VOLUME 3 – NO 7 / JULY 2020
Cash , Legal Tender and the Future of Euro Banknotes By Martina Horakova
A case currently being heard in Europe’s top court could have a major bearing on the future of banknotes in the region. The case asks the court to define the term ‘legal tender’. The judgement will be delivered in the Autumn. It was mid-June and Luxembourg was just emerging from a three-month lockdown to halt the spread of COVID-19. Sat three seats apart, an audience of a dozen gathered in the European Court of Justice’s (ECJ) Grand Chamber to hear the oral arguments of a legal case with potential major implications for the future of cash. The hearings relate to a legal challenge against the Hessischer Rundfunk, the German public broadcaster, which is accused of not accepting payments for an obligatory fee in euro cash. The plaintiffs argue that this refusal is in violation of the status of euro banknotes and coins as legal tender. The argument for the challenge is led by Norbert Haering, a Handesblatt journalist and pro-cash activist, whose lawyer opened with a plea, ‘save the euro, preserve the banknote ’. On the side of the plaintiffs were the European Central Bank (ECB) and the European Commission, while the defendant was joined by representatives of the German and French government. The case was brought to the ECJ by a referral from the Bundesverwaltungsgericht (BVerwG), the German Federal Administrative Court. The BVerwG found
that ‘the exclusion of the possibility of paying broadcasting fees with euro banknotes violates the federal law (Bundesbank Act) and that German public authorities are obliged to accept euro banknotes.’ The BVerwG further found that ‘exceptions cannot be based on practical administrative reasons or cost savings, and require an authorisation by a federal law.’ However, the BVerwG deferred a ruling on the case pending receipt of a preliminary ruling from the ECJ, on the three questions: 1. Given the EU’s exclusive competence for monetary policy, is a euro member state entitled to oblige national public authorities to accept euro banknotes in the fulfilment of mandatory payment obligations? 2. Does the legal tender status of euro banknotes make it mandatory for member states’ public authorities to accept euro banknotes as a discharge of obligatory payments? Or can a member state’s public authority, under certain conditions, refrain from accepting euro cash for such payment obligations? 3. If, as a consequence of the legal tender status of euro banknotes, member states’ public authorities have to accept euro banknotes as a discharge of mandatory payment obligations, can a Eurozone member state nevertheless apply national law as long as the EU has not made use of its transferred competence? Continued on page 4 >
New European Payment Solution Welcomed by ECB The European Central Bank (ECB) has welcomed the decision by 16 European banks to launch the European Payments Initiative (EPI), the objective of which is to create a unified payment solution for consumers and merchants across Europe. The EPI will include a payment card and a digital wallet covering instore, online and person-to-person payments as well as cash withdrawals. Fragmentation persists across Europe in the way people actually pay, be it online or on-site in brick and mortar shops. Ten European countries still have national card schemes that do not accept cards from other EU member states. A growing number of innovative services, such as mobile wallets, are national only. In November 2019 the Eurosystem relaunched its retail payments strategy, calling for increased collaboration between European stakeholders to provide payment services that meet the needs of European customers and strengthen the autonomy of the European retail payments market. The EPI is a response to this call. It seeks to replace national schemes for card, online and mobile payments with a unified card and digital wallet that can be used across Europe, thereby doing away with the existing fragmentation. As it is based on the SEPA instant credit transfer (SCT Inst) scheme, it can immediately capitalise on powerful and sophisticated existing infrastructures, such as the Eurosystem’s TARGET Instant Payment Settlement (TIPS). The Eurosystem, however, will continue to support private initiatives for retail payments provided that they fulfil five key objectives: pan-European reach, customer friendliness, cost efficiency, safety and security, European identity and governance, and, in the long-run, global reach.
Why Financial Inclusion Includes Cash Financial inclusion is a trending topic, hand in hand with resilience, during the COVID-19 pandemic. We assume we understand its causes, know it is a big issue and are confident that solving the problem will lead to good things. Are we right?
The term ‘financial inclusion’ is heard a lot. Almost always this actually refers to digital financial inclusion. Amongst those using the term, there is a belief, almost unquestioned, that digital payments are associated with countries with higher GDP, increasing economic growth and lowering levels of economic income inequality. The role of digital payments in delivering these benefits is seldom explored – other than the statement that digital payment services lead to digital lending based on data analysis of people’s payment history. Financial inclusion is an explicit objective of the IMF, World Bank and many governments. The World Bank says that nearly a billion people have been included in the last decade and that 69% of the world now have a bank account or a mobile money provider, up from 51% in 2011.
Inside this Issue 1 Cash, Legal Tender
and the Future of Euro Banknotes
1 New European
Payment Solution Welcomed by ECB
2 Why Financial
Inclusion Includes Cash
3 All Change for Retail Payments
5 End the Practice of CashShaming: Cash is Safer to Touch Than Cards
6 Payment News from Around the World
8 Cash Innovation News 9 Shedding Light on Real Cost of Payments
10 Payment Innovation News
11 Cash Demand Surges
in Canada While Cash Usage Continues Largely Unchanged
13 Landmarks in an
14 A Time to Rethink International Payments?
15 Conference and
Webinar Round Up
2 CASH & PAYMENT NEWS | COMMENT
The IMF has recently launched an Index of Digital Financial Inclusion measuring 52 emerging markets and tracking their progress. It notes that in the COVID-19 pandemic, countries have accelerated their efforts to increase digital financial inclusion with programmes to lower transaction fees and to increase spending limits on mobile money transactions. In Africa, for example, Ghana, Kenya and Uganda are regarded as front runners. There appear to be three main reasons why people don’t have bank accounts or mobile money providers. Firstly, the financial and social circumstances of individuals. Their income is too low or unreliable, they have no fixed address, no credit history, they have failed financially in the past, they are women, refugees, foreign etc. The World Bank says a third of women, 1.1 billion people, are excluded from formal financial systems. The second reason is one of infrastructure, the digital infrastructure. The question is both does it exist and is there equal access to it? Electricity, a mobile signal, internet access, a digital identity? And then there is the concept of ‘database bias’. What was assumed, and coded, when the algorithms that make financial decisions behind the bank systems and financial apps were created? Do they set the bar too high, favour some over others? The final cause of exclusion lies with the individual. For example, in the UK, by law, anybody can open a free basic bank account, there are fintech and pre-paid card players who offer products not linked to bank accounts and with tools designed to help with budgeting and personal finance.
Despite this, many people do not pay digitally. For some the issue will be a lack of trust in the banking system and institutions. For many more the challenge will be a mix of financial literacy and a fundamental lack of skills and confidence, sometimes known as the ‘digital barrier’. The data from countries such as the UK is easily accessible, 11.7 million people without basic digital skills, 7% of the population without an internet connection (1.9 million households), 1.23 million people without bank accounts, but this challenge applies everywhere. Mastercard has recently joined a UK campaign called ‘Leave Nobody in the Dark’ to address the digital barrier. It is also a founding member of The Inclusion Foundation. It is working with partners to widen government disbursement solutions, digitise how private sector workers are paid, create partnerships with mobile phone operators and scale efforts with fintechs, and others, to address the human side of the digital barrier. It has run 350 programmes in 80 countries over the last five years and says it has brought 500 million people into the digital economy as a result. It aims to repeat this by 2025. Mastercard’s commitment to this task draws attention to the challenges ahead highlighted in a recent IMF report, namely the safeguarding of consumers. The IMF has emphasised the need to maintain competitiveness in this sector. A result of the pandemic has been a more difficult business environment for small innovators that risks leading to a consolidation around big firms. Examples of these challenges are a tightening of funds, more non-performing loans, fewer transactions and fewer credit demands. The need for regulatory governance needs to be high on the agenda of central banks and politicians. A second area of concern is around safeguarding vulnerable consumers, protecting their data and data rights, cyber security threats and creating solutions that have good interoperability across users and across borders, another element of competitiveness. Cash is the most democratic and inclusive payment option there is. The challenge of digital financial inclusion is multi-faceted and complex. As always the conversion of the tail, the reluctant and challenged, is going to be the challenge. The need to maintain cash may feel a retrograde requirement, but perhaps it is a vital, urgent, humane and positive task to deliver.
All Change for Retail Payments The retail world is dealing with lower transaction levels, new challenges to interact with consumers and increased complexity in everything they do. It appears that the old reality won’t return but it is unclear where we will end up.
Change is the only answer, and that includes for payments. Cash remains, although with new options for working with it without contact and at lower costs. But the need to adopt digital payment in shops, online and for mobile payments is adding cost, complexity and risk. A major challenge for all, particularly the small retailer. Tracking and understanding the future of the retail sector is key to payments since transactions largely take place in shops. Change has been in the air for a while as online shopping has grown and payments have started to shift to electronic card or mobile based payments. The COVID-19 pandemic is accelerating these changes. By mid-April the pandemic had reduced spending in Western Europe by 50% yearon-year, with offline spending down 60% and online spending down 20% according to data from INSEE and GIE Cartes Bancaires. The consultancy Oliver Wyman forecasts that spending won’t recover to the July 2019 level until the fourth quarter of 2021. Although spending is down, the way we buy has changed significantly. The pandemic has driven an increase in online spending. In March 2020 in France it increased from 22% to 36%, in Spain from 13% to 22% and in Italy from 10% to 36%. It has also increased the use of contactless card payments. Pre-COVID, 92% of card payments in Western Europe involved a PIN number, with only 8% contactless. The rise in contactless payment limits meant that approximately 15% of payments that were previously below the old payment limits can now be made by contactless cards. Although card payments in total have fallen dramatically, the percentage made by contactless cards have reached about 50% of those transactions.
