CP January 2021

VOLUME 4 – NO 1 / JANUARY 2021

NatWest Brings Together the UK Cash Industry In the three months leading up to 9 December, NatWest, a UK bank, brought together 36 organisations to establish cross industry working groups to improve the environmental performance of the UK’s cash cycle.

Three working groups were set up looking at energy, plastics and CO2 to establish best practice and to drive change.

Commercial banks (13 organisations) Retailers (two organisations) Machine suppliers (five organisations) ATMs (Link and CMS Analytics) Cash in Transit (two organisations) Other suppliers (four organisations) Associations (UK Finance and British Retail Consortium (BRC)) Press (Reconnaissance and Chartered Banker)

Energy working group

This group looked at how to minimise energy use whilst maintaining operations.

Energy efficiency in buildings was excluded, since in most organisations this is an ‘estates’ issue rather than a day to day operational responsibility.

A number of challenges were identified: Equipment turnover is low and, therefore, the focus needs to be to work with suppliers on reducing energy usage on existing equipment.

NatWest’s initiative takes place in the context of the 2015 Conference of the Parties, known as COP, which adopted the target of achieving net zero carbon emissions by 2050 as laid out in the Paris Agreement and which, in 2019, became part of UK law. Global emissions must fall by 7.6% each year between 2020 and 2030 if the global temperature rise is to be limited to 1.5°C and to achieve net zero.

The UK projections suggest that it will fall behind where it needs to be.

The response of the industry was impressive, with parties from the entire cash cycle involved: The ‘owners’ of the UK’s cash (the Bank of England and the Treasury) Banknote and coin production (De La Rue and the Royal Mint)

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Environmental requirements often conflict with cost and reliability priorities.

Security is always the number one priority.

When setting targets, 2019 is a better year to use as the baseline since 2020 has been unusually low.

Current energy consumption is not known.

Clearly, future equipment needs to be designed with energy efficiency, including low power modes, at its heart. Behaviour and equipment usage play a significant role in how much energy is used and needs focus. A knowledge sharing portal needs to be set up, including for energy usage, so that best practice is shared.

Continued on page 3 >

Euro Vision (But not the Song Contest) Doris Schneeberger, Head of the Currency Management Division at the European Central Bank (ECB), spoke at December’s RBR conference giving the Eurosystem perspective on trends and developments in the use of cash.

Her talk covered the rise in value and volume of euro banknotes over the last few years, and 2020 in particular. Her view was that, initially, the rise in demand for notes was driven by the banking system ensuring they had sufficient notes in stock, but that public demand then kicked in with people wanting to hold cash ‘just in case’. The €50 was the most popular note.

Cash in circulation continues to rise even now with issues still exceeding deposits.

The ECB ‘expects the normalisation of banknote demand in the medium term.’

The presentation went on to look at the 2019 Study on Payment Attitudes of Consumers in the Euro Space and the July 2020 study of the impact of the pandemic on cash usage (both of which were covered in December edition of Cash & Payment News™).

It finished with a look at the 2030 strategy and the ECBs five strategic objectives: Eurosystem ensures the issuance of cash.

Eurosystem supports access to cash services (withdrawals and deposits).

Eurosystem defines acceptance of cash as essential for the freedom of choice how to pay.

Eurosystem ensures innovative and secure euro banknotes.

Eurosystem ensures the health and safety of banknotes and endeavours to reduce the ecological footprint of cash.

Continued on page 2 >

Italy Moving Towards Digital Payments The European Central Bank (ECB) is keen that EU member states engage with the public policy debate around Central Bank Digital Currencies (CBDCs) for the eurozone. In this context, it is reported that the Italian Banking Association is starting a technical feasibility study into using Distributed Ledger Technology (DLT) for a future ‘digital euro’.

There are two streams of work planned and all interested banks are welcome to take part.

The first piece of work is to look at the technical feasibility of creating an effective infrastructure and distribution model.

This will be carried out as a collaborative piece of work between ABI LabChain’s infrastructure, which has 100 active nodes across Italy, with the banks that operate using those nodes, and with SIA, an Italian technology company. At the moment the focus of this infrastructure has been as an interbank reconciliation system.

Inside this Issue

1 NatWest Brings Together the UK Cash Industry 1 Euro Vision (But not the Song Contest) 2 Italy Moving Towards Digital Payments 4 News in Brief 5 The Practicalities of Partnership 6 Contactless Payments Have Little Impact on Cash Usage 7 DNB Quick Guide to CBDCs 7 Sweden Considers the Future 8 Call for Higher Contactless Payment Limits 9 Payment News 10 ‘A Digital Euro is Due, if not Overdue’ 10 Protecting ATMs 11 CPN is Going Online… and Weekly!

11 Cash Essentials Launches Cash Glossary 11 Further Reading 12 Without Cash, Can There be Safe Payments?

2 CASH & PAYMENT NEWS | IN THE NEWS

The second work stream focuses on how the CBDC can be differentiated from existing electronic payments. Working groups are being set up to consider a range of user cases. The work will be a collaboration between the banks, NTT Data, PWC and Reply.

Encouraging digital payment initiative

Whether to encourage shopping face to face rather than online, to pay digitally rather than with cash or to discourage tax avoidance, in December the Italian government launched what has been called its cashback initiative.

People were asked to register on a national IO app. Once registered, if people make an in-store purchase with a payment card or a smartphone app, they get an automatic refund from the state. Online transactions are excluded.

When the scheme was launched, 7.6 million people downloaded the app on the first day. Perhaps unsurprisingly, the sheer volume of requests created a few technical glitches.

The programme was launched on 8 December but was not just a short-term scheme for Christmas; it remains a live programme, although with slightly different conditions for 2021 than in December.

The programme includes purchases in shops, bars, restaurants as well as from craftsmen, and professionals. In December consumers received a 10% refund up to a maximum of €150 on the condition that they make a minimum of 10 purchases with a payment card. After 1 January, the maximum reimbursement is up to €300 for the whole year.

It would appear that the ECB was less happy with this initiative than with the CBDC initiative.

On 14 December Yves Mersch, on his very last day as a member of the ECB’s Executive Board, wrote to the Italian Minister of Economy of Finance. In his letter he said that the ECB considered ‘that introducing a cashback program for electronic means of payment is disproportionate in the light of the potentially adverse impact on the cash payment system that such a mechanism could have and because it undermines the objective of having a neutral approach to the different means of payment available.’

Its concern was that the incentive seemed design to encourage people to make low value transactions using digital payments, which is where cash is usually used.

