As the world continues to move towards digitisation and automation, banks are diminishing their focus on cash, more than ever before.
And understandably so—it’s all too easy to lose sight of this particular service because everyone’s talking about cash going away.
But in reality, as compelling as the digital economy may be, cash is still playing an important role in many people’s lives and isn’t going anywhere, not in the short term at least.
Customers Still Want Cash
It is undeniable that the share of total over-the-counter payments made in cash reached an all-time low of 23% during the pandemic, from 27% at the end of 2019. This was partly due to a 3.6% decline in merchants’ acceptance of cash for over-the-counter payments. However, the value of banknotes in circulation grew by 17.1% over the year to February 2021, reaching a historic high of 4.9% of the Australian GDP, which suggests an increased reliance on cash as a store of wealth.
Common services still relying on cash include:
- Deposits and withdrawals of coins and notes, in-branch or at self-service terminals
- Over-the-counter payments in coins and notes, in-branch or at retailers
- Cash exchange in coins and notes
- Currency exchange.
It is hard to think of a society without cash as legal tender. Although banks and governments may desire the conversion out of cash to solely a digital economy, many customer segments continue to want to deal with cash.
A relevant part of small businesses, typically tradespeople, prefer the convenience of being paid in cash, rather than by credit card or bank transfer. For this type of payments, still very common among the population, the incentive to use cash remains high.
Banks with no particular focus on the “retail” part of the banking business may decide to ignore consumers’ needs, as long as they preserve a good alignment between customers’ preferences and business goals (more on this at “The Healthy Tension Between Customer And Bank Goals”, Chapter 4 of the Monetising book and subject of a next blog).
The mentioned decrease in cash usage during the pandemic highlighted to the banks the relevance of cash handling costs as part of the overall operational cost of the physical delivery channels. Fewer cash in transit (CIT) trips, less time spent attending to automatic teller machines and less people needed to perform over-the-counter transactions in the branch stood out as a substantial saving in the branch’s profit and loss statement.
The refreshed awareness around the cost of handling cash in branches, together with the new consumer and merchant’s preference toward electronic payments for over-the-counter transactions, could make of COVID-19 “the ultimate disrupter” in the evolution of cash usage, as mentioned by the Assistant Governor (Financial System) of the Reserve Bank of Australia, Michele Bullock, on 3rd June 2020 in a Keynote Address.
But regardless of the trends, access to cash and its continued use are still being taken very seriously by central banks.
Even Sweden Still Keeps Cash Around
Cash is still considered an essential means of payment, even by a country like Sweden that is expecting to go cashless by 2023.
Focusing on cash as a diminishing product and accelerating development of digital alternatives will keep a bank serving the consumer and small-business sectors firmly stuck in this problem. Banks that want to reduce tellers as a way of reducing cash activity also curtail the opportunity for customer engagement.
Ever since the beginning of the anti-cash campaign in the 1960s, Swedish bankers understood that cash was important for retaining customer loyalty. Although the cost of handling cash was recognised, branch managers had no doubt it was well worth it.
In 2018, the Swedish Central Bank, Riksbank, decided to formally look into the issue and undertook a formal review of the monetary policy framework around “Secure access to cash” (SOU 2018:42). The conclusion of Riksbank’s analysis was declared in a press release of that same year which stated that all banks and credit institutions offering payment accounts “shall be obliged to handle cash.”
It came as a surprise to many observers that one of the most advanced cashless societies in the world conceded the need for banks to continue serving cash to customers when requested. The reason being that cash services are what customers can reasonably expect of banks.
This doesn’t mean Sweden will not go substantially cashless by 2023. Academic research showed that, when cash transactions for a retailer fall below 7% of the total payment transactions, managing cash becomes more costly than the marginal profit on sales. At that point, it is likely retailers will stop accepting cash for over-the-counter payments.
This can be done in Sweden because their contract laws have higher priority than payment laws. Not so in most other countries.
The physical channels, branches and ATMs, will have to adapt. However, consumer sentiment may mean the eventual outcome is not as clear cut as the researchers would like to predict. Time will tell.
There is no doubt that cash transactions need to be automated as much as possible at all points of interaction.
Banks would mostly think of ATMs (intelligent and not) as the main point of cash transactions. But not all cash transactions can be completed on ATMs. Beyond just wanting a higher amount, a customer might be seeking to take cash out of an account not linked to an ATM card or have security concerns about operating a self-service machine for substantial amounts of cash in an open area.
While it’s true the ATM can deal with most low-value cash transactions, there remains a need for the bank to address higher-value or more sophisticated cash transactions for consumers as well as small business customers. This is where the branch can play an important customer engagement role.
Cash Services In The Branch
The physical channel is currently the subject of a profound revision by all retail banks, not only in Australia.
Although all services connected to ensuring Australians have access to cash have been declared essential by the Reserve Bank, a recent cost rationalisation has brought many banks to close branches and decommission even more ATMs over the past 5 years.
Data from the Australian Prudential Regulation Authority (APRA) shows the number of branches nationwide has shrunk by 23% from 5,816 in mid-2017 to 4,491 in June 2021. 447 branches (9%) have been closed between 2020 and 2021, also prompted by the pandemic. ATMs have been removed at more than double the branch’s rate, nationwide.
The inconvenience is mostly felt by consumers and business owners in regional Australia. A closure of someone’s life branch due to shrinking transaction activity requires customers to either go to the next town, in many cases tens of kilometres away, or to move their banking to a local credit union, or perhaps to make an effort and familiarise themselves with electronic banking, which, however, doesn’t help in case cash is needed.