Being realisitic about cash vs digital payments debate

Interesting speech by Bank Negara Malaysia’s Deputy Governor – ncik Abdul Rasheed Ghaffour. He speaks on the burning issue of cash vs digital payments.

He says there are three aspects to this debate:


As a policy maker, I would think that there are three elements, or the ‘3S’, that we should consider in determining an optimal balance of paper and digital, cash and cashless.

The first consideration is security. Counterfeiting is as old as money itself. However, cash has become more secure in recent years. In Malaysia, the amount of counterfeits discovered reduced by 25% in the past year. The currency industry is continuing to make good progress in enhancing security features. I am particularly pleased to note the recent efforts to make such features intuitive – so that the man on the street is likely to notice when something is amiss

The security challenge will not disappear by going cashless. The latest being the recent Ransomware attack. Cyber risk remains a real threat that must be managed. Significant efforts have been made to strengthen resilience against cyberattacks. The banking and payments systems industry has made this a key priority in recent years. However, cybersecurity is ultimately a shared responsibility between the provider and the consumer. Even the most robust systems can be breached if consumers do not exercise adequate caution or are deceived by fraudsters. In this regard, consumer education plays an important role in keeping cashless payments secure.

In addition, cash is also a choice payment instrument for illicit activities. Unlike digital transactions which almost always leave a trail to the parties, payments in cash are anonymous. In his recent book, The Curse of Cash, Kenneth Rogoff points out a very sobering reality – the amount of US Dollars in circulation outside of banks suggests that each American should have around USD4,200 in their wallet. This is not the case. According to him, most of this money is used to hide transactions.

However, this alone does not warrant moving away from cash entirely. Rogoff himself acknowledges this, and proposes the solution of eliminating large denomination notes – such as the United States’ hundred dollar bill. The logic is simple. With the next largest bill being USD50, such a move would immediately make it twice as cumbersome to hoard and pass around suitcases of cash. This is in fact a policy call which Malaysia has made, when we phased out the RM1000 and RM500 notes in 1999. At the same time, the case for removing large denominations becomes weaker as each year goes by. This is because the effect of inflation plays a similar role in making cash transactions more difficult for illegal activities.

Social cost
The second element for consideration is the social cost imposed by the form of currency chosen. On the surface, cash may appear to be costless. Consumers do not have to worry about subscription fees and exorbitant interest rates lying in wait. Retailers are not required to pay fees to accept cash, and so need not pass on any servicing charges to the consumer. There is no need for banks and merchants to invest in and maintain sophisticated software and hardware to support digital payments.

However, cash does not come cheap. Money needs to be printed and minted, and then transported, counted and guarded – several times over. Each step here poses a significant cost to various actors within the economy. Central banks have to deal with the rising cost of producing secure and durable money. Storing and moving money around under tight security can be expensive for both commercial banks and retail businesses. This does not yet account for the losses relating to under-reported taxes which is directly enabled by a cash economy – a cost borne by society as a whole. A 2005 study estimated this figure to be USD100 billion annually in the United States alone

The task of calculating the relative total cost of cash and cashless payments is a difficult one. Apart from the methodological challenges, the findings for each study are also likely to differ according to the nuances of each country. Nonetheless it is a worthwhile endeavour. Policy makers around the world have made positive progress in this area, and I believe we will see more efforts on this front in the coming years.

This leads to another dimension of the social cost consideration, which is the impact on financial inclusion. Millions of people live in rural areas globally, with little or no access to the modern infrastructures necessary to facilitate cashless solutions. The availability of cash is therefore paramount in ensuring that they continue to be seamlessly included in the financial system. At the same time, the success of mobile payments operator M-Pesa in rural Kenya has demonstrated that cashless alternatives can in fact be a means to promote financial inclusion for the unbanked. Here in Malaysia, where mobile banking transactions have tripled in the past year, there is potential to leverage the high mobile penetration rate to improve financial inclusion.

The third element is stability. The ability to make retail payments reliable is crucial for the effectiveness of the financial system. As discussed earlier, we have come a long way in developing a reliable way of transacting electronically – through solutions such as credit cards, mobile transfers and prepaid balances. Central banks are now carefully monitoring newer developments, particularly digital currencies based on the use of a distributed ledger. Digital currencies have tended to be volatile and subject to speculative hoarding. This raises the potential for runs on the digital currency, triggered for instance by a loss of confidence in the currency itself or a third party provider like an exchange. This risk is likely to be augmented where the digital currency is not backed by an issuer, and where there is no lender of last resort function. If digital currencies are widely used, such a shock could have systemic repercussions. At the same time, some of these concerns may be addressed if the digital currencies used are issued by a central bank. Many policymakers are studying this option.

In addition to facilitating payments, cash has been a powerful instrument for central banks to build trust and credibility with the public. The notes issued by central banks provide us with a direct and tangible link to the people – making it a key branding tool. Trust and confidence in the central bank are crucial for us to effectively deliver our mandate. This dynamic is augmented in jurisdictions like Malaysia, where the central bank is responsible for promoting both monetary and financial stability. If we were to go completely cashless, central banks might lose this traditional means of maintaining a strong brand.



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