The initiative appears, therefore, to be targeted against cash. It ‘could push participants to compete for the highest number of transactions carried out, which would ultimately favour participants settling a large number of transactions for small amounts (ie. amounts that could otherwise be paid in coins). In particular, the ‘special cashback’ reimbursement of €1,500 appears to be designed to incentivise the use of electronic payments for small amounts. Any adverse impact of the proposed cashback should therefore be carefully weighed against the anticipated public benefits.’

The ECB also pointed out to the Italian government that, ‘national authorities are required to consult the ECB on draft legislative provisions in its fields of competence, including, in particular, on means of payment.’

The ECB’s opinion is not binding and the response of the Italian Treasury was that ‘the formal remarks made by Mersch do not appear to be justified’.

The cashback initiative may also raise questions with the European Commission because it only applies to Italian nationals and not all EU citizens.

Euro Vision (Continued) The implementation measures needed to achieve these objectives were reviewed. The ECB will study whether the geographical coverage of the ATM network and bank branches is sufficient. Its national central banks (NCBs) will monitor fee policies for basic cash services. The ECB sees ‘cashback’ as welcome but not as a replacement for ATMs and branches.

For cash to remain as an effective contingency payment instrument, cooperation with stakeholders will be necessary. This is part of an awareness that the ECB needs to work more closely with the intermediaries in the cash distribution system.

The ECB will also look at whether it is possible to have offline transactions via cards in an ‘emergency mode’.

In the light of the opinion recently handed down by the Advocate General of the European Court of Justice, and the ruling expected on 26 January, the ECB will work with the European Commission to clarify and promote the legal tender status of euro cash. The Euro Legal Tender Group will meet to take stock of the latest developments regarding the availability and acceptance of euro cash.

The ECB will also discuss the legal tender status of euro cash with the stakeholder of the European Retail Payment Board.

UK Cash Industry (Continued) The plan agreed is that in 2021 companies will move to using 100% renewable energy for their own operations and work with procurement to encourage their supply chain partners to do the same. By 2024 this should be a requirement on suppliers. In 2021 data should be gathered so that in 2022 energy efficiency standards can be set.

Plastics working group

It was recognised that plastics are needed but that single use plastics, in particular, are wasteful. The obstacles to making progress were identified as: Customers send in large volumes of unnecessary waste.

Plastics are used for storage, particularly for coins, and it will take time to be circulated out.

There is significant variance in the processes used across the industry.

Bag and till limits restrict the volumes carried. In addition, the size of alternative materials needs to be considered relative to the room in the vans.

The BRC agreed to help with customer outreach and engagement about the use of plastics. A review of standards to see if the value of coins in bags can be increased was needed. A plastic bag levy was discussed, and this will need work to understand how this might be calculated and charged.

Loomis and Virgin Money (formerly Clydesdale Bank) will trial using cardboard cartons rather than plastic and investigation is needed to see if cardboard can be used in NotaTracc trays. Glory explained that six countries in Europe use TCR fitness sorting to allow local recycling and a number of organisations will now investigate this.

Finally, increasing bulk till limits was proposed, although the insurance implications need investigating.

The plan agreed was to eliminate single-use non-recyclable plastic in note centres in a series of steps by 2030 (25% less by 2023, 50% less by 2025). Similarly, for coins, to reduce this, by weight, to less than 45% by 2030 (less than 70% by 2023, less than 60% by 2025).

UK legislation has already set a requirement of less than 55% by 2030. The base line is 2019’s figures.

Carbon working group

The obstacles identified included: The availability of data.

An infrastructure challenge due to electric vehicles and rural locations.

Engagement, particularly in the supply chain.

The development of policies that have not considered the environment.

That Scope 3 does not allow off-setting. Even if it did, publicly funded organisations must use UK based offsets, and these may not be available.

Reducing carbon cuts across all that the organisations do. As a result, the TCR fitness sorting was mentioned again. The need for the environmental impact of policies to be part of policy development was highlighted, including the need for procurement to be used to include suppliers and partners. A trial is needed for keyless access.

Knowledge sharing needs to be embedded and become normal.

There is a need to collect good quality data and to share it. There was also discussion about the benefits of developing standards looking outside of the industry.

The agreed plan was to achieve net zero carbon for each organisation’s own operations and for business travel by 2030 (based on a 2019 base line).

There was also agreement on a voluntary commitment to a charter proposed as one of the outcomes of the work done (see box).

Outcome

The charter created as part of this work includes both commitments and targets. All were asked to sign up to this by 29 January 2021.

As part of this work, it was agreed that UK Finance would work to unite the industry and to continue to drive collaboration. This role is particularly important given some of the actions identified by the working groups, such as the need to establish base line data against which to be measured, for a review of industry standards, to co-ordinate collaboration and information sharing etc.

Cash Industry Charter The main aim of the UK Cash Industry Charter is to provide a cash industry ambition and a course of action to tackle climate change in the three key areas identified (plastic, renewable electricity and CO2).

In recent years, recognition of the issue of climate change has increased. In 2018, the Intergovernmental Panel on Climate Change published a special report on the impacts which would be seen if we fail to limit warming to a 1.5° rise above pre-industrial levels. In 2019, the UK government declared a climate emergency in the UK and passed legislation mandating that all greenhouse gas emissions in the UK be brought to net zero by 2050.

We recognise the urgency of this situation, while also recognising that businesses must find ways to continue to operate in this changing world.

This Charter shows our ambition by working towards a set of targets, our commitment to working collaboratively across the industry and the roadmap of initiatives identified as the key areas of focus that will help towards driving significant change in the cash industry.

We, the signatories to this Cash Industry Charter on Climate Action, affirm our commitment on behalf of our companies/organisations to work across the industry to achieve: The Charter Commitments The Charter Targets The Charter Roadmap

Charter Commitments

1. Champion climate action within the cash industry through an enhanced and trust-building dialogue with relevant stakeholders.

2. Take significant climate action across the cash industry by working collaboratively with stakeholders and environmental advocates to develop and implement a shared strategy including targets and plans.

3. Quantify, track and report our greenhouse gas emissions and plastic usage consistent with standards and best practices of measurement and transparency.

4. Commit to prioritising materials with lowclimate impact without negatively affecting other sustainability aspects.

5. Support the movement towards a circular economy and acknowledge the positive impact this will have towards reducing climate impacts within the cash industry.

6. Commit to continuously pursue energy efficiency measures and renewable electricity in our properties, products and services.

7. Reduce our emissions to as close to zero as possible before offsetting the remaining emissions.

Where offsetting is adopted, the projects which are invested in are considered carefully and are accredited to a standard such as VCS and Gold Standard, which have clear frameworks for accounting, auditing and registering carbon credits.