Successful online selling requires a significant investment in understanding data and how the consumer is navigating through websites and mobile phone apps to buy. Retailers have had to react fast, working out how to add telephone and online shopping to how they sell. In the US prior to the pandemic, only 2% of the $700 billion grocery market was online. Retailers assumed people wanted to shop in person for these products and, with low margins, the investment needed in warehousing technology and delivery networks could not be easily justified. It takes time to make those investments and some retailers have turned physical stores into warehouse/distribution centres and what are known as 'curb side pick ups’ have become popular to avoid the costs of delivering the extremely expensive ‘last mile’ deliveries. The big question is to what extent new habits are becoming embedded and what does it mean for payments? Analysts in the US say 50% of shopping malls will close by the end of 2021. In its quarter one report, Nike set itself the target of moving its digital sales from 30% to more than 50%. PepsiCo launched two ‘direct to consumer’ web sites in May 2020. Small examples of significant change. The LINK survey of UK consumers in April 2020 reported that 49% of respondents expected to use cards more, 44% will use contactless cards and mobile payments more and 33% will shop online more. These examples may be from Europe and the US, but the challenges for retailers are the same across the world. Given the way the pandemic is developing and the investments being made by retailers, we have to assume that the pandemic has significantly accelerated online and mobile transactions. Retailers need to be able to take payments with less contact. Some of the cash responses to enable this are covered elsewhere in this month’s edition. Compared with the decisions retailers need to make for digital payments, cash looks somewhat simpler. One of the challenges is the need to be able to accept both in store and mobile payments because of the growth in curb side payments at the point of delivery. In store the retailer needs to have point of sale (POS) terminals that are capable of handling Near Field Communication (NFC) signals, the underlying technology for contactless payments whether by card or mobile phone.
The proliferation of solutions, some of which are app based, has added to the complexity of the retailers’ IT requirements, although this is largely the responsibility of the payment processor they sign up with. In addition to the hardware and software licensing costs, the retailer is faced with increasing fees and charges. A recent Wall Street Journal article had the headline ‘Credit card fees merchants hate, bankers love, consumers pay’. Small merchants have relatively low transaction volumes and so have little leverage when it comes to negotiating with their banks, the card companies, the mobile companies, the payment processors or the hardware companies. We discuss card fees elsewhere this month, but in 2018 the British Retail Consortium estimated that third party fees in the UK cost retailers £1.3 billion. The range of mobile payment options is huge and those mentioned here are just a handful of the options since it doesn’t include all of the available apps. Google Pay, Apple Pay and Samsung Pay are the leading mobile products, although each is slightly different. They are free to retailers, although Google Pay, for example, requires the retailer to use a participating Google Pay processor to take part. PayPal has a division called Braintree and Fattmerchant have ‘Contactless by Omni’, both of which are designed specifically for both store and curb side mobile payments. Products such as Square and PaySafe are apps that act like a portable POS and also work with NFC enabled card readers. PaySafe can also still accept cash and cheques. The use of QR codes that connect with payment apps are widely used around the world. They are very low cost for the merchants since they don’t require them to invest in infrastructure, and they avoid the need for infrastructure in places where it can’t support complex POS systems. Pity the retailer, particularly the small retailer, as they move from a simpler world of cash and, perhaps, cards, to this full-on payment world. Whether purely online or a full spectrum omni-channel retailer, being a retailer and taking payments efficiently, without friction and without contact must feel daunting.
RETAIL PAYMENT | VOLUME 3 – NO 7 | JULY 2020
Cash , Legal Tender and Euro Banknotes (continued) The subsequent discussions and arguments evolved around two key questions which, based on the ECJ’s ruling to be made on 29 September, could set significant precedents for the future of cash.
and its usability as legal tender. In fulfilling these tasks, the ECB ultimately ensures that people can go about their lives, with their fundamental rights protected, using euro banknotes and coins.’
the only central bank money available to all citizens. The ECB goes to great lengths and logistical efforts to secure cash provisions and to make euro cash available for citizens ‘in all circumstances.’
Firstly, what is the legal meaning of the term ‘legal tender’ and does it impose a binding obligation on public authorities in the euro member states to accept cash?
In their oral arguments, both representatives of the European Commission and the ECB explained that restrictions and limits on cash usage can be imposed, for instance to protect against money laundering. These must however have a legitimate purpose and, to that end, be proportionate, suitable, necessary and adequate in regards to achieving public objectives. Eurozone member states are expected to request the ECB’s opinion on any legislative proposals on limits to cash.
The trust achieved in the euro by Eurozone citizens is clearly shown in the ‘record high demand rise’ during the COVID-19 crisis, despite the rise of contactless payments. The ‘practical usability’ of the euro, its acceptance and availability, ‘underpins and embodies’ this trust. Why would citizens hoard cash as a store of value if they didn’t trust that they can also use it? The ECB is here to guarantee this.
Secondly, does the authorisation to issue euro cash constitute a part of the ECB’s monetary policy?
Let’s tackle the first question. Divergences of opinion as to what is meant by ‘legal tender’ in large part stem from differences in how European and German national law define euro currency banknotes. The Hessischer Rundfunk, the German and the French governments argue that the term legal tender, as defined by the Treaty on the Functioning of the European Union (TFEU), simply stipulates that the euro is the only accepted currency within the Eurozone, without specifying its implication on cash acceptance. Art. 128 Paragraph 1 of the Treaty: ‘The European Central Bank shall have the exclusive right to authorise the issue of banknotes within the Union. […] The banknotes issued by the European Central Bank and the national central banks shall be the only such notes to have the status of legal tender within the Union.’ The defendant argues that because the TFEU does not refer to the euro in the form of physical money, it is therefore not the only legal means of payment. In contrast, German law on legal tender explicitly defines euro banknotes as a method of payment: ‘Euro banknotes are the sole unrestricted legal means of payment’ and hence the need of the BVewG to refer for judgment to the ECJ. The European Commission representative in the case has argued that legal tender implies an obligation to accept cash for debt payments, adding that the ability to pay cash is a fundamental right and economic freedom of citizens to have the ability to pay cash. Citizens can choose to opt out via private contracted agreements. The Hessischer Rundfunk, as a public authority, however, cannot refuse mandatory payments in cash. The ECB also struck a defiant tone on the integrity of cash as legal tender. In a 2018 speech, Yves Mersch, Member of the Executive Board of the ECB, likewise stressed that ‘the ECB is also responsible in particular for protecting the status of euro cash as the sole legal tender. This includes guaranteeing the existence of euro cash
There is currently legal uncertainty at the euro area level with regards to a common interpretation and definition of legal tender, what it means and if and how it must be protected. What is clear is that past definitions of legal tender – written at a time when the potential demise of cash and the all-encompassing rise of electronic payments made for a good sci-fi script – have not adapted to the present set of challenges. In this vein, Sveriges Riksbank, Sweden’s central bank, has seen a decline of cash usage for transactions, as well as the overall demand for currency, since 2007 (although this trend has been reversed since 2018). The central bank is also calling on Swedish legislators to amend the term legal tender, requesting that it ‘be strengthened further, also under normal circumstances, and mandatory requirements to be placed on at least some business operators.’
Cash as part of monetary policy
In regards to monetary policy, the German and French governments have argued that euro issuance was not part of the ECB’s monetary policy mandate, as it is not necessary to achieve price stability and is not a listed monetary policy instrument as such. France tried to reason that euro cash has no impact on liquidity in the Eurozone and hence no effect on monetary policy given it makes up a marginal proportion of the overall money supply. The ECB corrected the French representative that euro cash in circulation is in fact part of money aggregates and is, therefore, far from irrelevant for monetary policy. Furthermore, citizens’ trust in the euro is crucial for monetary policy and the ECB’s ability to deliver its price stability mandate. Trust in the euro is an ECB goal in itself and euro banknotes are ‘the printed trust in the euro.’ It is the only payment means settled instantaneously, at face value and
4 CASH & PAYMENT NEWS | THE LAW AND EURO BANKNOTES
In his remarks on cash restrictions for public interest purposes, the European Commission representative jokingly called the threat of transmission of COVID-19 via banknotes ‘fake news’, much to the amusement of those sat in the Grand Chamber.
The cost of cash
In their rebuttal, the Hessischer Rundfunk argued that the decision not to accept cash payments is based on practical administrative and economically costeffective considerations. Both the European Commission and the ECB stressed, however, that a public authority cannot limit the use of cash on the basis of cost efficiency. Furthermore, the ECB added that, according to its studies and statistics, euro cash is in fact a highly cost-efficient payment method. Indeed, it would be an interesting exercise should the ECJ judges request the Hessischer Rundfunk to present their cost calculations of various means of payments. The European Commission representative argued that legal tender implies that no additional cost can be incurred by the payee. However, for those who do not own a bank account, Rundfunk’s insistence on non-cash payments makes bank transfers very costly. In fact, this represents an imposed tax for those who do not own a bank account and are forced by the public authority to incur the cost.
