How to reduce reliance on cash

By Felix Salmon
October 10, 2011
Mohamed El-Erian:

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When the financial crisis hit, the smart money went to cash. Literally, in the case of Mohamed El-Erian:

On the Wednesday and Thursday after Lehman filed for Chapter 11, I asked my wife to please go to the ATM and take as much cash as she could. When she asked why, I said it was because I didn’t know whether there was a chance that banks might not open. I remember my wife sort of pausing and saying, “Are you serious?” And I said, “Yes, I am.”

It turns out that this was a worldwide phenomenon. Here’s Ravi Menon, the managing director of the Monetary Authority of Singapore, in a speech last week (HT IK):

Physical cash commands a premium during times of uncertainty. We saw this during the 2008 global financial crisis. Within the first month of the collapse of Lehman Brothers, there was an exceptionally large withdrawal of high denomination notes by banks in Singapore. Typically, 90 per cent or more of the high-denomination notes withdrawn from banks are re- deposited within the month. During the initial months of the 2008 crisis, only 70 per cent of the $100, $1,000 and $10,000 notes withdrawn were returned.

This is understandable. But the fact is that cash is a very expensive payments mechanism:

Handling cash is costly. According to a 2010 study by Retail Banking Research, the cost of distributing, managing, handling, processing and recycling cash in Europe is estimated at €84 billion. This is equal to 0.6 per cent of Europe’s GDP.

For individuals, cash clears at par: if you give me a $100 bill, then I’m $100 richer and you’re $100 poorer. No one’s going to jump in and charge a fee for facilitating the transaction. And if I then deposit the $100 bill into my checking account, once again I see the full amount appear on my statement.

But the fact that most people never get charged for cash transactions is corrosive, in its own way: it helps to impede the inevitable-yet-glacial move away from cash and towards more secure, easier, and cheaper forms of payments.

Which is one reason why Bank of America’s $5 charge for debit transactions is so mindblowingly stupid. The more that people use their debit cards, the less they’ll use cash. And Bank of America spends billions of dollars every year processing heavy, dirty cash flowing in and out of its branches. If banks can persuade people to move to weightless forms of payment like debit, it will save them enormous amounts of money. After all, most of that 0.6%-of-GDP cost of processing cash is borne by retail banks.

And much of the rest is borne by the government. Minting physical currency is expensive! And wasteful! (Menon reveals, in his speech, that those charity-donation buckets in airports are placed there largely at the behest of the monetary authority, to try to stop local coins from leaving the country and having to be re-minted.)

Which means there’s a massive public-interest argument in favor of slowly phasing out cash in favor of other kind of payments. That’s never going to be easy, but it’s going to be pretty much impossible if the alternative payment mechanisms don’t clear at par.

I don’t know what kind of payment mechanism the world will ultimately alight on; I suspect however that it will use NFC technology in cellphones, and that it will be owned and run by a consortium of large retail banks. In the meantime, however, it behooves everybody, from the government to the banks, to do everything they can to wean people slowly off cash. If cash transactions cost the US 0.5% of GDP each year, that’s $70 billion a year at stake — significantly more than all credit and debit interchange fees combined. Don’t any of our greedy banks see the opportunity here?


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“The inevitable-yet-glacial move away from cash and towards more secure, easier, and cheaper forms of payments.”

I think you need to read up a bit at, before you can make such blanket statements about debit cards.

Honestly, NFC on phones will be a great thing, because you can turn it on / off. On a credit or debit card, not so much. Transmitting 24/7/365, that RFID chip will allow you to be tracked. It will also allow anyone with a few hundred dollars, to build an RFID-receiver that logs all your information, then offload it and break the encryption.

Posted by GRRR | Report as abusive

In a panic El-Arian tells his wife to withdraw as much cash as possible from the ATM, but by doing so what size loss did he think he was avoiding?

My question is: after Lehman’s collapse how big would have been the haircut exacted upon money-market fund shareholders IF the Fed had not flooded the banking system with cash (thru the Asset-Backed Commercial Paper Money Market Mutual Fund Liquidity Facility, which at its peak on Oct. 1, 2008 had $152.1 billion of loans outstanding) ?  /fed-s-1-2-trillion-liquidity-lifelines -dwarfed-tarp-glossary.html

Would all of the largest MMFs have broken the buck or just some? Was El-Arian avoiding a loss of a few pennies on the dollar or something much bigger? (My bid for quality CP was in the low-90s, but of course it never got hit because the Fed’s bid was so much higher, which enriched financial institutions like JPM, Pimco, Fidelity, etc, the rescue of which we’re often reminded was the necessary precondition for avoiding financial collapse.

If El-Arian’s redemption request had gotten him only 90 cents on the dollar, it’s likely that other asset classes (like investment grade bonds & mezzanine leveraged loans, etc.) would have fallen proportionally much much more than CP. I’d guess the loss on his cash would have been greatly exceeded by the fall in asset prices generally, thus providing those with any cash like El-Arian the buying opportunity of a lifetime.

But instead he pesters his wife to withdraw cash in order to avoid a loss of, what, a few pennies? He’s some trader (snicker, snicker).

Posted by dedalus | Report as abusive

Also remember that money needs to serve three functions as medium of exchange, store of value and accounting unit. When El-Erian called his wife the function of ‘money’ in a sigh deposit at the bank was in question, while money in hard cash was still viable. Cash was ‘Monier.’

