If people are buying with their cards, why do they still want to keep cash?

Access to cash is being underwritten by new Government legislation, details of which were published this week. As well as ensuring those without bank accounts – or who might be uncomfortable with digital payments – have access to an ATM, Minister for Finance Michael McGrath said it was essential as a fallback in case digital systems had an outage, or were hit by a cyberattack. As the saying goes, “cash does not crash”. And so the Access to Cash Bill proposes that the big banks be obliged to maintain a certain number of ATMs based on population size, with scope for the Central Bank to step in and mandate provision in particular remote areas.

This could be seen as just a step towards managing the gradual phasing-out of cash in an increasingly digital economy. But not so fast. Cash may no longer be king, but it remains widely used and likely to maintain a role in Irish life.

1. The figures

The move to online shopping and digital payments has been steady, particularly since the middle of the last decade and accelerating during Covid-19, while ATM withdrawals have fallen. Figures from the Banking and Payments Federation Ireland (BPFI) show a 60 per cent rise in online and mobile banking payments since 2018, with more than 6.6 million credit and debit card payments processed daily. Meanwhile, ATM transactions fell by a third from €20 billion in 2018 to €13.5 billion in 2022. So the switch to digital is very much on – and in countries such as Norway and Sweden cash is now used for only a single-figure percentage of transactions.

However, Central Bank figures show that the actual amount of cash in circulation continues to hold up, with €23.8 billion in notes and coins in circulation in 2023, up from €19 billion pre-pandemic. While the Irish notes and coins figures are technically a contribution to an EU total (notes from any euro zone country can circulate in any other) the wider euro zone figures – and those in the UK – show a similar trend. The demand for cash has held up and actually increased as the pandemic hit.

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Why is this happening when the use of cash in transactions is on the decline? A Central Bank paper in 2020, written by David Cronin, pointed out that the return of used notes to the Central Bank of Ireland has fallen, and speculated that this could be because notes are much less used now for small, frequent transactions, which leads to them circulating and getting damaged. And so fewer are returned as worn or damaged to the Central Bank and – like a bath – the outflow is important to the level of the water as well as the inflow.

[ Cash still most popular form of payment for three in five Irish people ]

2. So if they are buying with their cards, why do people still want to hold cash?

A Bank of England report dubbed it the “banknotes paradox” – the rise in demand for cash even as transactions using notes and coins dropped. There are, of course, a group of people without bank accounts or who are uncomfortable with technology who still favour cash for all or most transactions – a 2022 UK survey found almost one in five people there would struggle to survive without cash while in the Republic the Central Bank’s Access to Cash report shows that pre-pandemic, 7 per cent did not own a bank card.

The Central Bank 2020 paper pointed out that as well as being used to buy and sell things, cash is also a way of storing savings. Academic work points to this as one reason why cash demand has held up, with a particular surge in demand for cash as Covid hit and consumers got nervous. The Bank of England speculated that people were happier to hold savings in cash during the long period of very low interest rates from after the financial crash until 2021.

And as well as being used by those uncomfortable with the technicalities of digital payments and fearful of being defrauded, the report suggested cash also has a role in “local” economies – paying for services such as gardening and window-cleaning, for example, and for family gifts. Whether “Revoluting” reduces this type of use remains to be seen.

And cash has not lost its allure completely among younger generations. Notes and coins have been used for many years by households to budget and this has been renamed on social media as “cash stuffing” – putting notes into envelopes for different uses, for example one for rent, one for groceries, one for entertainment and so on. This is seen as a way of tightly controlling spending and understanding what is available. And, on a more serious level, cash is also used in some cases where people or their relatives fear due to mental illness or incapacity that the use of a card online could lead to serious overspending.

3. And then there is privacy?

Cash is the ultimate way of maintaining privacy in transactions – some people just prefer to stay off the digital grid, while cash is also used in the criminal world, to launder money, make illegal transactions and so on. Cash transactions are a traditional way to avoid the tax authorities - typically by not paying incomes taxes and VAT - and while estimates for the scale of the so-called shadow economy vary widely, there is no doubt of its significance.

And here we enter into the money culture wars and the debate about the massive changes under way. Plans by international central banks, including the European Central Bank, to investigate the launch of their own digital currencies – effectively cash in a digital form – have raised privacy fears among campaigners about “official” access to information on spending and even claims that this could be used to in some way control where money is spent. While the latter seems unlikely – given that central bank digital currencies would coexist with many other payment forms, including cash to which the central banks remain committed – there is no doubt that the privacy of using cash remains an important factor.

Anyone have the loan of a tenner?