Future of cash
One of the judges asked the ECB what impact the term ‘legal tender’, as defined by the Treaty, would have on the ‘development’ of the ECB’s central bank digital currency (CBDC). The ECB representative clarified that the central bank is currently only ‘brainstorming’ the ‘possibility’ of introducing a digital currency and no decision has been made. The research is looking at various technical solutions and it isn’t even clear, at this stage, whether the ECB would even issue a retail CBDC.
In a follow-up question about a cashless society, the ECB confirmed that cash is crucial for vulnerable groups in society and is fundamental for their inclusion in a functioning society. The ECB representative further wondered about who actually wants ‘this transition to cashless society’, questioning whether they are lobby groups of electronic payments start-ups who collect transaction fees, or simply a lower demand for cash payments by citizens? The jury is out on this question. In his above-mentioned speech, Yves Mersch further elaborated on the crucial role of cash for equality. ‘Alternative payment methods cannot replace euro cash; they can only complement it. The Eurosystem must therefore continue to ensure the existence of euro cash. This is the only way we can safeguard the role that euro banknotes and coins play in protecting the fundamental rights and freedoms of the people of Europe.’
Watch this space
A final ruling on the case is expected in the autumn. Depending on the outcome, Eurozone member states and their public authorities may find themselves collecting taxes in cash, giving the cash network system a much-welcomed boost. References: The original German said, "Retten sie den Euro, erhalten sie ihn das Papier!" The literal translations is, “Save the Euro, preserve the paper.” BVerwG, Beschluss vom 27.03.2019 – 6 C 6.18 [ECLI:DE:BVerwG:2019:270319B6C6.18.0] https://www.bverwg.de/de/270319B6C6.18.0 Request for a preliminary ruling from the Bundesverwaltungsgericht (Germany) lodged on 31 May 2019 — Johannes Dietrich v Hessischer Rundfunk https://eur-lex.europa.eu/legalcontent/EN/TXT/?uri=CELEX%3A62019CN0422 “Auf Euro lautende Banknoten sind das einzige unbeschränkte gesetzliche Zahlungsmittel.” Gesetz über die Deutsche Bundesbank https:// www.bundesbank.de/resource/blob/598136/ dcaaa3edf096b057757746ac446dd311/mL/ gesetz-ueber-die-deutsche-bundesbank-data. pdf “The role of euro banknotes as legal tender” Speech by Yves Mersch, Member of the Executive Board of the ECB, at the 4th Bargeldsymposium of the Deutsche Bundesbank, Frankfurt am Main, 14 February 2018 https://www.ecb.europa.eu/press/ key/date/2018/html/ecb.sp180214. en.html#:~:text=As%20the%20central%20 bank%20which,its%20usability%20as%20 legal%20tender Sveriges Riksbank (December 2019): “Separate statement of opinion by Christina Wejshammar” https://www.riksbank.se/globalassets/ media/ovrigt/sarskilda-yttranden-191204/ separate-statement-of-opinion-by-christinawejshammar.pdf
End the Practice of Cash-Shaming: Cash is Safer to Touch Than Cards In response to continued misinformation about the cleanliness of cash and the refusal by businesses to accept it, the Canadian Association of Secured Transportation (CAST) issued the following open letter: COVID-19 has exacerbated fears that as cash changes hands, it becomes a transporter of germs and viruses. But is cash really any worse than your debit or credit card? LendEDU, a company that helps consumers learn about financial products, used a scientific device that tests for bacteria on a given surface to examine just how dirty credit/debit cards and cash really are. They tested the front and back of 41 different debit and credit cards, 27 different bills and 12 different coins. After calculating the average germ score for each payment method, debit/ credit cards turned out to be the dirtiest payment method. The study showed that the average germ score for credit/debit cards was 285 vs. the average germ score for cash/coins at 148 (almost 2x higher for cards compared to cash). Just think of how many surfaces cards touch as they wait on tables, bars or countertops to be picked up and swiped. In fact, the average score for plastic cards was worse than the score registered for the bathroom at New York City’s Penn Station, which used to see more than 650,000 people on an average workday! Eliminating the use of cash only punishes some of the most vulnerable members of society: homeless people looking for a few dollars to buy breakfast, elderly people who may be uncomfortable with technology, people with no credit, coin drives for charities (like poppies for veterans, daffodils for CF, change at Christmas for the Salvation Army), tips for those in the service industry, and the list goes on. It is also critical for consumers to have options to pay for their goods and services. While some may prefer the convenience of cards, others prefer how cash protects their privacy and anonymity, while helping them manage their debt level. Cash is a vital part of our economy.
Fabio Panetta, a Member of the Executive Board of the European Central Bank, recently noted that ‘adequate availability of cash is crucial for the functioning of the economy…[cash] remains the dominant means of payment for consumers, and is of fundamental importance for the inclusion of socially vulnerable citizens, such as elderly or lower-income groups… Overall, banknotes do not represent a particularly significant risk of infection compared with other kinds of surface that people come into contact within daily life.’ We need to end the practice of cashshaming. Dirty cash is a stigma for songs, not economies. Everybody needs to continue to practice good hygiene and be considerate of those around them. But don’t buy into the fear. The best way to protect all consumers and retailers is to continue to provide options for payment and to keep our economy moving. Wash your hands frequently, avoid touching your face and maybe even wipe your cards and cash with the right products, but don’t think you are protecting anyone by refusing to accept cash or removing cash from our economy.
The purpose of the Canadian Association of Secured Transportation (CAST) is to promote and advocate for the interests of Canadian providers of secure transportation of valuables, to provide a venue for beneficial dialogue among members, and to encourage the advancement and excellence of industry standards across Canada and abroad. www.cast-acts.ca
VIEWPOINT | VOLUME 3 – NO 7 | JULY 2020
Payment News from Around the World Africa
M-Pesa increases reach in Tanzania
M-Pesa’s 8 million customers in Tanzania can now carry out international money transfers to 200 countries. This service is added to their ability to access e-payments, savings and loans, overdrafts and its virtual debit card function through their mobile phones and the 106,000 agents in the country. The Bank of Tanzania announced at the same time that it is increasing limits on digital transactions and received balances of mobile wallets in order to provide relief and ensure continuity of service during the COVID-19 pandemic.
Zambia supports digital payments
Dr Denny Kalyalya, Governor of the Bank of Zambia, recently made a speech where he outlined measures taken to support digital payments. As part of the Bank’s pandemic response it has, like the Bank of Tanzania, increased transaction and balance limits on
Card and mobile payments advance in India, but have a long way to go A new report from S&P Global Market International says that mobile payments increased 163% in India in 2019 while debit and credit card payments only increased 24%. Google Pay and India’s PhonePe achieved 7 billion transactions on the Unified Payment Interface, approximately two thirds of the total. Despite these advances, the report estimates that card and mobile payments still only accounted for 21% of India’s $781 billion spent in stores.
e-wallet and money transfers. In addition, it has waived fees on P2P transfers up to a value of K150, capped the Merchant Discount Rate for transactions on POS to a maximum of 2% of the value of the transaction, and reduced transaction fees on Real Time Gross Settlement and Electronic Fund Transfer (EFT). Zambia is keen to increase usage of digital channels as part of its journey to being a digital economy. The World Bank has recently issued its Digital Economy Diagnostic Report for 2019 looking at the impact of technology on the economy. Over the last four years, mobile money payments have increased by 126% in value on average each year to K49.45 billion, POS transactions have increased by 560% to K20.09 billion and EFT has averaged growth of 35% from K21.83 billion in 2015 to K67.81 billion in 2019.
Payment change and innovation in Vietnam
The State Bank of Vietnam reported that in the first four months of 2020 there has been a 26.2% increase in domestic banking transactions. Compared with 2019 there has been a clear move to mobile payments, with volumes increasing 189% but the value increasing by slightly less at 166%. A Consumer Payment Attitude survey by Visa found that 37% of those surveyed used a contactless card and 42% used a mobile payment app to pay. Three banks – TPBank, Vietinbank and Sacombank – installed technology to allow account holders to withdraw cash from ATMs by scanning a QR code, while Eximbank and Vietbank have ATMs and offices that let people withdraw cash from ATMs using their fingerprint for authentication.
Acquisition brings new phone payment option to Turkey
The European Bank for Reconstruction and Development (EBRD) has provided a loan to the Dubai-based TPAY Mobile so that they can acquire Turkey’s payment platform Payguru. TPAY Mobile’s solution allows users to make purchases by charging payments to their mobile phone carrier bills or pre-paid airtime balance, as well as wallet stored value.
6 CASH & PAYMENT NEWS | AROUND THE WORLD
As part of the deal, TPAY Mobile took over an electronic money transfer platform which allows banks card-free transfers, deposits and withdrawals through a network of 30,000 ATMs or 75% of the cash machines in Turkey. TPAY Mobile is already active in 24 countries in the Middle East and North Africa, working with 54 telecoms and e-wallet providers.
