Thursday, March 23, 2017

"Peak Cash? Goldman Ponders A Cashless Society And The Benefits For Government"

Major caveat: Mr. Heisenberg provides no link to his source and I see no other references on the interwebs to the bit that follows after the "Via Goldman".
Close cover before striking, your mileage may vary etc, etc.

From the Heisenberg Report:
Much has been made over the past several years about the so-called “death of cash”.

How many articles have you seen circulating (pun fully intended) with titles that contain the words “cashless” and “society”?

Indeed, the notion that “society” is on the fast track to becoming “cashless” has become almost ubiquitous and although we here at HR have a deeply ingrained aversion to conspiracy theories (it’s a “once bitten, twice shy” kind of thing), we have to admit that the prime beneficiary of a move away from hard currency is government. Or, perhaps more precisely, policy makers.

First of all, a fully digitized system means there’s an accessible transaction ledger. The benefits of that for government are clear: tax collection is easier and oversight of citizens’ economic activities is streamlined.

But beyond that, think about it from the perspective of policy makers constrained by the zero lower bound. If you’re a central banker operating in a ZIRP or NIRP regime, cash is a real pain in the ass. Why? Well, because it constrains your ability to cut rates. At a certain point, savers will simply put their money under the proverbial mattress if they believe they are being penalized for keeping it in the bank. Importantly, the effective lower bound isn’t zero. There’s a risk to holding your life savings in cash and storing it in the closet. That risk means savers will likely put up with interest rates at or even below zero before they’ll pull everything out of the bank. But that patience starts to wear thin beyond a certain point.

Well, if you do away with cash, there is no effective lower bound for rates. If you’re a policy maker you can centrally plan the whole damn economy. Consumer spending too low? No problem. Just make rates negative 20% and force people to either spend or take a haircut. Economy running too hot? Again, no problem. Raise rates to +20% and force people to choose between spending and earning a huge return on their digital wealth. If there’s no cash, those are choices consumers would have to make because physical bank notes would no longer exist.

Now clearly, that’s a gross oversimplification that ignores pretty much all nuance, but that’s on purpose. We’re just trying to frame the debate.

Well with all of the above in mind, consider the following out Thursday afternoon from Goldman.

Via Goldman
Have we reached peak cash? Technology has been an important catalyst for shrinking cash usage, but it is by no means a new phenomenon. As we wrote in 2012, the first technological step-change in the payments arena was the shift from cash to plastic money, i.e. credit and debit cards, which happened in the 1960s.

There are many parallels to be drawn between that period and the ongoing shift to digital money: an initial period of an increasing number of providers was followed by a consolidation stage that established a few players (Visa and MasterCard primarily) as the industry standards, eventually accelerating the adoption of plastic money.

However, the availability of technology alone has not ensured the demise of cash. As the following chart shows, there are several advanced economies in which it is still the dominant mode of payment in volume terms (surprisingly quite a few European countries are in the bottom left quadrant)....
Scandinavian countries are on the cusp of becoming some of the first cashless societies, as a result of industry-co-ordinated steps and government initiatives. Swish, a payment app developed jointly by the major Swedish banks, has been adopted by nearly half the Swedish population, and is now used to make over nine million payments a month. About 900 of Sweden’s 1,600 bank branches no longer keep cash on hand or take cash deposits and many, especially in rural areas, no longer have ATMs. In conjunction with that, cash transactions were just c.2% of the value and 20% of the volume of all payments made last year (down from 40% five years ago).

Denmark’s move to a cashless society is a deliberate result of policy, with the government removing the obligation for some retailers to accept payment in cash. (MobilePay, a Danish app, was used by half the population to make 90 million transactions in 2015)....