Postpone the Requiem for Cash

Despite what you hear about electronic payments displacing coins and folding money, the real story is a little more complicated.

The world is flat. Or at least that’s what most people believed until Aristotle around 330 B.C. provided evidence of a spherical Earth.

Even then, it was slow to catch on. Recall that prevailing wisdom had the Earth at the center of the universe until around 1500, when Copernicus proved otherwise.

You’d think that the argument would have been put to bed fairly quickly after word got back to England that Columbus did not sail over the edge (as many feared). But as late as 1956, the Flat Earth Society was a healthy organization, and even that did not disband until 2001. So much for sending men to the moon and taking pictures of Earth.

And so it is with cash, whether in the U.S. or other developed economies. For at least 25 years, the prevailing wisdom has been that cash is bound for the trash heap, to be replaced first by cards and more recently by mobile wallets carrying any of a variety of powerful brands (e.g., Apple Pay, Samsung Pay, etc.).

The question was never whether this would happen, only when. Even in the face of empirical evidence to the contrary, cash was presumed dead … a zombie in the world of payment form factors.

Notable predictions of the demise of cash have been made over the years by CEOs and journalists alike. In 2015, Tim Cook, chief executive of Apple, said that modern payment methods, including Apple Pay, would render old-school notes and coins redundant, adding “Your kids will not know what money is” to Trinity College students.

At the February 2018 Apple shareholder meeting, his tone was more muted—“I’m hoping that I’m still going to be alive to see the elimination of money,” adding that “mobile payments have taken off slower that I personally would have thought.”

Over the past few years, I have had numerous discussions with capital sources (private equity, venture, family offices, etc.), and almost to a person the sentiment toward cash is negative—if not an outright belief that cash is already dead, then a fear that it will be dead shortly. Even when presented with evidence to the contrary, the response is predictable: “Yes, but what if in two or three years a tipping point is reached and cash falls off a precipice.” In other words … the world is flat.

Cash Is Growing

It is true that cash, once the paragon of payments, no longer dominates. In the U.S., debit is now the leader, with cash being relegated largely to small-value payments.

And there are other proof points as well, notably that ATM transactions have peaked and in some markets are declining at 1%-to-2% annually. In the same breath, it is fair to point out that other cash-access points (e.g., cash back at the point of sale) are growing, though this fact is rarely mentioned.

In fact, cash back at the point of sale now occurs more than 1 billion times annually in the U.S., growth that would have accrued to the ATM channel had not banks and independent ATM operators increased their price points so much over the past decade. Why pay $5 (a $3 surcharge plus a bank fee of $2) at an ATM in a retail location, when I can get cash back at the point of sale for free?

Consequently, my thesis is simple. Cash is not dead. In fact, it continues to grow, maybe not as fast as debit or mobile, but on an absolute basis, growth is positive. Now for the evidence:

– In the U.S., the Federal Reserve Bank’s Cash Payments Office (CPO) tracks cash in circulation. Even with the introduction of competitive payment forms, growth has been fairly steady, with an uptick following the 2008 recession.

– Normalizing this data on a per-person or per-household basis delivers the same story. Transaction value notes, whether just $1, $5, $10, and $20 or these plus $50, are all growing, again with an uptick since the 2008-09 recession (Denominations larger than $50 have been excluded from this analysis in order to more accurately reflect denominations used largely for transactions. Denominations of $100 and larger, although used for transactions in a few urban markets like New York City, more accurately reflect a store of value, and are often held in markets outside the U.S.) On a per-person basis, growth was 1.7% per year before 2009, 4.0% per year after 2009; on a household basis, growth was 2.1% per year and 3.5% per year, respectively.

– Even when normalized against gross domestic product, we don’t see a pattern that would indicate an imminent demise of cash. Rather, cash appears to be leveling off at 1.2% on a per-person basis and 1.65% on a per-household basis.

Curved, Not Flat

Is cash the preferred method payment? Does it dominate the point of sale? No, those days are over. That said, cash continues to play a valuable role in the small-value payments segment. It also plays a valuable role with the substantial segment of underbanked individuals and households in the U.S. It is by no means dead.

None of us should be foolish enough to believe that cash will endure in its current state. New form factors will continue to be introduced, and each will fight for its share of the global payments market.

That world, however, the one represented figuratively as a payments horizon, is curved, not flat.