Nowadays, we can pay for a magazine at the newsstand and a large shop at the supermarket by card or mobile phone within seconds. Rent and electricity bills are paid in no time using e-banking. So is cash obsolete? Economists Martin Brown and Arina Wischnewsky outline their outlook for the future in an interview.
Statistics show that cash is being used less and less in most countries. How will we make payments in ten years?
Brown: I’m convinced that we will still carry cash and physical payment cards with us in ten years’ time. Cash will be used less and less but it will not disappear. Most consumers, who already only use digital means of payment, still carry cash with them as a reserve if electronic payments do not work. It is also possible that in future “cash” cards such as prepaid or gift cards will be carried as “emergency money” in wallets instead of banknotes.
And if we look into the distant future?
Brown: Our current level of knowledge only allows us to speculate about what we will pay with in 30 or 50 years. But one thing is clear to me: it will be something that we use very regularly on a daily basis and therefore carry with us all the time. It could be a pair of glasses, a ring, a watch, or perhaps still the mobile phone.
Wischnewsky: Current evidence suggests that cash will continue to exist in 50 years, as it has several features that cannot be completely replaced by any other payment method. Cash is universally accepted, can be used offline and is free of charge. It contributes to financial inclusion, protects against cyber risks and serves as a stable value investment independently of third parties. Since the end of the barter economy, cash has therefore remained an important part of economic transactions.
What do the statistics say about the use of cash?
Wischnewsky: The figures speak clearly: usage is decreasing, albeit slowly. In my research, however, I came across a curious phenomenon: although people are increasingly using alternative payment methods, the total amount of cash in circulation continues to increase. A notable example of this is Japan, one of the most technologically advanced countries in the world. It was the first country to develop the QR code for transactions and establish mobile commerce. Nevertheless, Japan remains one of the most cash-intensive economies: The share of currency in circulation (CiC) accounts for more than 20% of nominal GDP in Japan. Around 40% of the cash is hoarded in the form of banknotes. Sweden, on the other hand, is at the other end of the spectrum: the ratio of CiC to GDP there has fallen to around 1%. This makes Sweden one of the world’s most cash-poor societies.
How do you explain these differences?
Wischnewsky: I think it’s not just about technology, it’s also about deeper societal values. Social trust, risk appetite and data protection concerns strongly influence how different countries deal with digital payment methods. Scandinavia – and now China too – have the highest values of general social trust in the world. Meanwhile, Germany and Japan have lower and, in some cases, declining trust values and have greater concerns about data protection and security. Another important aspect: the payment process is strongly influenced by habits. In other words, why should I use a different payment method than usual if I see no advantage in it for myself?
What does it take to change such habits?
Brown: Queuing at the bank or post office counter for deposits is a very good example of this. Nobody likes to wait at the counter. So most people quickly got out of the habit as soon as more convenient and faster payment options became established. Network effects also play an important role here: the more widespread a service is – such as mobile payment apps – or the more people around me use it, the more likely I am to give up my previous habit.
Wearables or implants, i.e. portable payment options or chips implanted in the body, would also be an option. What do you think about it?
Wischnewsky: I think it's questionable whether such interventions in the body will actually be necessary. I don’t see any major advantages compared to mobile apps or contactless payment cards. By contrast, the improvement of biometric authentication systems means that payment by face recognition is already becoming a reality. In countries such as China or Russia, you can already pay on public transport or when shopping with a glance at the camera. On the other hand, in countries with higher data protection concerns, this technology faces considerable resistance.
Digital payments leave traces of data. Does this inhibit people from paying digitally?
Brown: I don’t see that fear of data traces has a major impact on people’s payment behaviour. Surveys also show that anonymity is far less important when choosing a payment method than factors such as security, speed or user-friendliness.
If we mainly use digital payment means in the future, how can we ensure that the system still works in the event of major breakdowns?
Brown: The risk of malfunctions and attacks is already there today. The functioning of POS systems, ATMs, etc. depends on the Internet as well as on the power grid. Probably everyone has experienced that the check-outs at the supermarket suddenly didn’t work. In countries with unreliable power grids, emergency generators are available for power outages. And if nothing works at all – I’m a little nostalgic about that – you could have it written down in the store and pay later, as in the “good” old days.
Are there differences between older and younger people in terms of payment behaviour?
Brown: Certainly. The proportion of mobile app payments amongst young adults is three times as high as amongst people of retirement age. The difference in income is also striking: for those with high incomes, the proportion is twice as high as for those with lower incomes. This is due, on the one hand, to their greater affinity for technology and, on the other, to their different consumption patterns, as people with higher incomes tend to spend more.
Do digital payment options induce people to spend too much money or to become more carelessly indebted?
Brown: Contrary to popular belief, there is no evidence that cashless payment must lead to reckless buying behaviour. In a recently published study, we showed that consumers in Switzerland spend more money on a daily basis if they pay more frequently with cards. But: this pattern is not particularly pronounced amongst young adults or those with lower incomes. That’s really surprising. Instead, we found a correlation between the choice of means of payment and the amount of spending for people with higher incomes. It would be very interesting to further investigate whether the use of cashless means of payment actually leads to more consumption – for example amongst young adults. At this age, life circumstances are changing, people usually have more income and also rising expenses. If we knew more about this, we could look into such questions in more detail.
Which payment methods do you personally prefer?
Wischnewsky: I almost always pay with my mobile phone. At home, however, I always have some cash as a reserve.
Brown: For me, speed and simplicity are paramount, and I always use my debit card to make contactless payments in shops. For online purchases I use a Swiss payment app, I find paying by credit card tedious.
Martin Brown
Professor Martin Brown is Director of the Gerzensee Study Centre (foundation of the Swiss National Bank) and Full Professor of Finance at the University of St. Gallen. In his research and teaching he focuses on consumer financial decisions as well as banking and monetary policy.
Arina Wischnewsky
Arina Wischnewsky holds a PhD in economics from the University of Trier with a focus on macroeconomics, financial stability, monetary policy and payment systems. Her research examines, amongst other things, the interplay of incentive structures and trading behaviour and the determinants of cash use.
