eastern Caribbean, Nigeria, and Jamaica already having launched live retail CBDCs. China, which has worked on a CBDC since 2014, started piloting its digital yuan in 2020 and made it available to foreigners at the February 2022 Beijing Winter Olympics.

And yet, as Laboure concludes cash is still essential while 1.4 billion people worldwide – more than one in five – remain unbanked. Cash is still relied on by the elderly and those who use it for small payments. It remains popular with consumers. Traditional currency is needed during a natural disaster when online access to digital currency might be unavailable and unlike digital payment systems it is not vulnerable to hacks and cyberattacks.

King Charles III’s coins and banknotes are likely to still be in circulation even when CBDCs have finally been embraced by the world’s major economies. That’s continuity…

Deutsche Bank Research report referenced

Future Payments: Towards the End of Cash? by Marion Laboure (1 November 2022)
A Cashless Society: One Small Step for Sweden, One Giant Leap for Payments by Marion Laboure, (2 July 2020)


1 See reuters.com
2 See youtube.com
3 See riksbank.se
4 See betalningsutredningen.se
5 See timesnownews.com
6 See bis.org

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