After the Pandemic – What Next for the Cash Industry?

We normally reserve the crystal ball gazing in Currency News™ for the end of the year, but the pandemic is no respecter of editorial calendars, and the consequences of the pandemic on our industry will last long beyond the next calendar year.

We aren’t done with the pandemic yet. But whether we are now at the ‘beginning of the end’ or the ‘end of the beginning’, there is no doubt that, thanks to vaccines, we are at the point where the pandemic is becoming endemic, and we are learning to live with COVID-19.

So what will the future look like in this ‘COVID as an endemic’ world?

Two of the articles in this month’s issue give some pointers – Antti Heinonen writes about the cash paradox, which speaks to cash in particular, and Andrea Nitsche writes about why cash matters, now more than ever, considering the socio-economic impact of COVID.

Antti’s article provides some hard facts and figures supporting the cash paradox conundrum of falling cash transactions but rising volumes of cash in circulation. This appears to be caused by people using cash as a store of value, a precautionary holding, rather than as a means of payment. Add in the buffer stocks that many central banks have built up, and the paradox makes complete sense.

Andrea’s article also describes the cash paradox, but looks at the wider social impact of COVID-19, particularly in poorer countries and those on the margins of society, for whom it has been devastating. It does not make for pretty reading.

Both articles raise questions as to what comes next.

In terms of the broader economic and social landscape, it is already becoming clear that, whilst economies are beginning to fire up again, early optimism is now starting to yield to the hard realities of life post-pandemic.

At some point soon we will have to start paying for the damage wrought by the pandemic. At the same time, however, disruptions to production and supply chains, combined with soaring demand for energy and materials, is exerting severe pressure on prices. Inflation, higher costs and higher taxes will affect us all, in developed and developing countries alike. The ‘build back better’ mantra bandied around at the height of the pandemic, to instil a sense of optimism around the corner, will come with a hefty price tag.

These higher costs – in materials, labour, energy and transport – will affect our industry, which also faces the likelihood of fluctuating and then reduced demand for banknotes and coins.

Reduced demand will, in part, be a consequence of changes in how we pay – a move to digital payments has been accelerated by the pandemic. A reduction in cash infrastructure is likely as a consequence of fewer cash transactions but it will also act as a driver for it, creating a downward spiral. The development of CBDCs to provide an alternative to private providers of digital payments may also be part of this story.

A consequence of the increase of cash stocks – in central bank vaults or under the proverbial mattresses – during the pandemic that do not circulate is that they do not need to be replaced, distributed or destroyed, reducing demand. Circulation velocity is the lifeblood of the industry.

In other words, the short-term boost to demand – caused by people turning to cash as a safe haven – that has helped sustain suppliers and mitigate against the costs and challenges caused by the pandemic, is just that – short term. In the longer term, the ever-more digital world means cash demand can only decline. Some argue that we have seen ‘peak banknote’.

There are, of course, a myriad of good reasons why cash will remain an essential part of the payment landscape, albeit with lower volumes in the future. No other form of payment combines the function of a means of transaction and a safe, resilient and private store of value. Cash is the ‘people’s money’, a shared utility uniting every group in society. Nothing does what cash does, which will make it hard to ‘kill’.

For those reasons, Currency News suggests that ‘reports of my death have been greatly exaggerated’ (Mark Twain) apply equally to cash. But we do hope that there will never be another event in our lifetimes where the precautionary holding aspect is the main driver for its use.