CASH INDUSTRY | VOLUME 4 – NO 1 | JANUARY 2021

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News in Brief Accessing Cash at ATMs with Bitcoin In the UK a company called BitcoinPoint has acted to make owning and using bitcoins easier. They are collaborating with the independent ATM operator Cashzone, who run 16,000 ATMs across the UK. BitcoinPoint want to make bitcoin a mass market product and know that registering on a crypto exchange can be a daunting task for people who are not tech-savvy.

They have developed an app to allow people to buy and sell bitcoins through a network of easily accessible points of contact such as bureaux de change and newsagents, as well as online.

The deal with Cashzone is BitcoinPoint’s next step to make bitcoins accessible and attractive to a mass market. It allows people to turn their bitcoins into cash easily and conveniently. The bitcoin owner uses BitcoinPoint’s app to enter the amount required and scan a QR code. They then receive an SMS message with a PIN code to be entered at the ATM which then issues the cash. No card or bank membership is required.

BitcoinPoint’s commission is reported to be a fixed fee of £2.70 along with 3.99% of the value withdrawn. Although this convenience comes at a price, it could be argued that this does make bitcoins feel more tangible and ‘main street’ than they have done before now.

Australia Scraps Bill to Limit Cash Payments The Currency (Restrictions on the Use of Cash) Bill 2019 has been stopped in the Australian Senate. The bill would have banned cash payments over $10,000, with a two-year jail sentence for law breakers.

The government said the bill is being delayed while it prioritises its response to the COVID-19 pandemic.

Although the Bill was put forward to crack down on Australia’s ‘black economy’, it was unpopular with the Liberal and Green parties, some of whose MPs saw it as infringing civil liberties as well as forcing people into the banking system.

The level of penalties were also felt to be disproportionate by some groups, including the Law Council of Australia. Australia’s Green Party put forward a dissenting report opposing the Bill for restricting people’s civil liberties.

4 CASH & PAYMENT NEWS | NEWS IN BRIEF

It is possible the government may still bring the Bill back since it was adamant that it was the best way to fight the black economy. The task force that had put forward the Bill had made a qualitative estimate that up to $50 billion was lost to the black economy each year. This was based on a wide definition of what activities make up the black economy.

MAS Suggests Going Digital at the Lunar New Year At the Lunar New Year, it is the custom in Singapore, as in many other countries in Asia, to give banknotes as a gift. The Monetary Authority of Singapore (MAS) and the Association of Banks in Singapore (ABS) would like people to consider a different approach, to give e-gifts instead.

This is known as e-hong baos.

There are a number of advantages to doing this, in the view of MAS, including less queuing to get physical notes to give and reducing the carbon emissions generated producing new notes for each Lunar New Year, estimated to be about 330 tonnes currently.

The environmental benefit is estimated by MAS Assistant Managing Director, Finance, Risk & Currency, Mr Bernard Wee, to be the ‘equivalent to emissions from charging 5.7 million smart phones or one smart phone for every Singaporean resident for five days.’

The option to give new physical notes, if that is what people prefer, remains.

An online reservation system has been introduced. Apart from those aged 60 or over or those with disabilities, account holders at three of the major banks will need to make an appointment to collect their new notes. There will also be some pop-up ATMs with new notes from DBS bank. Customers of Maybank and Standard Chartered also have the option of pre-ordering and making a collection reservation.

E-hong baos is seen by MAS and ABS as part of a larger long-term shift towards e-gifting. MAS will give the fintech firm that creates the most innovative e-gifting solution special recognition at the Singapore FinTech Festival in November 2021.

New Global Cash Initiative Currency Research and Enryo recently launched a global initiative, ‘Universal Access to Payments’ or UA2P, recognising the need to both understand such effects and to implement plans that will proactively address potential issues.

UA2P seeks to help further financial inclusion by providing access to new digital payment instruments, while ensuring that access to cash will not suffer as a consequence.

Dutch ATM Attack Problems Continue In 2019 Dutch banks, faced by a series of attacks using explosives on ATMs, closed down the ATM network overnight. The latest development is explosives being put into the deposit mechanism used by small business users when they want to drop off takings quickly and receive a credit to their accounts. In a recent attack the explosives failed to detonate.

In response, Geldmaat, who run the network for the largest Dutch banks, has shut down temporarily the entire network of machines that use Sealbags, 500 machines. Geldmaat are said to be looking at stationing security guards at machines in order to stop future copycat attacks.

ICA Responds to the EC Cash Consultation The International Currency Association (ICA), which represents most of the global currency sector, has responded to the European Commissions (EC) consultation on uniform round rules for cash payments.

This also included thoughts on the discontinuation of 1 and 2 euro cent coins, which have already been dropped in some Eurosystem countries.

According to the ICA's press release, its key points were: The need to maintain all the current denomination notes and coins in order to safeguard the right of citizens to use cash.

The importance of keeping 1 and 2 euro cent coins both as a strong cultural identifier with the euro and because of their role in developing the financial literacy of children.

The importance of treating different forms of payment equally in order to guarantee true consumer choice. This entails not singling out one form of payment for rounding rules – in this case, cash, which would discriminate users of cash against those using another means of payment.

Jutta Buyse, ICA Director General, said: ‘the ICA believes that the future of payments, and of cash in particular, should be part of an ongoing societal dialogue and we commend the European Commission for consulting the public before considering to take initiatives that would affect the use of cash in the eurozone.’

The Practicalities of Partnership Bantas is a Turkish based cash in transit (CIT) joint venture between three Turkish commercial banks. With about 1,600 staff, it looks after 48 cash centres, servicing 9,000 ATMs, 2,700 bank branches and 3,300 shops using 425 armoured trucks.

If cash handling is outsourced, it may also be possible to reduce costs based on greater economies of scale and eliminating inefficiencies. It also allows the bank to transfer risk outside and to allow it to direct all its focus to its core function.

What are the options?

One option is to keep cash handling in-house. The great advantage is that the bank retains absolute control of its operations. By focusing on improving, optimising and rationalising its work, it is estimated most banks could save 10-15% of their costs.

In 2019 Bantas presented on the realities of co-operative cash handling models in Georgia at the Europe Cash Cycle seminar (ICCOS). Since then, Belgium’s four largest banks (Belfius, BNP Paribas Fortis, ING and KBC) have formed Batopin, joining the long list of countries sharing cash infrastructure, and the world has started to adjust to changing levels of cash usage as a result of the pandemic.