Kenya supports non-cash payments In a 90-day agreement that was a response to the pandemic, mobile money transaction fees were waived on transaction values of Sh 1,000 or less. In addition, banks did not charge consumers to move money electronically from their banks to mobile money wallets. Effectively Safaricom, with its M-Pesa product, which is reported to have 99.9% of these transactions, is the sole provider. Safaricom reports that this cost them Sh1.7 billion. This agreement was intended to encourage people to pay electronically rather than with cash. The Central Bank of Kenya reports that between 20 April and 10 May, daily average mobile transaction values for payments of Sh 1,000 or less increased by 83% to Sh 1.98 billion compared with before the fee waiver. For payments with a value of more than Sh 1,000, transactions fell 18.4%.
Changing payment practices in Asia Mastercard has carried out an Impact Study in Asia to understand how payment practices are changing. They surveyed 10,000 people in Malaysia, the Philippines, Thailand and Singapore and the results are consistent with the impact of the COVID-19 pandemic around the world, namely cash usage has dropped and card and mobile payments are up.
While reported cash payments have dropped between 59% (the Philippines) and 67% (Singapore), cashless payments of all types only increased by 15-18%, indicating a significant drop in economic activity. Mobile wallet usage has increased by more than contactless card usage; for example, in Malaysia, wallets increased 40% while debit cards increased by 26% and credit cards by 22%.
Apple faces anti-trust investigations
The European Commissioner (EC) has concerns that Apple may be distorting competition and reducing choice, quality and innovation in payments due to its terms and conditions and because it does not allow proprietary bank payment apps to work with its near field communication system.
The EC commissioner Margrethe Vestager said that Apple ‘sets conditions on how Apple Pay should be used in merchants’ apps and websites. It also reserves the tap and go functionality of iPhone to Apple Pay’.
The individual tokens can be traded to create a specific set and these can be exchanged for credit card size physical silver coins with a nominal value of €19.18. The coins are not legal tender.
Lithuania’s digital coin
A new round of innovation hubs announced by BIS
The Central Bank in Lithuania is carrying out an experiment to test a state backed digital currency based on blockchain technology accessible by the public. Although not legal tender, the digital tokens, known as LBCOINs, are exchangeable between members of the public on private blockchain networks or with the central bank. 4,000 sets of six digital tokens have been created. Each set costs €99 and the design of the six tokens are random, with an attached portrait of one of the 20 people who signed Lithuania’s declaration of independence in 1918.
The Bank for International Settlements (BIS) will open innovation laboratories with the Bank of Canada in Toronto, the Bank of England in London, the European Central Bank in Frankfurt and in Paris and in Stockholm with the central banks of Denmark, Iceland, Norway and Sweden. The BIS is looking to identify and develop insights in financial technology relevant to central banks. The aim is to enhance how global financial systems function and to create a focal point for a network of central bank experts on innovation.
The BIS already has innovation laboratories in Hong Kong, Singapore and Switzerland along with a strategic partnership with the Federal Reserve System in New York.
Reality of less cash affects the UK
G4S, one of the four main cash handling companies in the UK, will cut a quarter of its workforce in the UK and Ireland, 1,150 people, with the job losses mainly amongst its cash handling staff. The reduction in cash usage and cash handling was blamed. The UK’s Financial Conduct Authority has issued draft guidance for financial institutions considering closing branches or ATMs, or converting free to use ATMs to be pay to use ATMs. Firms will need to put in place alternative access arrangements such as sharing services with other providers, providing mobile banking hubs or commissioning free to use ATMs, albeit where this is reasonable to do.
Central Bank of Brazil suspends WhatsApp payment service
Facebook’s WhatsApp has been trialling its payment service in India since 2018 with 400 million users involved. Mid-June it launched its payment service in Brazil where it has 120 million WhatsApp users. Payments to businesses and person to person (P2P) are free for the user although businesses have to pay a processing fee. The payment is initiated within WhatsApp, requiring either a six figure PIN or a fingerprint to allow payment. Visa and Mastercard debit cards and Banco do Brasil, Nubank and Sicredi credit cards could be used, with Cielo providing the back office processing. Ten days after launch the Central Bank of Brazil suspended the service. The reason given was to ‘preserve an adequate competitive environment’ and to ensure ‘functioning of a payment system that is interchangeable, fast, secure, transparent, open and cheap.’ It also said that it had not analysed the P2P managing system.
Gaining regulatory approval in Brazil has now been added to Facebook’s regulatory approval problems in India.
Mobile payment platform has a slow start in Mexico
The Bank of Mexico launched its mobile payment system, known as Cobros Digitales (CoDi), last autumn with the aim of signing up 18.1 million users in the first year (see CPN September 2019). By June, although 3 million people had downloaded the app, only 167,424 people had made payments and 140,000 people have received a payment using the app. CoDi was created to allow people to make fast and safe payments or receive money using an app, QR codes, and near field communication, as in NFC technology. Unlike electronic solutions offered by some startups, CoDi charges no commission for its services. The reasons for this low uptake are unclear, particularly since it would have been logical to assume the COVID-19 pandemic would have increased the uptake.
The initial survey, two months after launch, showed public awareness was low, 76.6% did not know about it, and there appeared to be little appetite to use it: of the 23.3% that did know, 40.6% said they had no intention of using the solution. It will be interesting to see how the central bank responds and how the uptake changes. The Central Bank of Brazil will launch something similar in November.
Cash usage grows strongly in Mexico despite the pandemic
The largest increase in the monetary base this year was in May, the second month of confinement by the COVD-19 pandemic. The Bank of Mexico reported that in the week ending 22 May banknotes and coins in circulation, and current account bank deposits in its vaults, increased by over 5 billion pesos, reaching a balance of 1,839 billion pesos for May. Compared with a year earlier, banknotes and coins had increased by 17.8%, or 278 billion pesos. The equivalent increase between 2018 and 2019 was 4.3%.
Coin drought in the US
In April 2020 there were $47.8 billion worth of coins in circulation in the US, up from $47.4 billion a year earlier. Despite that, from 15 June the Federal Reserve, which distributes coins on behalf of the Mint, has started to allocate coins based on historic order volumes by denomination and the depository institution endpoint. In July it created a task force to address a problem with the availability of coins in the cash cycle.
The Chairman of the Federal Reserve, Jerome Powell, was asked about coin shortages when testifying to the House Financial Committee in Congress, and said that ‘with the partial closure of the economy, the flow of coins through the economy has gotten…. It’s kind of stopped’ It is not a shortage but the slow pace of circulation. People have not been paying with cash to the same extent and the Federal Reserve’s system of producing and distributing cons has been disrupted. This means banks have been holding fewer coins and the Mint’s production has reduced.
AROUND THE WORLD | VOLUME 3 – NO 7 | JULY 2020
Cash Innovation News
Making online payments using cash
PaySafeCash was launched in 2018 to allow people to pay online easily and safely using cash. If you do not have a bank account or credit card or if you just want to pay in private with no fear of being scammed because you are online, the solution allows you to buy online, choose PaySafeCash as your payment option and print off a barcode that you get scanned at a payment point. You pay cash and your online purchase is then authorised for delivery to you. PaySafeCash added Bulgaria to its list of countries this month. PaySafeCash is available at around 170,000 payment points in 28 countries (including the USA and Canada).
Recent innovation in CashTech (a term coined by Guillaume Lepecq of the think-tank Cash Essentials) has been shaped by the pandemic in a number of areas, primarily supporting the vulnerable, allowing contactless cash handling and making online payments using cash easier. It is said that necessity is the mother of invention. Clearly the pandemic is acting as a spur for change for cash as in other areas of life. In this, the first in a periodic series that will look at innovation in cash technology, we cover some of the latest initiatives and developments around the world to facilitate access to cash.
Supporting the vulnerable
Vulnerable customers, such as the elderly and those with special needs, and those in receipt of relief and aid, have seen cash related initiatives in a number of countries. The government of Tamil Nadu has included cash deliveries along with supplies of essential food items. The South African Post Office is running a trial in 40 sites in Kwa-Zula Natal of what are called ‘cashless ATMs’. Recipients can go to informal shops and insert their cards to get a slip from the ATMs which allow them to buy goods or receive cash handouts. If the pilots are successful, 10,000 cashless ATMs will be set up. The UK Post Office has extended its ‘Payout Now’ scheme which allows friends and family members of people who cannot go to shops themselves to withdraw cash on their behalf using a single use voucher.
8 CASH & PAYMENT NEWS | CASH INNOVATION NEWS
On 13 July PaySafeCash announced a partnership with Monese, a banking service that aims to ‘give people the financial freedom to thrive anywhere’. The new partnership will boost the reach of PaySafeCash in Europe through access to more than 110,000 Monese pay points. The international roll-out of the partnership between PaySafe and Monese starts in France, with plans to extend the availability of the service into an additional 11 countries over the next few months.
