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Behind enemy lines

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[Dave Birch] At the EFMA “Future of Cash” conference, M. Giles Lardy, the Director of Banknotes and Coins at the Banque de France set out the basic case in favour of cash. He said that the growth of cash in circulation in the eurozone is because of a number of factors:

  • It is trusted. The amount of cash in circulation shot up after the credit crunch as people began to worry that banks might fail.
  • Anyone can accept it. This is the major advantage of cash in commerce, an advantage that I think will be eroded by mobile phones.
  • It’s quick and easy. French studies indicate that cash transactions take 26 seconds on average and card transactions take 46 seconds. This will change because of mobile and contactless, of course, but fair enough.
  • You don’t need to have a bank account. The hoarding of euros represents a kind of tax paid by non-Europeans to the eurozone states. The number of euros in circulation is something like 40% higher than might be predicted from economic growth. Much of this “surplus” appears to be in the form of €500 notes.
  • Cash is anonymous, and although M. Lardy is right to say that “cash is not responsible for fraud”, it certainly makes a lot of fraud more tempting and more profitable.

He also set out the cash agenda for the coming years, something that a number of people at the conference spoke about. Broadly speaking, this means more recycling and “optimisation” of cash management.

And here’s the stats block, as we used to call it in Dungeons and Dragons..

There were 13.7 billion euro banknotes in circulation at the end of August 2010 with a face value of €820 billion.
There are 91 billion euro coins issued, worth €22 billion.
To date, the major banks that file with the ECB have reported shipments of €110 billion outside the eurozone (these shipments jumped €20 billion since the crash).
Where do euros go? EU non-eurozone (mainly UK) 24%, rest of Europe (mainly Switzerland) 41%, North America 2%, Asia 5%, Africa 5%., Eastern Europe 20%.

As even the most cursory examination of the statistics shows, virtual none of this cash is used to support the needs of commerce (the Bundesbank estimated that only 10-15% was used for this) and the rest of it is “unexplained”, as they say. This means that the cash is used for hoarding, tax evasion, criminal purposes, corruption and other elements of the less-regulated economy.

The stats about the cost of cash in retail aren’t worth reproducing since they were so confusing: they are clearly measuring apples and oranges, because they showed that the cost of a cash transaction to retailers in 3p in the UK and 300p in Belgium, or some such, the cost of a card transaction as 50p in the UK and 500p in Spain or whatever.

Meanwhile,with respect to the tiny proportion of cash that is actually used to support the needs of commerce, the march of e-payments is slow but sure. In the Netherlands we’re on the countdown to a cashfree country (and a clash with the European Commission), starting in Amsterdam.

A number of shops in Amsterdam will refuse to accept cash from the end of this month in an experiment to try to reduce robberies. The city council is buying the smart card pin machines for some shop keepers so they can take part in the experiment… The campaign will centre on shops around the Ferdinand Bolstraat, the centre of Osdorp and shopping centres in Nieuw West. Last year there were 547 armed robberies on Amsterdam shops, up 11% on 2008.

[From DutchNews.nl – Amsterdam shops go cash free]

Good for them. Armed robberies are a particularly bad side-effect of cash, and not simply because people get killed. They impose great external costs on the use of cash, because taxpayers have to stump for the police, detectives, courts and jails that wouldn’t otherwise be needed. But what I thought was especially interesting about this development is that it is the city council that is subsidising the introduction of the PIN debit terminals, presumably on the grounds that making the city a cheaper place to do business will be good for everyone, whereas a two armed robberies every working day is not only expensive, but a barrier to some new businesses. Banks have had to deal with armed robberies for ever, of course, and they have developed some alternative strategies.

The most effective method for preventing robberies is simply greeting everyone with a “hello” when they enter your branches.

[From The Financial Brand » Bank robberies on decline despite rotten economy]

Actually, a more effective method would be to stop having any cash in branches, which is what some of the banks in Ireland have started to do. But it’s not just banks who get robbed. When people (after the credit crunch, for example) draw their money out of banks, then they get robbed instead. This is what has been happening in Argentina, where a combination of high taxes and a large black market (which is what the UK is heading for) has had the predictable impact of boosting crime.

Many victims don’t even report being robbed, because they wouldn’t be able to explain to tax agents where they got the money

[From Argentines risking all to carry huge wads of cash – Yahoo! Finance]

Oddly, we already have in place the technology needed to get rid of cash and put a stop to this kind of thing, but it is only being adopted in the least developed countries.

They will only need their mobile for all transactions and it means the money-changers will be kicked out of the Somaliland cash temples forever… So while the world wasn’t watching, a small peaceful country in the Horn of Africa that doesn’t officially exist will set an example that the rest of Africa will inevitably follow

[From Guest Post: Could Tiny Somaliland Become the First Cashless Society?]

The most fascinating interjection at the EFMA event came from the European Commission representative. When questioned about countries such as Finland, where consumers and shopkeepers don’t use the 1- and 2-cent coins any more, or Sweden where a broad coalition against cash is forming, he said that the Commission would take action against them: Seriously! I decided to try and bring the system down from within, so I spoke up and called for immediate action agains the Netherlands, where some shops in Amsterdam are to cease accepting cash from next week: let’s see what happens.

Meanwhile, someone else has been working to bring the system down from within: I loved the story that Chris Skinner passed on about the Chinese mine owner who was told by a hotel there that he couldn’t pay his $30,000 by card but he had to pay by cash. So he paid with 200,000 1RMB notes: check out the pictures of the hotel staff having to count them while he sits and reads the paper. If there ever is an Order of the Heroes of Digital Money, he will be one of them.

These opinions are my own (I think) and presented solely in my capacity as an interested member of the general public [posted with ecto]

One thought on “Behind enemy lines”

  1. Okay, clarification: “The most effective method for preventing robberies AMONG FINANCIAL INSTITUTIONS THAT WANT TO PROVIDE CASH SERVICES is simply greeting everyone with a “hello” when they enter your branches.

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