Cash handling operations

There are four elements of cash handling: cash processing and management, security and support, ATM and self-service devices (SSDs) and CIT. Within each of these areas are multiple steps requiring skilled, experienced staff, sound processes and investment in equipment and information systems.

A McKinsey paper, ‘Attacking the Cost of Cash’, suggested that there are three areas where costs can be reduced across these areas: Making cash operations in cash centres and bank branches lean (30% reduction), using cash forecasting tools (30%) and using advanced route optimisation tools (5-10%).

Ensuring bank-owned distribution networks, branch and ATMs, are the right size, appropriately sited and equipped.

Pooling resources with other banks to create a shared cash handling network. A shared ATM network could save 25-30% and further savings should be possible from shared counting facilities.

What activity is core to a bank?

Simply put, banks are financial intermediaries between savings and credits. The core function of a bank is the buying and selling of money and, therefore, everything else can be regarded as noncore, as secondary and so possible to be outsourced.

Challenges of the co-operative approach

It would be wrong to suggest that this approach is without challenges.

Shareholder/client relationships require careful handling so that all are confident they are getting fair and equal treatment within the partnership.

It is important to have transparency about what is being done for whom, requiring accurate pricing and ensuring that costs are accurately and correctly allocated.

Alternatively, it could outsource cash handling, reducing costs by perhaps as much as 15-20% as well as transferring risk and allowing it to focus on banking.

Outsourcing brings with it challenges of control. Key questions to consider include whether there is sufficient provider choice?

Can a provider be found who will give full coverage, whose service prices will be reasonable and whose quality can be assured? Is a long term partnership possible? Will a split provider to mitigate risk be possible?

The final option is to develop a multi-bank capability. Bantas estimates that savings of 20-30% should be possible based on sharing assets, functions and best practice.

The more the number of partners, the lower the start up costs and operating costs per partner.

Bantas’s own experience is that in 2009, when it started, the cost per city drop was $40; by the end of 2018 it was $4.

Bantas was established in 2006 and it took five years to become a fully-fledged CIT provider. It took four years for a strong business case to be achieved after much testing and learning. In its first two years it only served its shareholders, thereafter it ‘commercialised’ the offer and served other organisations. Its growth rate of service points over 10 years has been 8.1%, whereas its growth of cash centres and armoured cars has only been 3.7%.

In 2013 Bantas was asked to help eight banks in Saudi Arabia set up a similar CIT and cash processing organisation for them, called SANID. The whole project took three years, effectively cloning Bantas.

This business was intended to serve 60% of the Saudi market over 5,000 ATMs and 350 branches.

This goes with systems to handle complex reconciliation issues and the ability to demonstrate to shareholders, and nonshareholders, that the organisation is competitive and adhering to clear service terms and conditions. Advanced technology and automation along with comprehensive reporting and co-operation helps deliver this.

An intense focus on cost and quality and the ability to demonstrate the best quality/ price ratio in the market removes sources of friction. An unexpected challenge is the need to balance off working on operational issues and delivering strategy and growth.

The future

This is a time when the number of bank branches is declining but also where selfservice banking and the number of SSDs is increasing. Electronic ‘mini branches’ with ‘loaded’ SSDs are increasing.

Serving this requires new skills and different approaches.

Since the ICCOS presentation, seven public banks in Turkey have decided to merge their ATM fleets, representing 40% of the country’s 53,000 ATMs. In addition to Belgium’s Batopin initiative, three Romanian banks have formed CitOne, expanding its role from serving one of them to all three.

Similar initiatives are underway in Pakistan, and the Banking Association of Georgia has also started the process of creating a joint CIT and cash processing capability for its members, and possibly in Ukraine as well, where Vaultex has recently been appointed to support the National Bank of Ukraine’s cash strategy.

It is clear that co-operative models are increasingly being adopted around the world, not just in Europe. This paper by Bantas demonstrates that it is possible to apply lessons learned in one region into another and that, when you get it right, a sustainable commercially led solution is possible.

CASH HANDLING | VOLUME 4 – NO 1 | JANUARY 2021

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Notes: Number of households are reported.

Contactless Payments Have Little Impact on Cash Usage Figure 2: Aggregate methods-of-payment shares Marie-Hélène Felt wrote the Bank of Canada’s Staff Working Paper 202056 ‘Losing Contact: The Impact of Contactless Payments on Cash Usage.’

It addresses an important topic for the future of cash, whether there is a causal link between the decline in cash transactions and the rise in contactless payments.

The short answer is no, but the paper includes rich detail supporting that answer and highlights just how much impact the ‘cost’ of getting cash is and how it affects behaviour. In particular, ‘cost’ includes the distance to bank branches and Automatic Losing Contact: The Impact of Contactless Payments on Cash Usage (© bankofcanada.ca).

Banknote Machines (ABMs).

Notes: The methods of payment market shares (left axis) are shares in volume (i.e., number of transacti The approach used made with a given method over the total number of transactions) as measured in the Canadian Financi The paper builds on the extensive research The large in number of households ‘zero’ 2010. The paper concludes that CTCs do Monitor (CFM).

The number of contactless terminals deployed Canada (right axis) with are reported from already done in this area, using the latest cash had a lower withdrawal frequency but have a negative impact on what it calls the Technology Strategies International (2017). data, assessing how the Canadian Financial had high ratios for cash withdrawals and ‘intensive margin of cash usage’, but not on Monitor (CFM) panel data estimates holdings, suggesting that they regarded its ‘extensive’ margin. have varied over the sample period, cash costs as higher. In Canada though, Clearly the starting point for and attitude investigating the heterogeneity in the throughout the CFM study period there has of CTC and non-CTC households towards impact of contactless credit cards (CTCs) been low and stable inflation, low interest how much they use cash and how widely across households using Finite Mixture rates and the risk of holding cash has they use it differs significantly, and so the Modelling and using a two-part model that been low. impact of CTCs is different. properly takes into account the cornerThe author concludes that the amount Evidence of a causal link solution nature of the dependent variable of cash spent depends on personal ‘cash share’.

Regression analysis of micro data provided preferences and merchant-side factors little evidence of a causal relationship The paper is an economist’s delight, but it rather than withdrawal costs. between CTCs and cash usage. This was contains rich nuggets for those who have a What drives cash usage? consistent with 2017 research by Chen H, less technical interest.