Allowing contactless cash handling Caixa Bank is rolling out 100 facial recognition ATMs across 30 branches in Spain. The hardware and software validate the user based on reading 16,000 points on the face and without the need to use a PIN for authentication. When the roll out is complete, Caixa believes this will be the largest facial recognition ATM network in the world.
Other cash developments
India has seen two commercial banks introduce mobile ATMs – Indian Bank and ICICI Bank – and the State Bank of India is allowing its premier banking customers to receive door to door deliveries of cash.
RBR has issued its ‘Retail Cash Automation 2020’ report which studied the use of cash counting, validation and storage devices in 26 countries. It shows that between 2017 and 2019 there was an overall increase of 15% in such devices, although with significant variations in sectors and countries. Japan has invested in cash automation significantly for many years. Outside of Japan this increase was 33%.
One of the initiatives coming from the UK’s Access to Cash report has been a programme to trial methods designed to help give people and merchants access to cash and cash services. On 8 June communities started trials of cash promotion schemes, for example opening local cash deposit centres for merchants, introducing shared bank branches, helping shops give cash back and subsidising bus routes to take people to places which still have open bank branches.
Smart safes increased by 35% although the US, with 150,000 installed units, accounted for much of this. From a low base, smart safe usage increased by a third in the EMEA region, with southern Europe a key area. The investment in back office cash acceptors and recyclers increased 35% while POS devices only increased by 2%. The result is that the number of back office devices has closed the gap by 7 points so that POS devices now represent 53% of the total. See table below.
In the US, PayPal has introduced a Cash Card which it hopes will transform its online business. One of the benefits the card mentions is how it opens up a large freeto-use ATM network to card holders. Cash back in shops is also possible. The cost of an ATM withdrawal is $2 per withdrawal and $3 for cash back.
Shedding Light on Real Cost of Payments The last month has seen a major court decision about interchange fees in the UK, a European Union (EU) review of its interchange cap regulation, a Reserve Bank of Australia (RBA) bank fee report and a US retail report on card costs. The cost of interchange fees is clear in the EU and its regulation is clearly working as intended. The situation in the US reveals that interchange fees are only one part of the card cost structure, other fees and charges are significant. The true cost of Reward points, shared by consumers and retailers, is highlighted by the RBA. Given the now significant importance of Reward points, this is a timely insight into their real cost.
There are, perhaps, two reasons for this level of increase. Firstly between 2012 and 2018, Federal Reserve figures show that credit card usage increased by 67%. Secondly, the use of what are known as Reward Points has increased significantly. Reward points are benefits consumers receive related to their level of expenditure on a card. Card companies charge higher fees to pay for these rewards (see below – ‘Bank Fees in Australia’). Interest rates charges on credit since 2010 have not increased similarly across the board. People with the lowest credit rating have seen rates increase by 4.2% while those with the best credit ratings by 1.3%. A Wall Street Journal article written at the time of the NACS report suggested that since card payments cost NAC members less than card payments, effectively every cash payment subsidises those who pay with cards. A Federal Reserve Bank of Boston report from 2010 put a figure on the size of that subsidy, cash households pay $149 to use cash and card households receive a benefit worth $1,133. 63 merchants in the US, including Amazon and Starbucks, are currently suing Visa, Mastercard and card-issuing banks, claiming they collude to avoid competing over interchange fees. A key complaint is that the merchants are required to accept all cards issued by Visa and Mastercard, they must ‘honour all cards’.
Situation in the US
In the US, the National Association of Convenience Suppliers’ (NACS) ‘State of the Industry’ report says that in 2019 convenience retailers paid $11.8 billion in card and swipe fees and in reward point costs. All merchants across the US paid Visa and Mastercard interchange fees worth $53.6 billion in 2019. According to a Nilson report, this is more than double the 2012 figure.
The problem is that swipe (interchange) fees vary between different card types. The merchants want to be able to choose which cards to accept and to be able to negotiate swipe fees individually with the banks. The banks argue that the fees are justified because they cover the cost of crime, innovation, reissuing cards with updated features and their losses on unpaid bills. They also point out that card payments mean that the retailers avoid cash related costs. New fees were about to be introduced when the pandemic struck, but they have been put off until 2021. Since 2011 the US has had a cap on debt card interchange fees. These are currently 22 cents per transaction and 0.5% of the transaction value. There is no cap on credit cards and a 2-3% fee on transaction values is common.
Interchange fees in EU
The European Commission has reviewed the regulations brought in on 7 February 2018 reducing and capping fees charged to merchants for card payments. Its report estimated that savings of €2 billion pa were being made (a range of €864 million to €1.93 billion was quoted) and that cross border acquiring had increased. The regulation included card schemes and entities processing card transactions. It prohibited territorial restrictions for the use of cards and the prevention of choice of payment brands and payment applications. The objectives of the regulation were the creation of a single market for card payments and the prevention of competitive restrictions, including the ability for merchants to negotiate fees below the interchange rate. It is little wonder that this report has been widely quoted in the US.
UK merchants win with the EU anti-trust regulations
A class action was brought by merchants in the UK against Visa and Mastercard, claiming that multi-lateral interchange fees infringe the EU’s anti-trust rules against restricting competition in the acquiring market. It was argued that Visa and Mastercard’s collective agreement to set the multi-lateral interchange fee effectively fixed a minimum price floor which limited competition. This has been a long standing case, and in June the top UK court found in favour of the merchants. All grounds of appeal were dismissed except over the degree of precision required to calculate loss, the so-called broad axe issue. 50 merchants are currently quantifying and progressing their claims. Again, this decision has been reported extensively in the US.
Bank fees in Australia
The Reserve Bank of Australia issued a report in June looking at bank fees. The authors reviewed 15 financial institutions representing 90% of the banking sector by balance sheet value. Annual fees on cards that do not earn Reward points were $54, down 1.2% in 2019 compared with 2018. In contrast annual fees for Reward cards were $211, up 3.8% in 2019. Mid-2018 a number of major financial institutions started what is known as least cost routing, which is where a merchant can direct contactless debit card transactions to the network with the lowest costs.
PAYMENT FEES | VOLUME 3 – NO 7 | JULY 2020
Payment Innovation News In this issue we continue the theme of innovation in the payments industry brought about by COVID-19 and the solutions designed to reconcile the needs of physical, in-person shopping with social distancing and the resulting decision of many businesses to transition to digital payments. The two worlds can successfully co-exist, as some of the new solutions demonstrate.
Canada adopts proven solutions
In response to the Canadian public’s concerns about using banknotes and coins during the pandemic, PayPal is rolling out a Quick Response (QR) code payments facility for small businesses taking in-person payments. The new service will allow customers to buy or sell in-person safely and securely without needing to purchase any new equipment. According to PayPal, to make the service even more affordable, it is waiving the standard seller transaction fees on sales using a QR code until 30 September. When making a payment, buyers can go to the PayPal app, click ‘send’ and tap the QR code symbol in the top righthand corner. The camera will open and customers proceed to scan a seller’s QR code and follow the prompts to complete the transaction. A QR solution offered by a prominent payment provider is new to Canada. But it has been extensively employed in many other countries, notably in Asia Pacific, where it serves as a channel to rapidly promote the adoption of cashless payments since no additional equipment is needed by the retailer. In a separate development, Canada’s DC Bank, together with tech company XTM, is installing cash accepting terminals that convert banknotes and coins into Mastercard balances to be used in digital payments, a kind of a ‘reverse ATM’. The same technology (eg. Qiwi Wallet) has been in use for many years in countries such as Russia, Kazakhstan, Ukraine and Romania, where cash paying consumers require a way to participate in the digital economy. While this solution helps to link cash with the new digital world, in Canada, where nearly all of the population (over 99%) has a bank account and a debit or credit card, it will be interesting to see how much demand there is.
10 CASH & PAYMENT NEWS | PAYMENT INNOVATION NEWS
AI could replace cashiers
Sberbank, Russia’s largest commercial bank, Visa and the popular domestic grocery chain Azbuka Vkusa have launched a joint project – the country’s first retail store without checkouts or cashiers. The model is analogous to the Amazon Go concept of ‘Just Walk Out’ shopping. Shoppers need to download a mobile phone app called Take&Go and link it to the Visa card that they will use to pay. The service starts when a QR code on the app is scanned at the entrance to the store. An AI-based surveillance system keeps track of the products on the shelves and moves them to the ‘virtual shopping basket’ as the customer takes the products. If the shopper changes their mind and put the product back, it will be instantly removed from the virtual basket. As soon as the customer leaves the shop, the app takes the payment for the chosen items, and the transaction is confirmed by a push notification on the customer’s phone and a receipt sent by e-mail. Sberbank’s management has high hopes that Russians’ uptake of this new way of shopping will happen as quickly as the adoption of cashless payments in a country that in the not so distant past almost entirely relied on cash. In the meantime, the original cashier-less store inventor, Amazon, is piloting a smart shopping cart that allows customers to skip checkout lines in conventional stores. The next generation shopping trolley, dubbed ‘Dash Cart’, is being tested at one of Amazon’s California grocery stores, tracking orders and charging customers to their linked payment card.
