The Blessing of Cash

Transcription

1 Page 1 The Blessing of Cash Presentation at the International Cash Conference 2017 of the Deutsche Bundesbank Island of Mainau, April 2017 Franz Seitz (Weiden Technical University of Applied Sciences) Malte Krueger (University of Applied Sciences Aschaffenburg)

2 Page 2 " the demand for currency may have properties nothing like what one would expect from textbook models of money demand." (S. Sumner, 1994)

3 Page 3 Cash and cashless payment instruments: Some data

4 Page Banknote circulation in the Eurosystem 100% % % 70% in bn. Euro % 50% 40% 30% Annual Growth Rate % % 100 0% % Net-Issuance-Eurosystem without Germany Net-Issuance-Germany Annual Growth Rate % - Eurosystem without Germany Annual Growth Rate % - Germany

5 Page 5 Cards and cash at the POS (share in retail turnover) 90% 80% 70% 60% 50% 40% Cards Cash 30% 20% 10% 0%

6 GE: Cash demand motives 45% 5-10% 25% 20-25% outside euro area hoarding other euro area countries transaction balances Page 6

7 Page 7 Cash characteristics

8 Page 8 Cash characteristics Cash has characteristics which make it hard to find a perfect electronic substitute Anonymity in use, Use without other service providers, Neither payer nor payee have to be online, Usable for big and small amounts, Payments are easy, comfortable and quick, Payment is definitive and final, Cash is relatively secure against counterfeits

9 Page 9 Some general remarks Functions of money domestic transaction demand Store-of-value function, foreign demand For unit-of-account function cash essential Legal tender No international agreed definition Euro banknotes unlimited legal tender Restrictions via freedom of contract principle Cash enables private sector access to secure central bank money (alternatives?)

10 Page 10 2 recent studies (1) Krüger, M. & F. Seitz (2017), Costs and Benefits of Cash and Cashless Payment Instruments: The benefits of cash (to be published). (2) Rösl, G., K.-H. Tödter & F. Seitz (2017), Doing away with Cash? The welfare costs of abolishing cash, IMFS Working Paper.

11 Page 11 Cash abolition

12 Page 12 Cash abolition The cost/(in)efficiency argument Cash is an expensive payment instrument Purely partial equilibrium analysis (e.g., banks, card-issuing firms), no general equilibrium effects and total cost-benefit analysis But: even sectoral studies do not reveal higher costs of cash payments in general - Costs per transaction: Costs of cash unambiguously lower than those of debit and credit cards - Costs per turnover: debit card payments with lower, but credit cards with higher costs than cash - Multi-country study of the ECB: in some countries cash, in others cashless payments the least cost-intensive payment instrument

13 Page 13 Cash abolition Security problems Nation-wide or world-wide introduction of electronic payment systems would mean that everybody must be able to pay and receive payments within such a system (incl. people with diminished cognitive abilities and fraudsters) If cash is to be completely abolished, access to electronic payment system becomes fundamental right System has to be simple and function offline (fall-back solution, costs) Moreover: "risk of theft": Incentives for criminal attacks the higher, the more comprehensive the system is

14 Cash abolition Use of cash in the shadow economy and by terrorists No doubt: Cash is a interesting means of payment (and store of value) in connection with these activities. But the questions are: If we are to abolish cash, how strong would be the effect on these activities? availability of substitutes (foreign cash, vouchers, diamonds) Is abolition of cash first best or are there better alternatives? How big is the role of cash in the underground economy? Equating the stock of cash with black money (Buiter) is nonsense. Figures on cash in circulation and estimates of shadow economy hard to reconcile. Page 14

15 Page 15 Consequences for a 2-tier banking system ("A bank is where the money is")

16 Page 16 Consequences for a 2-tier banking system ("A bank is where the money is") Two important factors: 1. Declining volume of cash transactions Regulation Use of cashless payment instruments 2. Lack of trust in commercial banks Both factors create pressure on central banks To provide central bank substitutes for cash To limit credit creation by commercial banks

17 Page 17 Consequences for a 2-tier banking system ("A bank is where the money is") Potential structural changes: central bank issued digital money 100% reserve currencies ("Vollgeld-Systeme") non-bank access to central bank accounts Consequences: Significant growth of central banks balance sheets Banks lose capability to create money and credit Willie Sutton ( ) Banks are becoming mere financial service providers A bank is no longer "where the money is".