M-H Felt, and K P Huynh that found little The final conclusion of the paper was Canadian data or no reduction in cash usage, by 2020 that the overall impact of CTCs on the 26transactional usage of cash was very small CTCs were introduced in Canada in 2006 research by Trütsch that found that CTCs

by MasterCard, with Visa following the and contactless debit cards (CDCs) exert between 2010 and 2017. next year. Between 2007 and 2015 their no statistically significant effect on cash What the paper does highlight, though, is adoption was relatively slow and this is usage (based on US data 2009-2013) and the role and impact of ‘geography’ on cash reflected in the CFM data, where 2016/17 2020 research by Brown M, N Hentschel, usage, a critical factor as bank branches appears to be an inflexion point for their H Mettler, and H Stix that found a moderate close and ATM networks shrink. It appears use. Between 2013 and 2018 the point of average reduction in the share of cash that in terms of the ‘cost’ of getting cash, sale infrastructure for contactless payments payments after the introduction of CTDs in Canada the distance travelled rather than increased at a rate of 24% a year. in Switzerland (0.6% relative to an average monetary costs has a greater effect on cash cash share of 68%).

Cash usage has steadily declined in the usage than the introduction of CTCs. meantime, and by 2017 nearly a quarter The author applied corner analysis to Previous research found that for a given of CFM respondents said they never or understand the differences based on purchase value, higher bank branch and seldom used cash. whether CFM respondents ‘participated’ ABM density reduces the level of average – focusing on the theory that the cost of The paper looked at households that consumer cash holdings, presumably getting and holding cash is a key driver, did not use CTCs and those that did. causing more cash withdrawals. Similarly, and the ‘amount’ of cash usage. The study Generally, CTC users had young families, Chen et al concluded that the shorter found big differences between the two were employed and homeowners. Over the distance travelled to get cash, the user types. Households that use cash hold the time the CFMs have been run, this more frequent the cash withdrawals. In a more, spend it more frequently and spend group became more urban and with higher similar vein, research also found that as more. It also appeared that it cost them incomes than non-CTC households. The retail density reduces, travel to get cash more to get cash. paper was clear, though, that unobserved increases. As a result, more online banking heterogeneity matters when assessing the The model was set up based on the takes place. impact of CTCs; for example, it could be assumption that the optimal withdrawal Do bank branch closures, therefore, lead or that being tech ‘savvy’ matters more than, frequency goes down in line with the follow consumer behaviour? The conclusion say, home ownership. relative withdrawal cost (ie. cost per dollar of Allen et al was that it leads. For those spent) and that both the withdrawal size to Overall, CTC households used cash about who wish to preserve payment choice, this cash consumption ratio and the average 10% less, number of transactions and paper highlights that perhaps maintaining cash holding to cash consumption ratio value, than non-CTC households. Nonaccess to cash is a more important area would increase in line with that cost.

CTC households in 2017 used cash for to focus on rather than worrying about the 31% of their transactions, 22% by value, plethora of alternative payment options. down from 42% and 28% respectively in

6 CASH & PAYMENT NEWS | SPECIAL REPORT

DNB Quick Guide to CBDCs Retaining public money for general use, through an alternative for cash Back-up for payments in commercial bank money

Electronic saving and paying

Diversity and Privacy in the payments Improved interoperability: efficient cross-border payments Digital distribution my be cheaper than physical distribution of cash Digital currency secured against theft differently than cash

Cross-border payments

Financial inclusion

Possible objectives of a CBDC (© Dutch National Bank).

In April 2020 Harro Boven and Peter Wieters published a Dutch National Bank (DNB) Occasional Study on the objectives, pre-conditions and design choices for Central Bank Digital Currencies (CBDCs).

Harro wrote an abridged version that was used in Payers’ December publication about CBDCs which is summarised here.

A general purpose CBDC is a digital currency, issued by the central bank that is universally accessible.

A CBDC joins cash and reserve accounts at the central bank as a form of central bank money. The paper suggests three potential rationales for CBDCs: To play a role in retaining public money for general use.

As a back-up against the failure of critical infrastructure in the payment system (although this requires the CBDC to be set up on infrastructure that is separate from the normal payment infrastructure. This has significant cost implications.).

To cater for the preferences of the public related to privacy and the use of data for public objectives (eg. anti-money laundering).

The Occasional Study goes further, including a discussion of cross-border payments and financial inclusion, as shown in the figure above.

CBDC design

If the value of a CBDC is locally stored on a wallet or card, it runs the risk of being hacked or simply being lost and it could be used for money laundering, since there is no centralised control of the system and a lack of identity connected to the device. As a result, for large scale schemes most central banks are looking at value held in accounts, requiring a ledger with balances and transactions denominated in the CBDC. The most common model is for the central bank to manage the infrastructure, including setting standards and managing security and solidity, and for intermediaries to access the core ledger through Application

Programming Interfaces (APIs). This could include the private sector managing identity, authentication, and validation.

The intermediaries would be regulated operators. This would work in a similar way to access to a payment account by thirdparty operators as currently regulated by the revised Payment Services Directive 2, so that the regulated operators compete to offer customers convenience and drive demand for the CBDC.

Destabilising risk

CBDCs also bring their own risks, including: Bank runs. If an event causes the public to need to safeguard their money, it is quicker to move digital currency than to withdraw physical money. The speed and scale of movement to a CBDC and a central bank account could significantly destabilise the financial system.

CBDCs could affect the funding base of banks by substituting bank deposits, which could increase banks’ dependence on market funding. This might make banks more vulnerable to unexpected market conditions.

Banks cross-sell higher value mortgages and loans based on the relationship they have with customers through their accounts. If customers move their accounts to the central bank, this could reduce banks’ profitability, jeopardising their ability to meet their prudential obligations.

It would be possible to design CBDCs with a publicly desired level of CBDC holdings, using quantity and price to manage this, or an absolute ceiling.

Sweden Considers the Future On 1 January 2021, a new law came into effect in Sweden intended to secure access to cash and payment services.

It requires banks that operate in Sweden with deposits over SEK 70 billion and which offer payment accounts to companies and consumers, to provide locations for cash withdrawals and daily taking deposits to an ‘adequate extent throughout the country’. The definition of ‘adequate’ is defined in regulations rather than in the law.

In December, the Ministry of Finance announced that it is appointing a special investigator to review the role of the state in the payments market. Technology, particularly digitisation, means that the financial and payment markets have changed significantly.

This is not a quick review. It is to report back no later than 30 November 2022, since its scope is broad. It must consider what the payment market looks like, including its regulation, and assess how this will change in the future. It is tasked to look at Sweden and abroad. Its review of the payment market must establish who is responsible for what and look at what the state’s future role should be. Within this, it is to propose what the definition of legal tender should be, and whether it is even needed.