How US retailers ‘keep the change’
In the past few months, US retailers have been experiencing shortages of coins due to significant disruptions to the supply chain caused by the pandemic (see page 7). Unable to give change to their customers, many retail chains have resorted to crediting the amount due in coins to customer loyalty cards. Not an innovation per se, but a quick response to the unfolding situation.
While some shoppers may resent getting store credit instead of cash, the move is a real boon for merchants. Not only do they get many new customers joining their loyalty programmes and sharing their personal data and shopping preferences with the merchant, but they will, presumably, revisit the retailer in the future to spend their unused change. There is also an added benefit of a reduction in coin handling for the retailers. If the US coin shortage grows, more and more retailers could force shoppers to ‘keep the change’ on their loyalty cards, making the future of US coinage even more uncertain than it already is.
Biometrics raise contactless limit
Since the beginning of the pandemic, many countries have increased the threshold for contactless payments, allowing for more transaction to be conducted without physical contact with the payment terminal. Yet, the limits are still relatively low due to security concerns. As a result, more and more consumers are using their smartphones in conjunction with payment apps such as Apple Pay and Google Pay instead of paying with contactless bank cards directly. While the fintech companies are benefiting from the growing customer base, the card issuing banks are missing out on receiving full interchange fees. To allow for larger card payments to go through without the need to enter a PIN, banks are starting to implement biometrics on cards. One example is France’s BNP Paribas, which is planning to roll out its first batch of contactless fingerprint cards this autumn. The cards, which use technology from Thales and Mastercard, will initially be distributed to between 10,000 and 15,000 holders of the bank’s premier or gold card holders. The built-in biometric reader enables users to make contactless payments above the usual limit by placing a finger on the card at the point-of-sale. In Switzerland, Cornèrcard teamed up with French card manufacturer Gemalto and Visa last year to launch the country's first, limited-edition, biometric gold card. The technology has also been tested by other banks, including Société Générale, Crédit Agricole, Intesa Sanpaolo and most recently the UK's NatWest bank.
Bank notes in circulation by year, 2015–20
Cash Demand Surges in Canada While Cash Usage Continues Largely Unchanged Chart 1 shows the value of notes in circulation (NIC) through each year from 2015 to 2020. We see that NIC increased significantly in March and April 2020. Further, this increase was larger than those seen during the
same two months in previous years. The rise in NIC was spread across different denominations of bank notes, but the $20 and $50 notes were most in demand, which is typical.
The primary objective of the study behind the report was to understand recent empirical evidence concerning cash and developments affecting other methods of payment such as debit and credit cards. It was issued against the background of a significant decline in consumer spending as a result of the COVID-19 pandemic, most likely across all methods of payments (cash, debit, credit etc.). The relative shares, or mix of, payment methods used also could have changed. The Bank of Canada (BOC) supplies financial institutions with banknotes needed to meet public demand through the Bank Note Distribution System (BNDS). This is based on ten Regional Distribution Points (RDPs) across Canada. Financial institutions can withdraw notes from the BNDS to meet demand, or they can deposit surplus notes and also return notes deemed unfit for further circulation. The report compares relevant statistics prior to and during the pandemic The value of notes in circulation (NIC) increased significantly in March and April 2020 compared with the same two months in the previous five years (see Chart 1). The rate of increase was spread across different denominations; the $20 and $50 notes were most in demand, which is normal. The change in NIC is equal to the value of net note withdrawals from the BOC, ie. withdrawals of banknotes less returns. Increases in net note withdrawals in March and April were among the largest since 1998, particularly in March (see Chart 2). To eliminate the effect of the increasing value of NIC over time, the weekly percentage changes in NIC across years were compared, and in March and April these were large compared with changes in these months in previous years. Although the increase in NIC was spread across Canada, it was concentrated in the major economic and population hubs of Toronto, Montreal, Calgary and Vancouver.
Bank's response to the pandemic
In early March the Bank increased its own note inventory reserves across the BNDS from less than 60% to more than 90% of capacity to ensure that any increase in demand from financial institutions across Canada could be met.
Chart 1: Notes in circulation by year 90
Notes in circulation (Can$ billions)
The Bank of Canada’s Currency Department has issued its first report – in the form of a staff discussion paper – on the impact of the pandemic on the demand for and use of cash.
Chart 1: Notes in circulation by year (© Bank of Canada).
Net note withdrawals from the Bank of Canada, January 1998 to
As mentioned, Only 7% reported difficulties accessing April 2020 demand did increased significantly to the extent that capacity cash during the pandemic. Compared The change in NIC equals the value of net note withdrawals from the Bank of Canada, which is withdrawals fell back to less than 70% by late April with the 2017 Methods of Payment of bank notes less returns. Chart 2 plots the frequency distribution of all monthly net withdrawals of bank as BNDS members withdrew notes (see Survey, the mean value of ATM notes from the Bank since January 1998, highlighting those in March and April 2020. Consistent with Chart 1, Chart 3). This reduction in the Bank’s note withdrawals were up slightly, $195 we see that the net note withdrawals in March and April were among the largest NIC increases since 1998; inventory in March and April corresponds to compared with $140, but bank teller this is particularly the case for March 2020. the large increase in NIC during this period. withdrawals were down, $141 rather than $289. To understand why demand increased, the Bank collected field reports from BNDS participants. The three key factors driving demand for cash from the financial institutions were: 1. They increased their cash inventories in case their cash transportation services were disrupted;
Canadians who hold cash reported having slightly more cash on hand, $85 median, compared with $70 in the 2019 CAS.
35% of Canadians reported that they decreased their cash use, but only 12% reported that a merchant refused to accept cash in a transaction.
2. To compensate for reductions in the flow of cash from retailers, which would normally have helped replenish their note inventories;
Most Canadians (74%) continue to report that they have no plans to go cashless in the next five years, although this is less than in the 2019 CAS (82%).
3. To cope with an anticipated increase in consumer demand for banknotes, which did happen and which appears to have been significant.
Regarding cash holdings, these were similar to the results of the 2019 CAS. The proportion of Canadians who reported holding zero cash on hand increased from 20% to 28%, and the proportion with zero other cash holdings increased from 71% to 82% (see Chart 4). However, conditional on holding cash, Canadian cash users increased their holdings in response to COVID-19.
Cash Alternative Survey
To better understand Canadians’ use and holdings of cash during this period of the pandemic, Bank staff conducted a Cash Alternative Survey (CAS) in collaboration with its survey suppliers, Ipsos and Statistics Canada. ‘Wave 1’ was conducted from 3 April to 22 April, with a nationally representative sample of 4,192 respondents. The key takeaways from the survey regarding cash usage were: 36% of Canadians reported using cash during the week, comparable to the percentage who used Interac e-Transfer (38%), but less than the proportion reporting debit card use (52%) and credit card use (62%).
As for access to cash, 93% of Canadians reported no difficulty obtaining cash relative to their typical withdrawal behaviour. It appears that there is a growing reliance on ATMs to access cash as financial institutions shift away from offering cash services through tellers, no doubt due to a reduced availability of tellers during the pandemic because financial institutions reduced branch hours. Continued on page 12 >
COUNTRY NEWS | VOLUME 3 – NO 7 | JULY 2020
Cash Demand Surges in Canada (continued)
Chart 2: Monthly net withdrawals from January 1998 to April 2020
Most Canadians were not affected by merchants refusing to accept cash.
A sizable share (43%) reported they did not hear, see or experience a merchant refusing to accept cash during the past week (Chart 3). In comparison, 16% stated that they had heard such news reports, and 22% reported seeing a sign indicating that a merchant does not accept cash. Importantly, only 12% of Canadians reported that a merchant refused to accept cash during their transaction. In the 2018 Merchant Acceptance Survey (which surveyed merchants directly), 96% of small and medium-sized businesses in Canada accepted cash. A majority of Canadians (64%) report that they did not change their cash use in response to COVID-19 and 35% said their use of cash decreased and, of the 30% that reported they did not use cash at all, a significant proportion of these respondents had cash on hand. Adjusting for this provided an estimate of 14% of respondents who do not use cash. Only 13% were not concerned about reports that viruses could be transmitted by banknotes, and only 17% reported taking precautions while using cash, such as washing their hands after making a purchase. Of the 36% who reported a change in their behaviour, 35% reported that they decreased their use of cash.
Expectations about future cash use The share of Canadians stating that they are already cashless has increased to 19% (from 10% in 2019). However, as in 2019, of the respondents who reported that they are already cashless, more than 50% had cash on hand, so their stated behaviour is not consistent with their actual behaviour. The share of Canadians stating they are already cashless and hold no cash is estimated as 10%. These changes in consumer preferences and behaviour related to the pandemic could be either temporary or long lasting; further studies will evaluate the changes over time. Bank staff will conduct a second wave of the 2020 CAS later in 2020 and another follow-up survey in the first half of 2021. They plan to assess whether the recent increase in the stock of cash is temporary or long-lasting, along with the potential timing and magnitude of the return of banknotes to the Bank of Canada. The report can be viewed at https:// www.bankofcanada.ca/wp-content/ uploads/2020/07/sdp2020-6.pdf
12 CASH & PAYMENT NEWS | COUNTRY NEWS
Weekly percentage changes in each year since 2015
Chart 3 shows that the weekly percentage changes in the value of NIC through March and April 2020 are -8000
indeed large compared with the percentage changes during these months in previous years.