18 Page 18 Consequences for a 2-tier banking system ("A bank is where the money is") Quantitative significance of such changes: Deposit liabilities of euro area banks Overnight deposits Deposits of euro area residents In comparison: Liabilities of the Eurosystem Banknotes in circulation Liabilities to euro area credit institutions Liabilities to other euro area residents denominated in euro 305 (end of January 2017; Euro billion)

19 Page 19 Data protection and privacy

20 Page 20 Data protection and privacy Economic aspects Approx. 400 cash trx. per capita per annum (Germany). Use of cash effectively protects payment data, in particular the data of the payer. The aim is not maximal data protection. Rather, there should be the option to carry out a transaction anonymously. Lack of anonymity increases the risks of data misuse and leads to fewer legal transactions. In all likelihood, there will never be a perfect electronic substitute for cash.

21 Page 21 An electronic substitute for cash?

22 Page 22 An electronic substitute for cash? Not required for a cash payment: involving a third party service provider use of a special hardware use of a special software a functioning online connection As a consequence: for cash, there is no risk of system failure cash is a suitable means of payment during disasters System failure does not affect cash: only true for payments not true for cash provisioning

23 Page 23 An electronic substitute for cash? High hurdles for electronic substitutes Cash has many properties that are hard to emulate. In all likelihood, there will never be a perfect electronic substitute. Security aspects are particularly important. A digital means of payment that provides an combination of anonymity, offline usability, open access for anyone and no transaction limits would pose huge risks for issuers. Should a digital means of payments be invented with all of these properties, it would be a dream come true for the shadow economy not to mention terrorists.

24 Page 24 Anti-trust and governance issues

25 Page 25 Anti-trust and governance issues Cash-card competition (or war?) Cash competes with card products. At the POS, it is either cash or cards. In Germany, the number of card brands that are accepted has been proliferating. BUT: Apart of niche products there is cash plus national card brands like Girocard and ELV in Germany the brands of Visa and Mastercard.

26 Page 26 Anti-trust and governance issues Competition between card brands Competition between Visa/Mastercard on the one hand and national schemes on the other has intensified considerably. In some countries national schemes have been discontinued already: Finland The Netherlands Ireland It does not seem unlikely that the same will happen in other countries, as well. Should Mastercard and Visa be the only remaining schemes of some importance, the existence or non-existence of cash would make a huge difference for competition.

27 Page 27 Anti-trust and governance issues Governance If cash were to be abolished, there would be in increasing pressure to offer card-products that can be used throughout SEPA. For the moment only Visa and Mastercard are able to offer such products. So, without cash and with Visa and Mastercard the only SEPA card schemes in existence, the rules for European retail payments would be made outside of the EU. What would that imply? Some examples: No payments for Cuban goods possible. Blocking of cards in case of international conflicts (Serbia, Russia)

28 Page 28 The pricing of payments

29 Page 29 The pricing of payments Arguments against cash The use of cash is free or it is subsidised. As a consequence: Payment choice by users is inefficient. But: Payment markets are 2-sided markets. Cost-based prices are not efficient (even hard to define). In many markets, only one side has to pay (i.e. telephony). On close inspection, the business model for cards and cash are quite similar.

30 Page 30 The pricing of payments Comparing the products "cash" and "card" Product: Cash (jointly with bank account) Principle service - Cash distribution and collection Fee for principle service - Account owner at own branch ATM: no - At foreign ATM: yes - Merchants depositing cash: yes Transaction-independent fees - Periodic account fee - Revenue from overdrafts - Revenue from low-interest deposits - Cross Selling (investment products, etc.) Product: Payment card Principle service - Payment at the POS Fee for principle service - Consumer: no (for fx transactions: yes) - Merchant: yes Transaction-independent fees - Annual fee - Revenue from Revolving Credit - Revenue from low-interest deposits - Cross Selling (insurance, etc.)

31 Page 31 Summary, conclusion Cashless society not in sight Importance: different motives of holding cash Diminishing role of transactions motive Increasing role of other motives Not cash or cards, but cash and cards Arguments for abolition of cash not convincing, implementation problems Moreover: "terra incognita" Welfare costs of abolishing cash essential Competition between cash and cards beneficial Let the consumer decide!!

32 Page 32 Thank you very much for your attention! Any questions?