A new study from Smithers, The Future of Physical vs. Digital Currency: Banknotes in a Digital World to 2032
, details the measures available to gauge the use of cash in society and looks at the proportion of physical cash versus how much is digital.
Digital currencies are becoming more popular in society. As a result, 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. The UK cash share reduced from 21% in 2016 to 12% in 2020. In 2019, cash accounted for 48% of POS and P2P payments.
Currency has always had a physical form in cash, but recently the industry has seen a boom in the use of digital currencies. Digital currencies are becoming more popular in society, and this has a knock-on effect on physical currencies. The rise in digital currencies affects physical banknotes and will have a subsequent effect 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 this was because at times of crises cash is held as a store of value.
Another way to measure cash use, shown by Khiaonarong and Humphrey from an IMF Working Paper is to use a Cash Share measure. Cash share is the value of cash withdrawn from ATMs (CASH) as the share of cash in the market for cash or CASH/(CASH+CARDS+E-MONEY). The authors argue this is a value share measure of the flow of cash to the flow of cash and its substitutes; cards and e-money rather than the alternative stock measure of currency in circulation divided by GDP. The advantage of this approach is that the data is available in the CPMI “Red Book” statistics in a common format for a number of countries.
Financial inclusion, or individuals and businesses having access to useful and affordable financial products and services that meet their needs, including 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 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 1 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.
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.