The Freedom of Paying with Cash

Headlines last spring heralded the demise of paper money and coins. “COVID kills cash,” proclaimed more than one newspaper and magazine. Fear of contracting the virus from banknotes, the line of reasoning went, would prompt many people to switch to digital alternatives. Are the days of paper money and coins truly numbered? The clear-cut answer is: yes and no.

Automated teller machines (ATMs) in Switzerland are a good starting point for gauging usage of paper money during the pandemic. In July and August, the number of ATM withdrawals was only 10% to 15% below the level registered during the months before the lockdown (see chart above). This equates to a seasonally adjusted 80% of the prior year’s monthly levels.

Demand for paper money thus plunged only briefly. How is that possible? In the age of COVID-19, bank teller windows are not a preferred channel for cash transactions. Many people have switched to ATMs. Alexander Verbeck, Head Cash Ecosystem at SIX, cites an even more important reason: “In uncertain times and when bank accounts are yielding little to no interest, physical cash is increasingly being turned to as a store of value.”

Consistent with this observation, the amount of money per withdrawal increased during the lockdown. “When people visited ATMs during the first stage of restrictions,” Verbeck explains, “they withdrew up to five times more cash than they did per ATM withdrawal at the start of 2020.” And high-denomination banknotes “almost always get stuffed under the proverbial mattress,” he says. Studies verify a hoarding ratio of 80% for the thousand-franc bill, the world’s most valuable banknote. “People use it almost like gold,” Verbeck adds.

He himself carries just 20 francs and 10 euros in his wallet, and those banknotes “have surely been there for half a year now.” The Head Cash Ecosystem at SIX uses cashless payment solutions whenever possible. He is confident, though, that cash will stick around – forever. “We like to pay tips personally, that’s deeply embedded in our culture. And, more importantly, debt counselors advise people who have trouble handling money to refrain from using plastic money as much as possible and to only withdraw as much cash as they need at the moment. We can’t declare a cashless society at the expense of those people.”

US psychologists proved in 1998 that an actual “pain of paying” occurs in the act of making purchases with physical cash, which activates the same regions of the brain associated with processing affective pain or revulsion. Later studies showed that this effect is absent or much less pronounced in the act of paying with a credit card or a smartphone. There are thus two sides to the coin in the truest sense of the expression.

However, it is undisputed that the pandemic has accelerated the rollout of cashless payment technologies. Verbeck expects that the volume of physical cash payments in Switzerland will decrease to around only 30% to 50% of today’s level by 2025 and refers to the white paper from SIX titled Future of Money (see top right). He says that’s slightly above the current level in Sweden, the world’s trailblazer toward a cashless society, where even beggars use digital devices to take handouts.

The trend corroborates Verbeck’s view. In the early 1990s, consumers in Switzerland were still making 90% of their store purchases in cash. After the lockdown, Migros, the largest retailer in Switzerland, reported that for the first time ever, over half of all shopping purchases were paid for digitally.

One could argue for a long time about pros and cons of physical money, but one disadvantage is beyond dispute: It’s expensive – very expensive. Procuring and maintaining ATMs, transporting money to and from retailers, central money collection points, vaults in bank branches, and sophisticated physical and electronic security concepts all cost a lot of money. It is estimated that it costs well over CHF 2 billion per year to manage the physical cash system in Switzerland. Verbeck agrees that “the cash ecosystem urgently needs to become more efficient, starting with ATMs, around half of which can’t be operated profitably.”

Here’s where ATMfutura comes in: The collaborative project that banks commissioned SIX to carry out has standardized equipment and software, pooled procurement, and centralized operational functions. The uniform cost conditions for all banks especially enable small banks to save a lot of money. “Since the completion of the project at the end of September 2020, all ATMs whose processes are handled by SIX have been migrated,” Verbeck says. “That’s a good 85% of all ATMs in Switzerland.” cash

The vaults and the sophisticated physical and electronic security concepts mentioned above make manned teller windows a cost driver for banks. They are increasingly eschewing teller windows and are instead setting up cashless branches configured as cafés and focused on advisory services.

If a client does happen to want to withdraw money, coming full circle, the customer is directed to the ATM, where he or she then uses a QR code, printed or on a smartphone, to get cash without a PIN or a bank card. There is another extra benefit. As Verbeck asks: “Who robs a bank that only serves coffee?”