Chart Monthly net withdrawals from January 1998 to April 2020 (© Bank Canada). since 2015 Chart2: 3: Week-over-week percentage change in notes in of circulation To some extent, these results could be expected with the increasing value of NIC over time. As the dollar 3
March value of NIC increases, recent extremeApril values are more likely to be in the tails of the historical distribution
of net note withdrawals. Therefore, next, we compare weekly percentage changes in NIC across years, which abstracts from the effects of the increasing dollar value of NIC over time. 2
Week-over-week percentage change
Impact on payment behaviour
Chart 3: Week-over-week percentage change in notes in circulation since 2015 (© Bank of Canada).
Cash on hand
Other cash holdings
Proportion holding zero cash Share (%)
Chart 4: Canadians’ cash on hand and other cash holdings (© Bank of Canada) Note: The Cash Alternative Survey (CAS) contains 'cash on hand' and 'other cash holdings' measured in Canadian dollars. The mean estimates were winsorized at the 99th percentile in 2019 and 2020. 4
$2,200 million, the 15th largest single monthly rise on record and the highest (by value) March increase ever. Growth in April was also strong, with a further net increase in notes on issue of $372 million, but news just out shows that, despite a widespread shut down of the Australian economy, banknotes continue to flood out of the Central Bank’s doors with total currency on issue growing by a further $2,383 million in May to a new record high of just over $88 billion. That’s a 10.6% increase (up $8.5 billion) in the past year.
Landmarks in an Australian Journey Australia is ahead of most of the world in its journey back to more normal times, albeit with a long way to go (for example Melbourne, a city of some 5 million people, has recently had to lock down again, and so it is interesting to note the landmarks and character of the recovery). The headlines are that in Australia April saw a major drop in economic activity with steady recovery in May and June. There was a major switch to online shopping using debit cards rather than credit cards and the public has been paying off their credit card balances. Cash usage has increased, with the $50 in most demand. The $100 saw an initial surge but demand has fallen back. There are signs of cash usage returning. Economic activity remains significantly reduced. Paul Blond, Managing Partner of The Blond Group, is writing a series of posts about the changes in cash during the pandemic based on data from the Reserve Bank of Australia and his own analysis. This article is a digest of two of those posts. Australia’s cash in circulation data between 31 December 2019 and the end of June 2020 increased by $6.1 billion, or 7%. In January and February, it fell but thereafter, with one exception, it increased by over $2 billion each month. In April, the increase was only $372 million. As the data below shows, April was the month where the economic impact of the pandemic has been most evident, with payment activity severely affected.
Cash in circulation
A look at the number of banknotes in circulation by denomination reflects what was probably an increase in notes withdrawn as a precaution against the unknown. For banknote volumes, the annual CAGR between 2012 and 2019 was 4% and yet the increase of $6.1 billion only increased the CAGR to 5%. The three lowest denominations went down 3-4% each, presumably reflecting the lack of day to day expenditure using cash, while the $50 and $100 increased by 11% and 6% respectively. The $100 can be assumed to be largely a store value note. The $50’s increase may be both for transactions and to store value given that the increase in May nearly doubled compared with its March increase (2.3% compared with 4.3%), while the $100’s May increase was only slightly half its March increase (3.4% compared with 1.8%). The $20, a transaction note, also increased in volume in June, perhaps reflecting the start of a journey back to cash usage for payments for both the $20 and $50.
Growth of Australian Dollars in Circulation
The wider payment landscape
If cash has had a difficult time, albeit with signs of recovery, the payments picture is more complicated across the different alternatives. Value of Australian Dollar @ Point of Sale (POS) Transactions
(Source: Reserve Bank of Australia/ Blond Group analysis)
Growth of Australian dollars in circulation. (© Reserve Bank of Australia)
In an article I previously wrote Cash is not just a dirty word!, I reported that the Reserve Bank not only publishes detailed banknote by denomination data, but also a comprehensive range of payments use statistics, although given it is gathered from a number of reporting institutions, this information takes a little longer to appear. Data for the month of April 2020 (the first full month of economic and social lockdown) has just been published and provides some fascinating insights into how Australian’s (and in normal times, visitors to Australia) pay for their goods and services.
The GDP data for the first quarter shows a slight reduction of 0.31%, but the payment data tells a starkly different tale.
The value of ATM withdrawals dropped 30% in April compared with the previous month before recovering by 17.1% in May. The $7.5 billion withdrawn in May was still a third lower than compared with the same period in 2019. Volumes were down even more which was reflected in the average withdrawal value increasing from $230 to $294. In May that figure hardly moved, remaining just under $295. The figures for cashback received at the till in retailers remained steady at $77 and credit card advances similarly remained unchanged at $380.
(Source: Reserve Bank of Australia/ Blond Group analysis)
Value of Australian dollar POS transactions. (© Reserve Bank of Australia)
A move online or ‘in app’
As with cash, April saw a major fall in the
While physical point of sale transactions are substantially down, device not present – onl value and the number of point of sale app purchases – have been much less impacted. Australian domestic (Australian acquire purchases down 27%billion andin 25% purchases have fallen(POS), just 8 percent (from $14.87 April 2019 to $13.63 billion t while the number of transactions hasaverage actually increased 4 percent year on year. The con respectively with the purchase a fall in average transaction values from around $130 a year ago, to $114 now.
value $51. In contrast, the number of online/in app purchases rose 4%. The fall Value of Australian Dollar Device not Present Transactions in average value from $130 to $114 meant that the value fell 8%. One assumes this reflects more day to day items being bought with cards rather than with cash.
In May the recovery gathered pace, rising $6 billion on April. Interestingly, debit card expenditure rose 24% to reach 99.85% The total withdrawal of cash from all of its May 2019 figure but credit cards, sources fell headline between March by the dramaticalthough While an immediate grabbing statistic and would April be to report fall in ATM cash they increased by 22%, only withdrawals (total demands with in Aprilthe was $6.4 billion, down 30from percent on the March figure and 43% compared year before, reached 72% of the 2019 figure. Since nearly 40 percent less than a year earlier), the breadth of data provided deserves more detailed $13.9 to $7.9 billion. (Source: Reserve Bank of Australia/ Blond Group December 2019, theanalysis) total outstanding analysis. Independent ATM Deployer (IAD) figures for credit card balances have fallen by nearly The value of ATM withdrawals is down, the number of ATM withdrawals have dropped even more March and April were down much more, 20% to $40.3 billion. At this time of The chart below illustrates the dramatic drop in ATM withdrawals across the board. Total ATM 57% by value and 64% by number of uncertainty, it appears the public are being withdrawals in Australia, both from bank and reporting Independent ATM Deployers (IADs), was transactions, their machines down from $10.57 billionreflecting in April 2019 tothat just $6.41 billion in April 2020, numberscautious not seen sinceabout the their financial positions. start of theto newbe millennium. The number fell even more sharply from 46.1 million to tend in pubs, clubsof withdrawals and small stores. Overall POS expenditure by the end of May
21.8 million (down nearly 53%) with a consequent significant increase in the average withdrawal value $230withdrawals to $294 (USD 204 / started EUR 181). to recover. In from Mayaround cash 2020 was
still only 88% of 2019.
addition toDeployers, the ATM rise, IADofwithdrawals ForIn Independent ATM typically with many their ATMs located in pubs and clubs,debit the Online and credit card transactions nationwide blanketby closure of these venues in late March hadwent a profound effect. The fall in increased 17.9% and cashback saw a shift from credit to debit cards as transaction numbers and, as a consequence transaction revenue, which are usually fixed per up 27.5% (both were still under half of the well, with transaction regardless of withdrawal value, were even more severe. IAD ATM withdrawals in Aprildebit cards achieving a record 2019 the figures) anda near advances fellequivalent to $688M from $1,498M previous year, 57% drop andon the number of withdrawals fell 40% of all online transactions. While credit 64% to just under 3.3 million credit cards rosetransactions. 5.3%. Australian Dollar Value of ATM Cash Withdrawals
card usage in May increased to 75% of their 2019 figure, debit cards increased by 115%. Debit cards had increased by 88% and credit cards by 67%. The decline in tourists visiting Australia and of Australians travelling overseas is also visible in the figures. The use of overseas cards in Australia at ATMs fell 54% and at POS 89% in April and Australian cards used overseas fell 83%. May’s figures were similar.