If the system the authorities install does not cater to the three needs then the people will make their own. They fall back on coins, other nation’s currency or even cigarettes.

I completely agree with the cost of handling cash issue and the remark towards BofA’s charges for the efficient debit card. Incidentally in Germany Telekom wanted to introduce a system to pay for parking via your phone, but Bundesbank came down on them and threatened to regulate them as a bank if they did. If you provide currency or currency like services, you are a bank and deserve to be treated as one.

Posted by Finster | Report as abusive

Sure, let the rentiers take a cut from every transaction, using electronic payment systems they control, and feeding the data into “loyalty programs” (whether corporate or governmental, assuming, at this point, there’s a difference).

What could go wrong?

Posted by lambertstrether | Report as abusive

Agree with you Lambert. The cost of cash transaction is a good thing if you want to reduce or mitigate the power of the banks.

Dedalus, I think you miss the point by thinking of the withdrawal of cash as a “trade” designed to preserve capital, as opposed to what it obviously was: a wise plan to guarantee short-term personal liquidity. Ever been to a gas station when the phone lines are down? Your credit card is worthless, but cash works in all situations.

Posted by MG2012 | Report as abusive

People pay for convenience. Under rare circumstances cash is convenient, most of the time it is not. Banks may have most of the cash handling expense, but the non-monetary inconvenience of cash falls heavily on consumers. That is why debit cards can be charged a fee. I am sure BofA is confident few will revert to cash. Most will do what is necessary to avoid the fee. The question is whether that will be enough for BofA.

Posted by MyLord | Report as abusive

#1 It’s pretty surprising that a true investment guru with a net worth surely well north of 10MM doesn’t have a few hundred thousand bucks stashed in a safe at home. At least half of my customers have modest amounts of physical cash at home. Keep it in a safe in your basement that weighs at least a couple hundred pounds. Don’t tell anyone but your spouse the combination, and write it down and put that in your “hit by a bus folder” in your safety deposit box.

I’ll even go a step further… in today’s zero return cash environment you should not leave any substantial amount in a money market mutual fund, or uninsured deposit earning less than half a percent. You are taking some level of risk and are not being compensated for that risk. My bank will give you 1.75% for an FDIC insured 5-year CD. Felix’s credit union probably has a low but still positive and free of fees deposit product also federally insured via the NCUA.

If you’re scared stiff there are still options which make sense. A money market mutual fund, or deposits above the FDIC limits earning no return is not a wise investment decision in terms of risk and return.

Posted by y2kurtus | Report as abusive

The BofA fee is more likely desperation. They used to pay people (and merchants) to take debit cards because that reduced checks and checks cost a lot to process. They made a lot by reducing that cost. The new limit on debit fees is still a lot more than it costs to process, but now they need the money. At least BofA needs the money because they blew so much on bad trades and bad securitized lending and all that other stuff.

Posted by jomiku | Report as abusive

lambertstrether writes what most of us are thinking every day. As the technophiles praise each new gadget and breathlessly worship the idea of cash less card swipe / RF tag transactions they presume good faith and trustworthiness will keep fraud in check. Yet credit card fraud is, by all accounts, rampant. Hidden fees and identity theft extract even more “rent” from purchasing power. FS tells us that we should have to pay for using cash to pay for stuff. Say what… I should pay a fee to use money? Isn’t that why I pay taxes? And is it really cheaper to stamp out credit cards, manufacture mobile phones, and build secure wireless networks than print paper money and mint coins?

Posted by silliness | Report as abusive

Love your name, Lambert. I’m a Henry James character, too.
-John Marcher

Posted by Christofurio | Report as abusive

Why should I care how much it costs BofA to handle cash? F BofA. The sooner they go out of business the better off the rest of us are. Cash is good. I don’t want the banks to have a record of everything I buy, or get a fee off of every transaction. There is a public-interest argument in retaining cash, in that eliminating cash means eliminating the last shred of real financial privacy, ceding total control of every aspect of our financial activities to the banking system. Do you really want to do that?

Posted by Moopheus | Report as abusive

The report mentions the cost to the economy of using cash, but does not examine any ways this cost might be reduced. This makes me suspicious of the motives of the author and whoever owns his news company and pays his salary. What, no ideas at all about how to reduce this cost except by charging a transaction fee which is unlawful everywhere and I am sure illegal and unconstitutional in most places? Also there are a number of benefits to using cash that are easily quantified-eg that it allows transactions when the phone lines are down-and others far more important still that are less easily quantified-privacy, autonomy and security from a system that can otherwise “shut you down.” This report is really tramsparent. I bet you won’t even print this.

Posted by Yoinkalicious | Report as abusive

This argument is ridiculous. I’m perfectly happy with the security, ease, and cost.

It is infinitely faster to pay with cash than a debit or credit card, if you live in the real world where I live.

I’ve carried several hundred dollars all my life, and never been robbed. And so what if I was, I’d lose about $100 out of (I guestimate) $300,000 I’ve carried around in my life. Big deal. Each of my fricking credit card fees are higher than that every year. This guy is a buffoon.

Meanwhile Cheques and electronic transfers are NOT free, otherwise the @#$ banks wouldn’t charge me $1.50 for my 7th cheque each month, and $5-10 plus a 2% spread for a withdrawal in Europe that costs them nearly NOTHING. This guy is a buffoon.

What the heck is the issue with cash?!? What if I want out? Cash gives me the power to opt out of the bank cartel, which is important to me.

Posted by gunirok | Report as abusive

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