Cash remains popular - and costly for society
Today, consumers continue to make significant use of cash - it is real, instantaneous and perceived to be free. In reality however, cash payments are costly for society. Studies over the years have shown that the social cost of cash still remains considerable and the demand for cash continues to grow. According to the report 'The Future of Cash and Payments', published by Retail Banking Research (RBR) in 2010, cash accounted for 78 percent of the 388 billion retail payments in Europe in 2008, or nearly 301 billion transactions. The RBR report states that the total cost of distributing, managing, handling, processing and recycling cash, and of accepting cash payments, was 84 billion euros; equivalent to 0.6 percent of Europe's gross domestic product (GDP) or 130 euros per person. The RBR report forecasts that there will be a significant increase in the use of cashless payments in Europe by 2014, accompanied by a general decline in the number of cash payments. The report however also predicts that by 2014, cash will remain the continent's main retail payment method. (For details on the RBR report, refer to the 'related articles in previous issues' below).
The 'World Payments Report 2011' (see 'related links' below) published by Capgemini, RBS and Efma, confirms that the "highly mature economies of the U.S. and Eurozone together accounted for 160 billion non-cash transactions in 2009 - the highest numbers in the world - and yet those volumes are dwarfed by the number of transactions conducted in cash." According to this report, more than 80 percent (about 715 billion) of all transactions in the U.S. and the euro area were made using cash. The authors of the 'World Payments Report 2011' reiterate: "The lifecycle of cash is expensive. Cash passes through central banks, businesses, banks and secure cash-in-transit (CIT) agents. And while it is unrealistic to imagine a society without cash, it would clearly be beneficial to the system to shift more cash payments to electronic means. But this shift requires cash-replacement initiatives to reduce cash-in-circulation, and cash-handling efficiencies to minimise the cost of managing the cash that remains in circulation."
In October 2012, the European Central Bank (ECB) released the report 'The Social and Private Costs of Retail Payment Instruments' (see 'related links' below). The objective of this study is "to enhance the general understanding of the social and private costs of different retail payment instruments from a European perspective, with the aim of helping policy-makers, banks and retailers promote efficient payments. The study was carried out by the ECB with the participation of 13 national central banks1 of the European System of Central Banks2. The ECB report defines private costs as those incurred by individual participants in the payments chain - including items such as transportation of cash, management of electronic transactions, acquisition of new customers, credit risk analysis, provision of terminals, fraud prevention and fees for other participants. Social costs are defined as the aggregate costs to society as a whole, excluding fees and tariffs for participants in the payment chain. About half of these total costs are incurred by banks and interbank infrastructure providers, while retailers bear 46 percent thereof. The report analyses the social and private costs of making retail payments in 13 European countries and discovers that they are substantial, amounting to around 45 billion euros, or almost 1 percent of their combined GDP. Due to the relatively high usage of cash, it accounts for nearly half of the total social costs. "This study is a true joint venture of the ECB and the national central banks involved," said Benoît Cœuré, Member of the ECB's Executive Board. "Its results underline how much retail payment services matter for European society and in the economy as a whole. The study will shed light on the debate about how the European market for payment services will look in the future and how overall cost efficiency can be improved even further." (See the related ECB press release included with the 'related links' below.)
European Payments Council introduces the paper 'Improving the Efficiency of the Handling of Cash - Cash Cycle Models'
The current Single Euro Payments Area ( ) landscape for the distribution and processing of cash is characterised by differing national infrastructures. This lack of harmonisation, common approach and sharing of best practice among participants in the commercial cash cycle3 increases the cost of cash processing and creates inefficiencies. Various players in the payments market are therefore considering means to incentivise the increased use of electronic payment instruments, while reducing the costs of wholesale cash distribution. The European Payments Council ( ) believes that actions by all stakeholders in the euro area could contribute towards reducing the high cost of processing and handling of cash. With this shared objective in mind, in 2010 the and the European Security Transport Association (ESTA) established a joint task force to identify best practice principles and, where possible, develop recommendations on how to further improve deploying and re-circulating cash. The considerations of this joint task force are reflected in the document 'Improving the Efficiency of the Handling of Cash - Cash Cycle Models' (see 'related links' below). It aims to create awareness among participants in the commercial cash cycles established at national level across the countries on how to improve existing processes and reduce the overall cost of cash.
The document addresses, among other things, the following aspects:
- Balance sheet relief (BSR) mechanism: this mechanism describes an arrangement between a national central bank (NCB) and certain commercial cash cycle participants to hold currency at selected locations (usually secure centralised vaults), in the name of and to the value of the NCB. Implementation of the BSR mechanism supports wholesale cash re-circulation, reduces the operational involvement of the NCB and, consequently, decreases the cost of cash inventories in a cash cycle. The BSR mechanism may therefore prove to be a valuable component for commercial cash cycle participants to consider when evaluating their existing cycles.
