As digital payments grow, so does demand for cash

February 3, 2021 10:25 AM

Card Forum: Contactless is keenly focused on the opportunities that come with the adoption of digital and contactless payments. Senior industry leaders will examine the huge shift in consumer behavior that has increased demand and explore how banks and credit unions can stay at the forefront of innovation.

Register today and join hundreds of leaders in the payments community on March 16th!

Learn More

The coronavirus pandemic has not only fast-tracked a shift to digital payments, it has also deepened the commitment to cash among those who use it.

Early in the pandemic, there was a coin shortage that forced the U.S. Mint to produce more pennies, dimes and quarters. Further, the circulation of U.S. paper money is the highest it’s ever been, although it’s not being driven by in-store commerce.

This is in stark contrast to perceptions that cash can spread pathogens, a concern that has caused many consumers and merchants to downplay its usage.

Millennials have often been considered drivers of P2P app usage in past years, but with the expansion of the bank-supported Zelle P2P network, adoption of the service has grown among all generations. The trend of greater digital P2P adoption has accelerated during the pandemic due to a variety of factors, including a reluctance by consumers to handle cash.

Social distancing, quarantining and a stronger ability to use electronic P2P funds for shopping online have all led to greater adoption of the service over the past year. Overall adoption of P2P usage grew five percentage points between March 2020 (before the national emergency declaration) and September 2020, according to data from the PaymentsSource Future of Money Study released in November 2020. Among Boomers, that actual growth was even stronger, going from 60% in March to 68% in September.

Looking at existing P2P users, 47% of millennials and 41% of Gen Z reported making more P2P transactions in September than prior to COVID-19. The increased level of P2P usage was also higher for older generations, but not as significant as the younger ones with 39% of Gen X and 22% of Boomers who reported using the service more.

Swedish consumers have slowly been shifting their in-store payments away from cash to payment cards and Swish, a bank supported account-to-account payments mobile app, over the last six years. Cash usage fell from 23% of in-store payments in 2014 to 13% in 2018, according to the Sveriges Riksbank (Sweden’s Central Bank) bi-annual survey. However, as the pandemic has accelerated many payment trends, the experiences felt in Swedish stores have mirrored those in many other countries.

Cash used as an in-store payment method in Sweden fell by to 9% in 2020, down from 13% in 2018. Cash’s fall from usage is even more dramatic when examined over the last 10 years. In 2010, Sweden’s Central Bank reported that cash was used for 39% of all in-store transactions.

The move to go cashless, aside from consumer interest to go digital, has largely been pushed by government initiatives to fight crime and maximize its tax collection capabilities. Sweden plans to allow merchants to refuse cash for in-store transactions starting in March 24, 2023, forcing consumers to pay electronically with a payment card or mobile app such as Swish.

Probably the most immediate impact on cash usage from the pandemic was the change in consumer shopping habits. Forced lockdowns and store closures had many scrambling to figure out how to buy life’s basic necessities.

In the last few years online commerce as a percentage of total retail sales has shown a steady beat of “metronome like” rate of increases, rising one or two percentage points each year, coming at the expense of in-store shopping. However, the pandemic saw this shift accelerate in 2020 with some months reaching one-third of all retail sales in the U.K., based on data from U.K. Office of National Statistics.

Just over 19% of all retail sales in the U.K. were generated through online channels in February, as the pandemic started to unfold. Fast forward to May, during the peak of lockdowns in the British Isles, and the internet’s share of commerce had reached 32.8% of all retail sales. The share fell over the summer as shopping restrictions were relaxed — only to find subsequent spikes in virus infections and the holiday shopping season drive it to a historical high of 36.2% in November.

Almost two billion consumers around the globe are unbanked, without either a traditional bank account or an account with a mobile money provider. These people, often living in poverty, have no other alternative to cash when making purchases or paying bills.

The World Bank reported that almost half of all unbanked individuals live in just seven countries, including two of the most populous – China and India. Additionally, the World Bank found that women are disproportionately affected, making up 56% of the unbanked compared to men, who make up the remaining 44%.

The most commonly cited barrier for not having a bank account is a lack of money, with nearly two thirds of unbanked adults having reported owning too little money to be able to use one. Further, 26% of unbanked adults noted that cost was a major barrier to account ownership as the bank fees were too high. The World Bank noted in its research that cost was more of an issue among the unbanked in Latin America and the Caribbean. In Brazil, Colombia and Peru, almost 60% cited cost as a barrier to bank account ownership.

The growth of the mobile wallet market has arguably been the strongest in China where two wallets have dominated the landscape – Tencent Holdings’ WeChat Pay and Ant Group’s Alipay. This duoply has a new challenger, Douyin, which aims to further take payment share away from cash.

Tencent’s WeChat is a messaging app that developed a payments functionality, while Alipay originated as a payment method that could be used for online and in-store purchases with its sister company Alibaba. Douyin is a messaging app as well, owned by ByteDance, the owner of TikTok.

Recently, the Chinese government expressed concern about the growing power of these third party mobile payment apps, and forced Chinese billionaire Jack Ma to sideline Ant Group’s IPO, which was slated to value the company at $300 billion. Chinese regulators have told Ma that he needs to shrink the company and refocus its operations on its original core of payments.

Despite consumers, merchants and governments pulling back on usage of cash for transactions, a trend which has been accelerated by the pandemic, there is one fact that flies in the face of this general trend: The U.S. Federal Reserve has noted that every year for the last 20 years, the number of bank notes in circulation has continued to climb. In December 2019, there were 44.9 billion notes in circulation, almost exactly double the 22.5 billion notes in circulation in 1999.

Specifically, it’s the $100 bill that has been driving up the demand for U.S. banknotes. In 1999, just over 17% of U.S. banknotes were $100 denominated bills, while 25.8% were $20 bills and 33% were $1 bills. In 2019, $100 bills represented over 31% of all U.S. notes in circulation while $20 bills had a 20.5% share and $1 bills had a 27% share.

So what’s driving up demand for $100 bills, especially because many stores are reluctant to accept higher denomination bills than a $20? It’s foreign ownership. The Federal Reserve Bank of Chicago found roughly 80% of $100 bills are held outside of the U.S. The demand for the $100 bill is fueled by war-torn countries as reserves held by governments, economic safety by consumers and illegal transactions by criminals.

The rise in e-commerce in the U.K., coupled with strong adoption of contactless cards for use in-stores, would logically lead to demand for cash to drop. And initial indications from the country’s LINK ATM network show that cash withdrawal transactions from ATMs were down by 50% in the initial months of the pandemic. Withdrawals recovered somewhat, but never returned to 2019 levels (1.64 billion in 2020 vs. 2.61 billion in 2019).

Despite these trends, the total amount of currency in circulation rose.

The Bank of England reported that total banknotes and coins in circulation stood at £81.28 billion in February, 2020 just as the pandemic was unfolding. Demand fell in April, but after that, the Bank of England has been printing banknotes and minting coins to meet a growing need for cash.

As of December 31, 2020 there were £91.895 billion in Sterling banknotes and coins in circulation, up 9% from the same date in 2019. However, most notable is the change from February, which marked the start of the pandemic; notes and coins in circulation are up by 13% or £10.62 billion, since that time.