Monday 25 January 2021

Points experts

Decoding - Money too is digitalizing

Forms of money tend to change over time: electronic means of payment are increasingly used, to the detriment of cash payments. Some countries are moving towards ‘cashless societies’. In addition, it is more and more likely that “digital” currencies, issued by central banks, will emerge in the years to come.

The decline in the presence or use of cash in developed countries

In several countries, the use of fiat money (banknotes and coins) has gradually become scarce, in favor of electronic means of payment. This trend can be assessed by measuring the amounts of cash in circulation or the frequency of use of fiat money.

If we focus on the quantities of cash in circulation, it is in Sweden that the development is the most spectacular: banknotes and coins in circulation only represented 1% of GDP in 2020, against 3% in 2010. In 2018, the deputy governor of the Swedish central bank (Riksbank) Cecilia Kingsley indicated that Sweden would stop using this type of means of payment within 3 to 5 years. The quantity of banknotes and coins in circulation calculated as % of GDP has also fallen gradually over the past 20 years in China. It has remained stable at low levels (4% of GDP) in the UK and Canada. On the other hand, the quantities of banknotes in circulation as % of GDP have rather increased in the United States, in the eurozone and in Japan. In the case of the eurozone, and even more so for the United States, the figures are higher than elsewhere, especially since the euro and the dollar are used in other zones1. Recently, the ECB estimated that 30-50% of euro-denominated banknotes circulate outside the euro area2.

However, the fact that the quantity of fiat currency in circulation is high does not say much about the frequency of its use. Electronic means of payment (cards, credit transfers, direct debits) have developed significantly in recent decades. Thus, in the euro zone, the share of the volume of in-person transactions carried out in fiat currency fell from 79% in 2016 to 73% in 2019, and its share in value fell even more from 54% to 48% over the same period3. This decline is more marked in some countries, such as the Netherlands. Cash payments are likely to continue to decline as households and businesses increasingly rely on electronic payment methods and this could be accelerated by the development of mobile payment applications (Apple Pay, Google Pay, etc).

The effect of the covid crisis on means of payment is ambiguous. On the one hand, it has been recommended for health reasons to preferentially make contactless payments (for example, the ceiling for contactless payments has been raised to 50 euros in almost all European countries). On the other hand, the demand for banknotes has accelerated markedly in Europe and the United States, but the main driver of demand for fiat money appears to have been the precautionary motive4. Moreover, the fact that central bank key rates are now close to zero now makes the opportunity cost of holding banknotes much less important and it is interesting to underline that it... 

1 Hassl T., S. Schulhofer et A. Paulson, 2018, “Understanding the Demand for Currency at Home and Abroad”, Chicago Fed Letter N°396.

2 BCE, 2021, « Foreign demand for euro banknotes”, Occasional Paper series.

3 ECB, 2020, Study on the payment attitudes of consumers in the euro area (SPACE).

4 Delmas M., L. Devigne, E. Politronacci, G. Torre, 2020, “Demand for banknotes: linkages with the crisis”, Bloc-notes éco de la Banque de France N°172.

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Bastien Drut

Chief Thematic Macro Strategist at CPR AM