Given the central role of payments for a country, this review will suggest whether constitutional or other changes are needed and, if they are, what these should be. Within this falls the need for a future Central Bank Digital Currency.

A big and important undertaking.

No wonder the Riksdag is creating a group, drawn from all political parties, to be attached to the investigator.

Conclusion

The article concludes by stating that a CBDC would involve a structural reform of the monetary system, not a quick or trivial task.

However, given that digital technology is so prevalent and normal in society, it is important that a relevant public form of money continues to be available. A CBDC is a realistic option to deliver this requirement.

VOLUME 4 – NO 1 | JANUARY 2021

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Call for Higher Contactless Payment Limits UK Finance, who represent the banking industry, are reported by The Times newspaper to have asked the Treasury to increase the contactless payment limit from £45 to £100. Prior to the COVID pandemic the limit had been £30.

The Financial Conduct Authority would have to approve any change.

In 2019, according to UK Finance figures, contactless card fraud was about 2.6p per £100 spent, including mobile phone contactless payments which have no payment limit and so have a higher payment value. Mobile contactless payments are regarded as more secure than cards, so it is likely that the fraud figure for contactless card fraud alone is higher.

This figure is not currently published.

In the first half of 2020, contactless card fraud fell 20% to £8.2 million, about 2p per £100 spent. This is the first time there has been a decrease in contactless losses since data started to be collected. This was due in part to the reduced opportunity for fraudsters to take advantage of contactless during the lockdown period of the pandemic.

It will be interesting to see the full year figure for 2020 for contactless card fraud to see whether the increase in the payment limit to £45 has had any impact. Strong Factor Authentication (SFA) requires a PIN to be entered after five taps or a cumulative spend of £135. Mobile wallets meet SFA requirements without this.

What we cannot be clear on is whether the banks are calling for a higher limit because they are being pragmatic about the higher level of use of cards or because they have to pay an additional fee if their customers pay using a mobile wallet.

The rise of cyber-crime

The move to more online activity started well before the pandemic began, although the pandemic has accelerated the move to online spending. This is illustrated by the Adobe unit that analyses Adobe Analytic Data. As part of this, it tracks the digital economy, and this showed that at the height of the first lockdown in the US, online spending went up 77% on the same month a year earlier.

In response to changing payment behaviour, criminals have innovated – creating a wide range of new ways to commit fraud. A recent article in the Financial Times quoted James Lews, an expert in cyber security at the Washington Center for Strategic and International Studies (CSIS), who stated that ‘you have no privacy when you use an online payment system. Your transactions are transparent in a way that they never were before’. This gives criminals new ways to defraud people.

8 CASH & PAYMENT NEWS | CONTACTLESS AND FRAUD

Distribution of the key COVID-19 inflicted cyberthreats based on member countries’ feedback

59%

36% 22% 14%

Malicious domains

Malware/ Ransomware

Phishing/ Scam/ Fraud

Fake news

© INTERPOL report shows alarming rate of cyberattacks during COVID-19.

McAfee, who produce security software, have also worked with the CSIS to estimate that cyber-crime has risen by 50% since 2018 to reach about 1% of global GDP. An Interpol report on the rise in cyber-crime during the pandemic used data from one of its private sector partners to illustrate the size of the challenge. In one four-month period (January to April) it detected some 907,000 spam messages, 737 incidents related to malware and 48,000 malicious URLs, all related to COVID-19.

UK Finance data

UK Finance data for the first six months of 2020 covers every type of payment related crime. Here we refer to just a subset of that data.

It is clear that there has been a big increase in the number of impersonation scams.

They almost doubled to 15,000. There has also been a move to more online scams, for example fake investments promoted on search engines, fake goods listed on auction websites and what are known as ‘romance’ scams, where criminals pose as would-be partners on online dating platforms.

Although in the first half of 2020, a total of £207.8 million was lost to authorised push payment (APP) fraud, losses in other areas have fallen. Unauthorised fraud fell by 8% to £374.3 million and the banking and finance industry prevented a further £853 million of attempted unauthorised fraud. This equates to the industry preventing £6.95 in every £10 of attempted fraud. This level of attempted unauthorised fraud was similar to the same period in 2019.

The UK introduced a voluntary code on APP fraud in May 2019, with the result that more customers are now being reimbursed; £73.1 million of APP fraud losses were returned to victims, up 86% compared to the same period last year.

Payment card fraud totalled £288.2 million in the first half of 2020. This was down 8%, although this is in the context of the overall value of card spending also falling 8% during this period. Card fraud as a proportion of card purchases has remained at 8.4p per £100 spent.

Crime in perspective

Relative to the sums of money being transacted, one could regard the losses to crime as relatively insignificant. No crime is victimless of course, and individuals and businesses experience loss and disruption as a result. The risk to the payment providers is an erosion of confidence in their products and, ultimately, their businesses.

One of the arguments for Central Bank Digital Currencies lies in trust, of course.

For all payments, cash sets the benchmark since the losses associated with the specific nature of cash as a payment instrument – counterfeiting, ATM attacks, theft – are small in comparison with the those referred to above.

The call for higher contactless payment limits suggests that UK Finance, and the banks it represents, is confident that the profits from higher value card payments can offset the losses likely from the higher limits.

Payment News Two Bidders for Cardtronics Cardtronics runs 285,000 ATMs in 10 countries, making it the world’s largest operator of non-bank cash machines.

This Houston based company is a major player in the cash industry but is now being pursued by two companies, firstly Apollo Global Management and Hudson Executive Capital and secondly NCR. The first bid came in late last year and now NCR has offered $39 per share, ahead of the Apollo and Hudson bid of $35.

This values the company at $1.7 billion.

According to NCR, they are the world’s number one POS software supplier for the retail and hospitality sector and the number one supplier of multi-vendor ATM software.

Contactless Gathers Momentum in the US The National Retail Federation in the US reported that by the summer of 2020, 60% of US merchants accepted contactless payments, with the uptake steadily rising and now estimated to have reached 75%.

Partly this has been due to merchants enabling existing equipment, but also due to investment.

According to the Mercator Advisory Group, all Amex and Discover cards are now issued contactless enabled and Visa has been working to have 300 million contactless cards in the US by the end of 2020. Their data also shows 79% of small business have seen an increase in contactless payments.

Whether card, wallet or via a QR code, this suggests the US has moved fast to be contactless enabled with the cards and infrastructure increasingly in place.

President Trump Bans Transactions with Alipay, WeChat Pay and Others As his presidency draws to a close, President Trump has used an executive order to ban transactions with 10 Chinese payment providers for reasons of national security. The order states that the apps could be used to track and trace US federal employees, allowing China to build detailed dossiers about those individuals.

