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A good 30 years before innovation threatens cash

July 19, 2013 by Terry Dooley — SVP & CIO, ITS, Inc

A new study by Loomis AB concludes that although payments innovations will reduce consumers' use of cash over time, new methods of payment will not show a significant impact on cash for at least a decade.

Despite the recent explosive growth of electronic payments, and the ever-present media coverage of payments innovators, cash remains relevant in today's society. According to the report, it will continue to do so for the foreseeable future.

The study examined 10 developed markets — France, Germany, Italy, Poland, Portugal, Spain, Sweden, Turkey, the U.K., and the U.S. — to calculate the growth or decline of cash over the next 10 years. In all but one market, Sweden, where consumer spending in cash is expected to decline, the study forecast an increase in total cash use. Specifically, the report outlined six observations related to cash, and consumers' use of it:

1. No one accurately measures how people use cash to pay for things — Cash in circulation is frequently used to assess cash use. However, that only measures the stock of cash available for people to spend or save. Measuring the flow of cash is essential to understanding how cash is accessed, and how quickly it is used. This requires looking at the places where consumers can get cash: including ATMs, financial institutions (FIs), and at merchants' points of sale (POS).


2. Overall cash use can grow even if consumer spending in cash is declining — Most analysts and pundits who look at cash only look at the "slice" of the total spending pie that represents how much of overall consumer spending is done with cash. However, that is only one-half of understanding the total growth in cash use. The other half relates to growth in the total size of the spending "pie," which is driven by Gross Domestic Product (GDP).


3. Seven factors will affect the future of cash — Governments, economy, payments networks, innovators, FIs, merchants, and consumers will all determine how the course of cash and payments innovations will evolve in any given country.


4. The future of cash correlates to the speed at which consumers with spending power adopt payments innovation — Payments innovation takes a long time to really work its way through the economy and be adopted by enough people with enough spending power to make it a standard. Younger people will more willingly adopt payments innovations, but they don't have enough spending power to have a significant impact. For the 10 countries included in the study, it would take 30 years for enough young people to develop enough spending power to force a wholesale shift away from cash to electronic methods.


5. Measuring historical use of cash will not provide an accurate measure of future use — The study's cash methodology uses three approaches to accurately measure the future of cash use by consumers: (a) the historical trend in the propensity of consumers to use cash, (b) the impact of the seven factors in each country, and (c) the rate of adoption of new technologies.


6. Mobile and payments innovations will impact the use of cash, but not immediately — Changing anything in payments takes time, even if the change is for the better. Keep in mind it has taken 25 years for the debit card to become the card of choice for most consumers.Cash has survived for thousands of years because it's user-friendly, accepted by almost all merchants, and is familiar. Even so, it's inevitable that as mobile and payments innovations evolve, the use of cash will certainly be impacted, however slowly.

This study provides a more comprehensive understanding of the confluence of cash use by consumers and payments innovations coming to market. Gaining a more accurate understanding of consumers' relationship with cash, as well as new payments methods, can prepare your FI to more effectively serve consumers of the future.

About Terry Dooley

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