- Different models of cooperation between NCBs and commercial cash cycle participants: the different models currently in place can be distinguished based on the different levels of responsibility of the actors cooperating in the model; i.e. the relevant NCB and the commercial cash cycle participants. The document describes the various cooperation structures that can be formed by these participants and identifies potential improvements. A future model should be able to respond to a potential scenario where the NCB decides to reduce its branch network, services and operating hours. The paper does not recommend any specific model. It suggests however that the 'partial delegation' model, the 'total delegation' model and the 'partial transfer' model appear to offer a combination of the elements required to create the most efficient cash cycle model for the future. These three models provide logistical cost optimisation opportunities for the NCB as well as the commercial cash cycle participants and allow flexibility to develop customised cash services. In addition, they facilitate the direct exchange of excess cash among the different participants in the commercial cash cycle. Finally, these models also achieve BSR for the commercial cash cycle participants involved.
The stresses that irrespective of the cash model (or combination of models) chosen, security of cash remains a key consideration when reviewing existing cash cycles.
All stakeholders are invited to provide feedback during the three-month public consultation launched on 15 April 2013
The document 'Improving the Efficiency of the Handling of Cash - Cash Cycle Models' was published on the Website for a three-month public consultation on 15 April 2013. All stakeholders are invited to provide feedback by 14 July 2013. For details on how to participate in this consultation, refer to the link ' Public Consultation: Improving the Efficiency of the Handling of Cash - Cash Cycle Models' included with the 'related links' at the end of this article. The aim of this public consultation is to ensure that the document correctly describes existing practices established between commercial cash cycle participants and NCBs and to enhance the content, where possible. Respondents to the consultation are invited to provide feedback on the document, in particular on the following topics:
- Factors impacting the cash distribution landscape in (chapter 2): section 2.3 of chapter 2 describes regulatory action including ECB decisions and legislation impacting the cash cycle. These regulatory actions refer to the authentication of euro banknotes and coins, value date rules and cross border transport of euro cash by road. Respondents to the consultation are invited to indicate whether, in their view, there is any area where more consistency between decisions taken by the ECB on the one hand and the legislator, on the other, would be required to foster greater efficiency in the cash handling chain.
- BSR mechanism (chapter 3): does the paper overlook any factor(s) relevant to the BSR mechanism? Respondents to the consultation are invited to elaborate on how the addition of one (or more) factor(s) would contribute towards the stated objective; i.e. stimulating wholesale cash re-circulation, reducing the operational involvement of the NCB and, consequently, decreasing the cost of cash inventories in a cash cycle.
- Existing cash cycle models (chapter 4): are there any other existing models that should be included in the analysis? Respondents to the consultation, who are of the view that the paper should address an existing cash cycle model not currently included, are invited to describe such an additional model and substantiate why it should be taken into consideration.
- Key considerations when selecting an efficient cash cycle model (chapter 5) and possible future cash cycle models (chapter 6): are there any other considerations relevant to selecting a cash cycle model and / or are there possible additional future models that should be included in the analysis? Respondents to the consultation, who are of this view, are invited to describe such additional considerations and future models and to substantiate why these should be taken into consideration.
The document 'Improving the Efficiency of the Handling of Cash - Cash Cycle Models' will be updated based on the feedback received from stakeholders and a revised version will be published on the Website later this year. The looks forward to continuing the dialogue with all stakeholders on the best way forward to boost the efficiency and, consequently, reduce the high cost of processing and handling of cash in .
Leonor Machado is the Chair of the Cash Working Group.
Related article in this issue:
On the Shelf Life of a Banknote or How to Promote the European Digital Market: Electronic Legal Tender Is Now a Matter of Fairness. Fresh thinking is required to bring greater coherence to the policy target of payment innovation
Related articles in previous issue:
Significant Growth in Cashless Payments in Europe. Yet cash will remain predominant payment method in 2014 ( Newsletter, Issue 6, April 2010)
1 The following 13 central banks have been actively participating in the study: Danmarks Nationalbank, Eesti Pank, Central Bank of Ireland, Bank of Greece, Banco de España, Banca d´Italia, Latvijas Banka, Magyar Nemzeti Bank, De Nederlandsche Bank, Banco de Portugal, Banca Nationala a României, Suomen Pankki, and Sveriges Riksbank.
2 The European System of Central Banks comprises the ECB and the national central banks of all Member States whether they have adopted the euro or not.
3 Participants in the commercial cash cycle are parties other than a national central bank and consumers taking part in the cash cycle: e.g. payment service providers, cash-in-transit companies and retailers.
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