The Commerce Department has 45 days to define which transactions will be banned.

On 20 January the new President will be inaugurated, and he will have to decide whether to implement the ban. Should it go ahead, this would represent a setback to Ant Group and Tencent.

Venezuela Going Digital (?)

It is reported that PBOC has also begun testing its CBDC payments using a wide range of contactless wearable devices in Beijing, including watches, bracelets and badges. This is in preparation for the 2022 Winter Olympics, which will represent a major trial of the technology.

Venezuela is grappling with the reality of hyperinflation. To try and combat this, in 2018 it launched a cryptocurrency, the Petro, backed by reserves of oil, gas, gold and diamonds. Despite that, sanctions and collapsing oil prices have seen the value of the bolivar reduce to the point where the highest denomination note, the 50,000 bolivar, is worth about $0.04. Bloomberg News estimates inflation to be 5,790% in 2020.

The result is that the US dollar been widely adopted. Local banks have started to offer accounts denominated in dollars, but sanctions mean there is no clearing system, which is necessary for digital transactions.

At the end of December President Nicolas Maduro, in a television interview with Telesur, explained that 18.6% of all commercial transactions are in dollars, while 77.3% are carried out in bolivars with debit cards. Only 3.4% are paid with bolivar notes. In this context, the President said: ‘we are moving this year to a more profound digital economy, in expansion.

I’ve set the goal of an economy that’s 100% digital’.

The Agricultural Bank of China is reported

by Shenzhen News to have equipped a number of its ATMs to allow customers to deposit and withdraw the digital renminbi.

The bank is also said to have established a ‘digital renminbi innovation laboratory’ in Shenzhen to innovate and pilot projects in new areas.

Huge Response to Digital Euro Consultation The European Central Bank (ECB) issued a public consultation on the creation of a digital euro in October 2020. The response has been significant, with over 8,000 submissions.

Before the consultation, the ECB had published a paper setting out the background behind its work considering a digital euro, the reasons to issue one, the potential effects of a digital euro and implied requirements, legal considerations, technical and organisational approaches to euro digital services and follow up work.

He vowed to create ‘payment formats’ allowing transactions using dollars but said formal dollarization would not happen.

The submissions appear to focus on three main areas – privacy of payments, security and the need for a pan-European reach.

Privacy was easily the highest priority amongst these, with 41% of responses ranking this highest.

PBOC Digital Yuan Trial Moves Forward The People’s Bank of China (PBOC) is moving its Central Bank Digital Currency (CBDC) trial into a new stage where it is testing its practical day to day use mimicking existing digital payments. It has introduced a contactless hard wallet along with Near Field Communication (NFC) wearable devices so that people can use the CBDC in shops and on the go in the transport system.

A Eurosystem task force drawn from the ECB and 19 national central banks are working on the topic. Analysis of the responses will be published in the spring and will be used in their final report to the ECB’s governing council.

PBOC has already trialled the use of CBDCs for in-store payments, when it offered 100,000 residents in Shenzhen the chance to win 200 digital yuan ($31) in what was called a ‘red letter’ lottery. The money could be spent in the 10,000 shops taking part in the trial. In the first pilot in the city in October 2020, it is reported that residents spent almost 9 million digital yuan.

This new ‘hard’ digital wallet is like a conventional NFC enabled smart card, so that purchases can be made without having to have a digital wallet on a mobile phone.

The first trials are in a hospital, allowing users to pay for medical services such as hospital diagnosis and treatments, physical examinations and parking fees using the card.

PAYMENT NEWS | VOLUME 4 – NO 1 | JANUARY 2021

9

‘A Digital Euro is Due, if not Overdue’ Thus said Ralph Wintergerst, CEO of Giesecke + Devrient (G+D), to the Frankfurter Allgemeine newspaper before Christmas. G+D has invested significantly in this area to position itself for the future and to support its worldwide relationships with central banks. It is confident that cash will remain a core payment instrument but sees a future shift to Central Bank Digital Currency (CBDC).

G+D is working with 20 central banks and governments, with just under 10 of those talks at a stage that could lead to pilots.

G+D started ‘Project Filia’ three years ago to develop the technology for digital money which is backed or supported by central banks.

This speculative investment has required the creation of a capability to create digital money, a distribution system and media that is secure for the storage of virtual money. The major technical challenge has been around safeguarding the currency from criminals. This is a constant task and G+D described their approach as employing ‘post-quantum cryptography’.

Wintergerst explained the different focus of central banks around the world. Those in developed economies are focused mainly on how to maintain payment systems and money and to create an effective offer that is safe and anonymous. Data protection is an important part of the design of the currency.

Ralph Wintergerst.

Countries in Africa are more concerned with the immediate challenge of how to get aid to their populations, particularly where there are few bank accounts and the solution must work off-line.

And although China is ahead, at the moment it is domestically focused, with the 2022 Beijing Winter Olympics as the next major milestone. He speculated that China might target Africa for initial international use.

Asked about timelines for a digital euro, Wintergerst thought it would not be quick, but not as long as the physical euro took to prepare and launch. Wherever digital currency will be used, user acceptance is key to success.

He expressed a reservation that Europe has all the ingredients for success but appears to hesitate over such big decisions, perhaps for longer than necessary. The European Central Bank was described as effective at financial policy for Europe. Once a decision is taken, it will be effective at introducing a digital euro quickly.

The Frankurter Allgemeine’s article finished with a question about the future of cash.

Wintergerst was clear: ‘whenever it becomes critical – whether it's the financial crisis, natural disasters, or now the corona pandemic – when trust in systems is damaged, people reach for cash.’

G+D is clearly backing two horses in the payment ‘race’.

Protecting ATMs In December RBR ran an online conference for Self-Service Banking Europe. There is much in the news about attacks on ATMs and this was one of the areas of interest in the conference. Paul Nicholls from Oberthur Cash Protection, Spencer Marshall from HID Global and Duane Campbell from Tesco discussed what they are doing in this area.

The number of transactions at ATMs may be falling, but their value is increasing. This creates the challenge of defining the right level of notes to hold.

role of different dye solutions to protect banknotes. Although these are common in CIT vehicles, they are also effective when used in ATMs.

The move to increased use of remote communication with the ATM to ‘order’ notes means that two factor authentication is being used rather than the PIN pad, adding to security.