Cheque usage dropped 42% by value and a third by volume year on year in April 2020. While ATMs are a main source of physical cash, point of sale cash out (or cash back) and credit card This continued in May with a further drop to cash advances, as well as over branch counter withdrawals, are also other important sources. 47% by value, less than a million cheques Debit card cash out and credit card advances were also significantly lower. When combined with ATM data, total cash out is down from $13.9 billion in April 2019 to $7.9 billion inper April 2020, a 43% month. (Source: Reserve Bank of Australia/ Blond Group analysis)
Australian dollar cash withdrawn at ATM and POS. (© Reserve Bank of Australia)
COUNTRY NEWS | VOLUME 3 – NO 7 | JULY 2020
A Time to Rethink International Payments? A number of changes are coinciding to create an opportunity to re-think cross border payments. As the dominance of the US in world trade reduces, the logic of using the dollar as the world currency becomes less clear. At the same time, technology has evolved, allowing almost instant low cost domestic payments while international payments remain slow and expensive. The question today is what is the right model on which to base the future and how? Dr Warren Coats, a long time IMF staffer, raised this top during the recent Currency News Book Club on ‘Hostile Money: Currencies in Conflict’, in which he was a panellist, asking us to consider Special Drawing Rights (SDR). This article provides the background to his suggestion and thoughts on SDRs.
The what and how of payments
Paying for things by barter is not efficient. And so, what was used to pay for things progressed from barter to coins to paper certificates bestowing claims on more safely stored commodities. The establishment of a common unit of account allowed for common invoicing and pricing. The paper certificates stopped people having to move valuable metals around to settle their payments. But as trade moved beyond being in very limited geographical areas, the priority became how to use these paper certificates, banknotes, bank drafts and cheques efficiently. The costs and risks of repatriating a paper certificate over long distances led to the establishment of networks of banks that recognised each other and settled their payments on their accounts with one common (central) bank – correspondent bank accounts. Rather than settling each individual transaction, they generally consolidated their payments due to and due from each other and settled the net amounts due each day in what became known as clearing houses. Local hubs led to regional hubs creating the requirement for interbank fund markets. In the US the establishment of the Federal Reserve Bank system in 1913 replaced the regional clearing houses and central bank money, the balances held at the Federal Reserve, became the settlement asset.
The challenge of cross border payments
The development of payments has always been driven by technology and, just as cash replaced barter, so scanning cheques replaced physically clearing them and digitisation is allowing retail and wholesale
14 CASH & PAYMENT NEWS | INTERNATIONAL PAYMENTS
electronic payments. The payment of a particular currency ultimately requires the transfer of claims on its issuer (transfer of deposit balances at the issuing central bank). The technology for doing so has become quite efficient for domestic payments. Cross border trade, though, appears to be stuck in the past due to the need to exchange one currency for another and the lack of confidence created by operating across legal systems. The legal side operates within contract law, the use of international agreements around shipping risk (Incoterms) and the jurisdiction of the World Trade Organisation. For payments, there are systems in place to allow settlement that does not involve the movement of actual currency, but international payments remain significantly slower and more expensive than domestic payments. Given that cross border payments generally involve the exchange of one currency for another, there has been the need to find a way to avoid having to have exchange markets for each currency for every other currency. Economic efficiency has resulted in a hub-and-spoke model similar to that used by airlines, in which a vehicle currency (the hub) connects all the other currencies. This role is predominantly played by the US dollar. Exchange rate instability adds to the risk and cost of international trade. The theory of comparative advantage that underpins trade is made less efficient, particularly when central banks intervene to manage their exchange rate to achieve a policy goal. A stable currency would also make investment and liquid assets more stable, encouraging borrowing and lending and cross border contracts.
A global currency?
Theoretical economists argue for a single global currency, or reserve currency, settled on the books for the equivalent of an international central bank. In fact, this is not completely theoretical since the Bank for International Settlements already operates a similar role for intercentral bank settlements and the IMF, with its 189 members, operates a reserve currency between its members, known as Special Drawing Rights based on a basket of five stable globally traded currencies. SDRs are used by the International Telecommunications Union and the International Postal Union to settle the accounts of their members. In effect, these unions are already using SDRs as if they were their domestic currency to make full and final settlement instantaneously. The Gold Standard was used as a tool to stabilise exchange rates and to give citizens, investors and partner countries confidence in a currency. In its strict ‘currency board’ application, if people required more currency to be issued, the central bank would have to buy equivalent gold. If people returned their currency, gold would flow out of the central bank. Central banks had to control money creation whether cash or broad money (deposits at commercial banks). Unfortunately, gold is expensive to store and to move, it is limited in supply and so changes in requirement for it can create artificial demand that distorts its price. Although in the long term its price was relatively stable, in the short term its value fluctuated creating instability. Continued on page 16 >
Conference and Webinar Round Up
Here is list of some of the latest ‘further reading’ to keep you in the frame. Some of these can be viewed online. Some will need to be requested or downloaded.
G+D: Solution Deep-Dive: Cash Cycle Forecasting & Optimization Cash Essentials: The Future of Cash: Beyond Corona, part III Currency News Book Club: ‘The War Against Cash’ by Ross Clark Cash Essentials: Is CashTech the Future of Cash?
Future Conferences The European Intelligent Cash Protection Association (EURICPA) conference: 15 September, Brussels
The Currency News Book Club: the War Against Cash This Book Club, focused on The War Against Cash by Ross Clark, delivered a wide ranging discussion with a variety of views and perspectives. For example, Richard Wall shared the phrase that the pandemic is driving, ‘accelerated Darwinism’, and that cash will be in a new position as the pandemic progresses. He was confident that cash would not disappear. There was, however, disagreement about who should champion cash with Ross and Richard believing that it did not need a champion since public demand would, and is already, creating political action to safeguard cash. John Winchcombe advocated the pursuit of more assertive grass roots campaigning country by country. Questions from the audience allowed Ross to talk about the UN’s support for cashless payments through its ‘Better than Cash Alliance’, with examples from around the world about some of the downsides of this approach. Maintaining accessibility, the importance of central bank cash, ensuring payment choice, negative interest rates, interchange fees and the cost of payments are just some of the topics covered. The link to the recording is on the Currency News website, www.currency-news. com/book-club/
The Great Currency News Debate The next ‘book club’ will take the form of a debate ahead of a break in August. Time/date: 2.30pm (BST) 30 July. Motion: This house believes the citizen has the right to payment privacy. Speakers: Proposer: Brett Scott, author Opposer: David Parker, Polymath Consulting Registration: www.currency-news.com/book-club/
Cash and COVID-19: The Impact of the Pandemic on Demand for and Use of Cash Bank of Canada www.bankofcanada.ca Fraud in Cash and Electronic Payments: Taxonomy, Estimation and Projections Security Ligue www.security-ligue.org Modelling and Forecasting Currency Demand in India: A Heterodox Approach Reserve Bank of India www.rbi.org.in Cash is Here to Stay Cashmaster www.cashmaster.com Mobile Cash Access: Tomorrow’s Must Have Fintech Feature Explained Credit Union Journal http://pages.marketing.cujournal.com/ Health of Cash Study and Health of Cash Check-Up Cardtronics www.cardtronics.com Shifting to the New Normal in Card and Digital Payments Finextra / FIS www.finextra.com Optimizing the Retail Bank Supply Chain Deloitte www2.deloitte.com Central Banks and Payments in the Digital Era Bank for International Settlements www.bis.org The 2019 Survey of Consumer Payment Choice: Summary Results Federal Reserve Bank of Atlanta www.frbatlanta.org
VOLUME 3 – NO 7 | JULY 2020
A Time to Rethink International Payments? (continued) In addition, governments have been bad at sticking to the ‘rules’, so that people lost confidence in the currency – creating currency manipulation against the official exchange rate between the currency and gold. The US, the guarantor of the gold value of currencies, closed its gold window in 1971 as its excessive deficits made it impossible for it to honour its commitment to buy and sell gold at its official price.
A modern global currency?
There is much talk of Central Bank Digital Currencies, but in themselves they don’t solve the exchange rate challenge. Facebook’s Libra project, for example, wishes to be a technical solution, based on a basket of currencies, to enable an international currency, should central banks and/or commercial organisations decide to agree that a global currency is desirable.
But could the IMF’s SDRs be developed further to become the basis of a new global currency? This is the suggestion of Dr Warren Coats, who has looked in detail at the idea of market SDRs that could be issued privately in the same way that commercial banks now create private money (bank deposits). His idea is that SDRs could be issued privately according to currency board rules, with the price of such market SDRs being based on the existing valuation of the IMF’s official SDR. The private issuer would have to sell or redeem its SDRs in line with market demand at the fixed official price of the IMF’s SDR. This avoids the involvement of monetary policy and reduces the risk of government manipulation of the rules. To seriously supplement or replace the dollar as a vehicle currency for cross border payments, the SDR unit would need to be used more widely for invoicing globally traded goods and denominating financial instruments (eg. SDR bonds).
This is more than theory, and it faces enormous political pressures as well as technical challenges. But it gives us the context to discuss so many of the payment topics and conversations that we are having today. (Warren Coats joined the International Monetary Fund (IMF) in 1975 and retired in 2003 as Assistant Director of the Monetary and Financial Systems Department. He was seconded as a visiting economist to the Board of Governors of the Federal Reserve System (1979-80), and to the World Bank's World Development Report team in 1989. After retirement from the IMF he was a member of the Board of the Cayman Islands Monetary Authority from 2003-2010 and of the editorial board of the Cayman Financial Review from 2010-2017. In March 2019 Central Banking Journal awarded Warren for his ‘Outstanding Contribution for Capacity Building’).
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