Geopolitics

The Problem With The 'Cash Is Dead' Argument

Cash use is declining, but don't expect it to disappear. Still, there is another popular payment method that could in fact go the way of the dodo, a Deutsche Bank strategist argues.

Contactless payment with a smarthpone
Contactless payment with a smarthpone
Marion Laboure

-Analysis-

PARIS — It's pretty common these days to hear about how cash has no future. But what happens to hard currency in the 2020s isn't really the issue. Cash will last. What's unclear, rather, is the future the bank card, and the effect that that could have on the payment industry, which has seen its earnings double over the past decade, representing approximately $2 billion dollars.

In order to understand why cash should persist more than cards, it's worth looking back at how payment systems dematerialized over time. Since the 17th century, money has been widely used in an increasingly urbanized environment, and characterized by increased trade. This transition took place during the "price revolution," a period of high inflation during which gold and silver from Latin America entered Europe via Spain in a considerable way.

Subsequently, the banks began to issue receipts, payable to the bearer of the document. Until the first half of the 19th century, many cities in the United Kingdom had their own banks, issuing their own banknotes. Then came the 1960s and the rise of international travel. Companies that were not originally in the financial sector began to issue travelers checks and credit cards. American Express was quickly followed by Diners Club. Demand for these credit cards increased even more when U.S. tax authorities (the IRS) began requesting details of taxpayer expenses.

In the United States, 16% of weekly store purchases are paid for without contact.

The discussion around the demise of cash is usually focused on the downward trend in usage. The momentum generated by dematerialized means of payment meant that cash lost its monopoly. Indeed, in developed countries, two-thirds of users now prefer paperless payment methods (no cash or checks).

In addition, in emerging countries, the decline in cash should be even faster because a large part of the population will go from using cash to making payments via smartphone. In India, cash transactions were almost halved, from 59% in 2000 to 30% in 2016. In China, cash was used for 63% of payments in 2000, but only 11% in 2016.

But in other countries, notably Japan, the United States, and the nations of Western Europe, the use of cash is still well-established. According to our study, covering a sample of more than 3,600 consumers, a third of the inhabitants of developed countries consider cash as their preferred means of payment and more than half think that it will always be present.

In Germany, almost 60% of spending in stores is made in cash and the Germans have, on average, approximately 52 euros in their pockets (the highest figure among developed economies). Overall, individuals pay in cash because they find their expenses easier to control, the transaction is quick and convenient, cash is accepted in all businesses (with no minimum purchase rules), and it's anonymous.

The future is not in the cards — Photo: frankieleon

In the United States, the world's largest economy, innovations concerning cards are finally taking off. Contactless payment technology, already widely available in many countries, is expanding. Two-fifths of Americans obtained their first contactless card in the past 12 months, and another fifth are about to receive them. Currently, 16% of weekly store purchases are paid for without contact, compared to 38% in the United Kingdom. Physical payments (cash and bank cards) are well established in American culture.

The main threat to the bank card comes from mobile payments. In 2004, smartphone payments emerged in China with Alipay. They are now the main means of payment. Their popularity is explained for several reasons.

First, the Chinese government has played a decisive role in building world-class infrastructure to support digitalization. As of 2013, China was the largest market for smartphones, e-commerce and online games, with more than 600 million users.

In addition, Chinese consumers quickly abandoned cash to convert to mobile payments, which they consider to be secure, convenient and reliable. Logically, merchants have thus turned to mobile payments as well. In fact, some stores only accept mobile payments, refusing cash. This abuse led the Central Bank of China to formally proclaim in 2018 that the Renminbi is the official currency and should not be refused.

The main threat to the bank card comes from mobile payments.

This trend is mainly found in Asia, where many consumers have gone directly from cash to mobile payment, without going through a bank card.

In Europe, mobile payment technology is more recent. Apple Pay launched it in 2014, while Google Pay and Samsung Pay entered the race in 2015. Currently, only 8% of consumers pay by mobile, but this figure is set to increase rapidly, for two main reasons.

First, consumers appreciate the convenience of mobile payment, its speed and the absence of fees. In fact, a third of users plan to use mobile payment in the next six months. Second, consumer preferences impact merchants. Their key argument for installing a mobile payment terminal is "to be in line with the customer's wishes." In addition, there's the convenience of not having to type a PIN code or give change, which can be significant psychological brakes.

In sum, the obsolescence of the bank card due to expanding smartphone payment is simply a matter of time. In developed economies, progress is made step by step depending on the infrastructure already in place. Meanwhile, fintech and smartphone manufacturers are rethinking the banking system and a real ecosystem is emerging.

Whether it is through the enthusiastic adoption of new technologies by millennials or the digitization of infrastructure, the plastic bank card as we know it today will disappear. And the people who pay in humble coins and banknotes? All the cashless society talk notwithstanding, expect a portion of them to stick to their ways. Old habits, as they say, die hard.


*The author is a strategist at Deutsche Bank.

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Geopolitics

Erdogan And Boris Johnson: A New Global Power Duo?

As Turkey fears the EU closing ranks over defense, Turkish President Erdogan is looking to Boris Johnson as a post-Brexit ally, especially as Angela Merkel steps aside. This could undermine the deal where Ankara limits refugee entry into Europe, and other dossiers too.

