Friday, July 17, 2020

What’s next: The future of cash - The death of dollars has been greatly exaggerated

by Pat Harriman, UCI | July 8, 2020

Contrary to popular belief, COVID-19 does not mean the end of cash. Although there was some concern during the early stages of the current crisis that paper money might transmit the virus, its demise had, in fact, been heralded by many people even before the pandemic began. Despite the convenience of plastic, the sense of safety with contactless online payment systems or the allure of cryptocurrency, however, there are still situations where dollar bills are best.

Bill Maurer is dean of UCI’s School of Social Sciences, a professor of anthropology and director of the campus’s Institute for Money, Technology & Financial Inclusion(IMTFI). Here, he provides expert insight into the driving factors behind – and implications of – eliminating physical currency, the changing uses and social relations of money, and the enduring appeal of cash.

The general public has been hesitant to handle cash during the pandemic. What does this mean for its future?

The King James version of the Bible uses the phrase “filthy lucre” five times, so money has long been associated with base motivations. While all kinds of germs and bacteria can survive on bank notes, they are not an efficient means of transmission. My concern is that if people associate dollar bills with disease, they’ll stigmatize those who – out of necessity – use cash. These tend disproportionately to be poor people, recent immigrants and refugees, people of color, the homeless, the elderly and the disabled.

As far as other payment methods are concerned, there’s some evidence to suggest that coronaviruses survive longer on plastic and metal. If you think about all the fingers that tap on point-of-sale terminals or hand-held wireless devices, those might be a greater risk. The epidemiological advice is the same as for everything: Wash your hands after you touch stuff.

If the pandemic isn’t the catalyst for all the talk about eliminating paper money, what is?

The drive toward cashlessness is mostly driven by two factors: fiscal concerns over revenue collection and industry interest in capturing additional data about people’s lives. If you’re a state tax authority, eliminating physical currency means that transactions have to pass through a bank or other institution. Despite secrecy rules and privacy regulations, if they have due cause, officials can still peer into people’s financial affairs.

For the Big Four platform companies and smaller digital services, going cashless offers a view into users’ offline spending. If you use cash at a physical till, there’s no data capture; but if you tap and pay with your watch or phone, platform companies all of a sudden know a lot about what you’re doing in the physical world. That’s a treasure trove of personalized information to use in targeted marketing, risk assessment and pricing for things like loans, as well as for predictive models to identify trends.

Can currency be completely replaced by plastic – credit and debit cards?

In the U.S., it’s not going away anytime soon. We have a very high level – 15 to 30 percent – of people who have no bank account or have difficulty maintaining a minimum balance, cycle in and out of formal banking services, or rely on check-cashing services. As a result, they live in a cash economy. Another reason is that when there’s a natural or manmade disaster, paper money becomes absolutely essential to community resiliency. When all other infrastructure goes down, dollars still work as a store of value and means of exchange.

And ironically, with every new digital or mobile payment innovation, we’ve seen cash demand go up. Apps linked to bank accounts make it easy to buy something or split a restaurant bill, so many people who use these apps withdraw money from ATMs as their “savings” because they can lock it in a drawer and eliminate the temptation to spend it.

What are the disadvantages of eliminating paper money and metal coins?

The biggest disadvantage will be the economic exclusion of the poor and underserved. Another implication is that eliminating paper money will more easily allow central banks to lower interest rates below zero. When the interest rate is close to zero or below, people start taking their money out of the bank and put it under the mattress, which acts as a kind of brake on further lowering the interest rate.

While eliminating cash would give the central banks more tools to deal with monetary and financial crises and also allow for relief payments to be made much easier via digital channels – so long as the government provides one for all people to use, like the FedAccounts proposed in an early version of the CARES Act – it also concedes a lot of power to them.

Do you think widespread concern about cash and germs will boost the credibility and popularity of cryptocurrencies such as Bitcoin?

Interestingly, as stay-at-home orders were being issued and the extent of the pandemic was becoming clear in early to mid-March, Bitcoin investors dumped their crypto and converted it into U.S. dollars. There have been ups and downs since then, but the overall trend has been to dump cryptocurrency, along with a more general flight to more liquid assets like the U.S. dollar. And I bet a good many of the people who sold their crypto ultimately converted it to cash.

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