Competition Between Digital and Physical Currencies in the Next 10 Years

The arrival of cryptocurrencies poses a fundamental challenge for cash cycle operators and banknote printers. For those firms that can successfully pivot, there are new market opportunities, including the challenge of how to integrate banknotes into a future digital payments economy.

A new study from Smithers, ‘The Future of Physical vs. Digital Currency: Banknotes in a Digital World to 2032’, details measures to gauge the use of cash and the proportion of physical versus digital cash.

Leading markets

Digital payments are becoming more popular in society. As a result, according to the report, the cash share in the UK, for example, reduced from 21% in 2016 to 12% in 2020. The share of adults making or receiving digital payments in developing economies grew from 35% in 2014 to 57% in 2021. In 2019, cash accounted for 48% of point of sale and person to person payments.

Cash use

The recent boom in digital payments has had a knock-on effect on the use of physical currency with the inevitable impact on security features.

A standard indicator of cash use is the ratio of all coin and currency in circulation (CIC) to GDP. This gives an indication of how cash demand is rising or falling but it doesn’t show how cash is used. During the Covid-19 pandemic there were fewer opportunities to make cash payments because many retailers only accepted cashless payments due to unfounded fears that cash could be a vector of transmission for the virus. Paradoxically, the majority of central banks experienced increased demand for physical cash during the pandemic even when digital payments were increasing. The consensus is that at times of crises cash is held as a store of value.

Another way to measure cash use, shown by Khiaonarong and Humphrey in IMF Working Paper WP/23/62, is to use a ‘Cash Share’ measure where ATM cash withdrawals are expressed as a ratio to the total value of all payments in a country.

This approach more closely reflects the use of cash for payments than does CIC. They regard measuring cash for payments as more important than measuring its other potential uses.

In addition, the Cash Share method is a flow measure capturing the value of cash withdrawn from ATMs rather the stock of cash. The value of ATM withdrawals is already adjusted for changes in velocity due to the substitution of cards and other payment instruments for cash over time.

Financial inclusion

Financial inclusion – or individuals and businesses having access to useful and affordable financial products and services that meet their needs – covers ng transactions, digital payments, savings, credit and insurance. In 2014, an estimated 2 billion adults lacked access to a transaction account and were excluded from the formal financial system. In response, the World Bank Group (WBG), with private and public sector partners, set an ambitious target to achieve Universal Financial Access (UFA) by 2020.

The UFA goal envisioned that, by 2020, adults globally would be able to have access to a transaction account or electronic instrument to store money, send and receive payments. The WBG committed to enabling one billion unbanked adults to gain access to a transaction account through targeted interventions by 2020. Hundreds of millions of unbanked adults received payments in cash, including wages, government payments such as pensions and benefits, and payments for agricultural products.

The UFA2020 initiative focused on 25 countries where 73% of all financially excluded people live: Bangladesh, Brazil, China, Colombia, Cote d’Ivoire, DRC, Egypt, Ethiopia, India, Indonesia, Kenya, Mexico, Morocco, Mozambique, Myanmar, Nigeria, Pakistan, Peru, Philippines, Rwanda, South Africa, Vietnam, Tanzania, Turkey, and Zambia.

Developing economies

According to the new research from Smithers, the share of adults making or receiving digital payments in developing economies grew from 35% in 2014 to 57% in 2021. This increase outpaced growth in account ownership over the same period.

Financial inclusion does not, however, guarantee that people will always make use of digital payments. Globally, 620 million adults with an account pay utility bills in cash. In developing economies 1.6 billion adults with an account made merchant payments in cash only. The report found that 30% of the global adult population doesn’t have internet access and therefore cannot access digital financial services.

Overall, the increased use of digital payments will have only a limited impact on physical cash, with the two solutions evolving in parallel. Hard cash will continue to circulate, but often at a slower rate, as lower value transactions increasingly migrate to the digital sphere. Despite this, cash will remain an essential cornerstone as the most popular and easily understood fungible payment solution.

For more information on ‘The Future of Physical vs. Digital Currency: Banknotes in a Digital World to 2032’, click here to download a brochure.