Johnson and Erdogan in NYC on Sept. 20

Carolina Drüten and Gregor Schwung

-Analysis-

BERLIN — According to the Elysée Palace, the French presidency "can't understand" why Turkey would overreact, since the defense pact that France recently signed in Paris with Greece is not aimed at Ankara. The agreement covers billions of euros' worth of military equipment, and the two countries have committed to come to each other's aid if they are attacked.

Although Paris denies this, it is difficult to see the agreement as anything other than a message, perhaps even a provocation, targeted at Turkey.

Officially, the Turkish government is unruffled, saying the pact doesn't represent a military threat. But the symbolism is clear: with the U.S., UK and Australia recently announcing the Aukus security pact, Ankara fears the EU may be closing ranks when it comes to all military issues.

What will Aukus mean for NATO?

Turkey has long felt left out in the cold, at odds with the European Union over a number of issues. Yet now President Recep Tayyip Erdogan is setting his sights on another country, which also wants to become more independent from Europe: the UK.

Europe's approach to security and defense is changing dramatically. Over the past few months, while the U.S. was negotiating the Aukus pact with Britain and Australia behind the EU's back, a submarine deal between Australia and France, which would have been worth billions, was scrapped.

The EU is happy to keep Erdogan waiting

Officially, Turkey is keeping its cards close to its chest. Addressing foreign journalists in Istanbul, Erdogan's chief advisor Ibrahim Kalin said the country was not involved in Aukus, but they hope it doesn't have a negative impact on NATO. However, the agreement will have a significant effect on Turkey.

"Before Aukus, the Turks thought that the U.S. would prevent the EU from adopting a defense policy that was independent of NATO," says Sinan Ülgen, an expert on Turkey at the Brussels think tank Carnegie Europe. "Now they are afraid that Washington may make concessions for France, which could change things."

Macron sees post-Merkel power vacuum

Turkey's concerns may well prove to be justified. Outgoing German Chancellor Angela Merkel always argued for closer collaboration with Turkey, partly because it is an important trading partner and partly because it has a direct influence on the influx of migrants from Asia and the Middle East to Europe.

Merkel consistently thwarted France's plans for a stricter approach from Brussels towards Turkey, and she never supported Emmanuel Macron's ideas about greater strategic autonomy for countries within the EU.

But now she that she's leaving office, Macron is keen to make the most of the power vacuum Merkel will leave behind. The prospect of France's growing influence is "not especially good news for Turkey," says Ian Lesser, vice president of the think tank German Marshall Fund.

Ankara fears the defense pact between France and Greece could be a sign of what is to come. According to a statement from the Turkish Foreign Ministry, the agreement is aimed "at NATO member Turkey" and is damaging to the alliance. Observers also assume the agreement means that France is supporting Greece's claims to certain territories in the Mediterranean which remain disputed under international law, with Turkey's own sovereignty claims.

Paris is a close ally of Athens. In the summer of 2020, Greece and Turkey were poised on the threshold of a military conflict in the eastern Mediterranean. Since then, Athens has ordered 24 Rafale fighter jets from France, and the new pact includes a deal for France to supply them with three frigates.

Photo of French President Emmanuel Macron and Greek Prime Minister Kyriakos Mitsotakis on September 27 in Paris

French President Emmanuel Macron and Greek Prime Minister Kyriakos Mitsotakis on September 27 in Paris

Sadak Souici/Le Pictorium Agency/ZUMA

Erdogan’s EU wish list

It's not the first time that Ankara has felt snubbed by the EU. Since Donald Trump left the White House, Turkey has been making a considerable effort to improve relations with Brussels. "The situation in the eastern Mediterranean is peaceful and the migrant problem is under control," says Kalin. Now it is "high time" that Europe does something for Turkey.

Erdogan's wish list is extensive: making it easier for Turks to get EU visas, renegotiating the refugee deal, making more funds available to Turkey as it continues the process of joining the EU, and moderniszing the customs union. But there is no movement on any of these issues in Brussels. They're happy to keep Erdogan waiting.

Britain consistently supported Turkey's ambition to join the EU

Now he is starting to look elsewhere. At the UN summit in September, Erdogan had a meeting with British Prime Minister Boris Johnson at the recently opened Turkish House in New York. Kalin says it was a "very good meeting" and that the two countries are "closely allied strategic partners." He says they plan to work together more closely on trade, but with a particular focus on defense.

 Turkey's second largest export market

The groundwork for collaboration was already in place. Britain consistently supported Turkey's ambition to join the EU, and gave an ultimate proof of friendship after the failed coup in 2016. Unlike other European capitals, London reacted quickly, calling the coup an "attack on Turkish democracy," and its government has generally held back in its criticism of Turkey.

At the end of last year, Johnson and Erdogan signed a new free trade agreement, which will govern commerce between the two countries post-Brexit. Erdogan has called it "the most important treaty for Turkey since the customs agreement with the EU in 1995."

After Germany, Britain is Turkey's second largest export market. "Turkey now has the opportunity to build a new partnership with the United Kingdom and it must make the most of it," says economist Ali Kücükcolak from the Istanbul Commerce University.

Erdogan is well aware of this, as Turkey is in desperate need of an economic boost. Inflation currently stands at 19%, and the currency's value is consistently falling. Turks are feeling the impact on their daily lives: food and rent are becoming increasingly expensive, while salaries remain unchanged.

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