They made the point that the criminal fraternity talk to each other, perhaps better even than the industry. When discussing crime, a pattern was described of a new modus operandi evolving which then spreads fast amongst criminals. A solution is found, and attack numbers fall. There is the opportunity and need for the industry to communicate better and for much closer collaboration.

Three layers of security

In some countries dye protection systems are a regulatory requirement, eg. France, and in others voluntary, eg. Mexico.

There are two types, passive (a bag of ink explodes over the notes triggered by a specific event – used widely in Brazil) and active (a sensor triggers the release of ink if an attack is detected). There is no international certification for the different systems.

ATMs installed in bank branches are usually put in place with careful consideration. As bank branches close, many replacement ATMs are in more vulnerable places or installed with lower levels of protection. In addition, they are often in remoter areas where there are fewer police available.

There was discussion about whether rules were needed to stop this.

10 CASH & PAYMENT NEWS | CBCDS AND ATMS

Three layers of security were described.

The use of analytics both to understand the threats and to manage the distribution and stock levels of machines, a layered approach to defend the front (manipulation of the interface), the back (the safe) and those threats that can be stopped (ram raids, explosives etc).

In recent years the number of physical attacks has risen (see page 4, which includes news of the latest ATM attacks in the Netherlands). However, this year the threat to ATMs has been lower in the UK, and Germany (although not as much as in the UK), but in the US it has gone up 148%.

With the use of explosives increasingly popular, the group then discussed the

The group recommended that in the absence of local regulations, those responsible for protecting CIT vehicles and ATMs look at countries like Malaysia, South Africa and Germany that do have clearly defined standards.

The discussion gave good evidence that active solutions work. There was a strong suggestion that the security measures used to protect cash should be publicised.

People need to know that if they are given a banknote with dye stain on it, they should not accept it. Information makes the protection more powerful.

CPN is Going Online… and Weekly!

Further Reading 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.

Consumer Behavior in a Health Crisis: What Happened with Cash?

Federal Reserve Bank of Atlanta

READ MORE

Reconnaissance International (RI), co-publisher of Cash and Payment News™ (CPN), is pleased to announce that it is moving to a new online platform incorporating a weekly newsfeed service alongside the monthly newsletter.

This means that you will be able to view your cash and payment news as separate, searchable articles on a visually appealing and easy-to-navigate website. What’s more, we will be posting new articles on a regular basis throughout each month, accompanied by email alerts advising subscribers about the new posts.

This doesn’t mean that we will be dropping the PDF or printable versions of CPN though. These formats will continue as part of the overall CPN offering, and full details of the different subscription packages will be published very soon.

Please note that due to the UK’s latest COVID-19 lockdown, we regret that the issue of printed copies of CPN remains suspended until further notice.

The new CPN platform also interfaces with Reconnaissance’s new e-commerce site, meaning that you will be able to manage your subscription online (including upgrades and renewals), and purchase and download special reports and other related publications at a discount.

The new online platform for Cash & Payment News’ sister publication, Currency News™, will be following shortly.

We will be sure to let you know when the website goes live for you to view, including the list of subscription packages, and we will of course welcome any feedback on this new way of delivering CPN to your ‘doorstep’.

Cash Essentials Launches Cash Glossary Cash Essentials, the independent initiative that seeks to provide a platform for debate about the payments and monetary ecosystems, has published its first edition of a Cash Glossary. The aim is to give the cash industry a shared vocabulary relating to payments and the cash cycle.

The Cash Essentials website describes the glossary as a ‘collective work’ edited

by Antti Heinonen, Chairman Banknote Ethics Initiative and ex-European Central Bank/Bank of Finland, and Guillaume Lepecq, Chair at Cash Essentials.

The glossary contains a mixture of words from banknote production, the banknote itself, the cash cycle and payments. At first glance the editors have done a good job collecting key words needed for discourse in the cash arena.

The glossary is not a comprehensive technical record and does not include descriptions of all the security features and technologies used in banknotes. It touches on some of the most frequently used words in these areas.

The editors welcome contributions of new words or edits of those already in the glossary. It will be interesting to see whether this could become a ‘Wikipedia’ style document broadening out to cover the full range of terms and areas of interest around payments and cash. In which case the ability to search on key words will be needed.

Losing Contact: The Impact of Contactless Payments on Cash Usage Bank of Canada

READ MORE Foreign Demand for Euro Banknotes European Central Bank

READ MORE Institutional Hostility to Cash and COVID-19 Institute of Economics, University of Rostock

READ MORE DNBulletin: Contactless Payments on the Rise During COVID Pandemic Dutch National bank

READ MORE The Indian Payments Handbook 2020-2025 PWC

READ MORE Safe Payments Bank of Canada

READ MORE Cash Glossary: from Acquiring Bank to War on Cash Cash Essentials

READ MORE Where to Withdraw? Mapping Access to Cash Across the UK University of Bristol

READ MORE

VOLUME 4 – NO 1 | JANUARY 2021

11

Without Cash, Can There be Safe Payments?

A recent Bank of Canada Staff Working Paper on ‘Safe Payments’ (2020-53) posed the question whether private payment systems based on bank deposits provide the optimal level of safety?

As cash declines, is a payment system dominated by privately issued money safe?

This is an important topic because the credit risk of these deposits is greater than cash. The paper is written in the context of a future time when cash ceases to exist and CBDCs replace it.

The broad conclusions of the paper were that although there are theoretical safeguards to ensure safe payments, there will need to be additional incentives put in place to ensure sufficient adoption of safe measures.

The sort of inducements considered were the establishment of narrow banks to invest funds in highly liquid and safe government assets and to allow payments in their liabilities. Such narrow banks, also referred to as safe banks, are expensive to set up and represent an opportunity cost since their investments will earn low levels of return. In addition, deposit insurance can also make bank deposits safer.

Depositors should, of course, perform ex-ante monitoring to reduce the likelihood of their banks defaulting, ie. they should actively ensure their banks are investing properly.

They should also perform ex-post monitoring to detect signs that their banks are failing to perform early liquidation of their investments to reduce losses.

Both activities are expensive and early liquidation implies investors lose liquid balances as a means of payment.

The research suggests the safe accounts are sub-optimal because people don’t fully think through the implications of their adoption decisions. Safe accounts will be under adopted as people don’t properly understand the risks. It also found that private incentives to adopt safe accounts are distorted by public safety nets. As a result, ex-ante public interventions such as corrective taxes or subsidies on safe payment adoption can restore the optimal adoption of safe accounts.

For CBDCs, the paper concludes that they can provide a safe payment system in the absence of cash by setting up a safe bank, together with appropriate taxes or subsidies, to ensure sufficient adoption of the safe means of payment.

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