The Strategist

Standing in Awe of Cash

08/10/2015 - 15:19

Will cash disappear from our everyday life? Many are heralding the coming triumph of the latest technology, firmly believing in it. But as turned correspondent BBC Future it out, the real situation is much more complicated.
Of course, it is hard keep oneself from foretelling the imminent decline of cash. And so do people – they are predicting the disappearance of money in physical form for the past 60 years.

With the advent of credit bank cards, contactless payments, and crypto-currency like Bitcoin, knell for cash sounds louder.

It may seem that cash will soon depart to the traditions of antiquity, but if you look closely to the obvious - those almost intimate psychological relations that bind us to the banknotes and coins - you will find that the predictions of fast cash is somewhat premature extinction.

Natural, 'real' money have accompanied people for thousands of years, and there is a good reason for this. Cash is almost impossible to track, easy to carry, can be taken everywhere, and they are reliable.

Now, an alternative payment system, which would be just as convenient, secure and anonymous, simply does not exist. Crypto-currency Bitcoin is anonymous, but it is too unstable and uncomfortable. Systems of mobile payments between individuals, such as PayPal or Venmo, are demanding applications and accounts, and they are still easy to track.

Moreover, the global reliability issue is important too. For example, two thirds of the savings in dollars are kept abroad. People roll their cash in the capsule in case of emergency, keep them as insurance and make sure that darling bundle of cash was always at their disposal under any surprises.

So far, modern technological civilization have failed all the attempts to develop a system which would have all the properties of cash. That is why, as the statistics of the use of cash around the world shows, paper money and coins feel not bad at all.

Difficulties account

It is very difficult to express in specific figures the amount of cash, used every day worldwide. One of the key properties of cash is that they are difficult to trace. However, the existing data allow us to get some idea.

The first method for assessing the amount of cash is to count up how many of them is in circulation. From this point of view, cash is far away from disappearing.

Cash turnover in the United States increased from 2007 to 2012 by 42%. As expected, the bulk of US money in circulation in banknotes and coins will grow by 5% annually.

The average growth of the global amount will be 7% a year, according to Eric Ziegler, president of developer security technology Security Technologies Group company Crane Currency, issuing banknotes.

This, however, is not the same amount of money passing from hand to hand during the daily transactions. “No one can get inside any economy, to count the number of notes and assess the value of these banknotes - says Daniel Wilson, an economist at the Federal Reserve Bank in San Francisco. - We cannot exactly say how many transactions occur in cash every single day.”

In order to get an idea of the movement of money, economists have developed special models and conducted targeted research.

Some countries carried out so-called "diary studies", where respondents were asked to record the daily value of transactions made with cash and non-cash money. It was found that in seven countries - Australia, Austria, Canada, France, Germany, the Netherlands and the United States - from 46 to 82% of payments in 2012 were made in cash.

Even those countries that are often perceived as the leaders of the crusade for non-cash payments, such as Denmark and Sweden, do not really get rid of the banknotes and coins.

In June this year, the media were full of headlines proclaimed that Denmark will get rid of cash in 2016. "Burn your bills: Denmark will be cashless by 2016" - says one of them.

Nothing like this is not in sight, says Rene Thomsen, manager of the Danish Bankers Association. "In my opinion, there was a certain lack of understanding of the true meaning of the Danish proposal", - he said.

Denmark, he explained, has a rule, according to which all shops are required to take cash. The new offer will allow some shops to circumvent this. That is all.

- I would be very surprised if we do not have cash in 10-15 years - said Thomsen. - It is difficult to imagine that in the next 10-15 years, it will be impossible to come to the bank and say, "I would like to get a thousand dollars. Cash, please. "

Irrational Bond

Stickiness to cash, apparently, has something to do with our relationship with the mysterious bills and coins. Like most of our decisions and preferences, our affinity with cash is not entirely rational.
People estimate the cash not the same way as electronic, even when the value of both is the same.

Psychologist Eric Uhlmann from the Paris School of Management conducted several experiments to ascertain to what extent feelings, that people experience with different kinds of money, are distinct.

Ullman has checked the validity of his ideas in public, inviting participants to analyze the experience of a set of multiple scenarios.

One of them, the participants were told the story of Ted and Donna. Forty years ago, the story goes, the great-grandfather Ted stole a thousand dollars from the great-grandfather of Donna. Ted subsequently inherited money.

According to one scenario, Ted inherited natural money - wad of bills in a box, which gave him great-grandfather. In another embodiment, the great-grandfather put money in the bank at Ted’s account. When Donna learned Ted owned the money, she asked him to return them.

Then the participants were asked whether Ted will return the money to Donna. Those who have heard the story of the natural money, according to which Ted was a box with banknotes, inclined to say that he should give the cash to Donna.

Participants, who were told the story with money-in-the-bank part, felt that he had "not quite the same" money that was stolen. They were less likely to seek the return of money from Ted.

This way of thinking has to do with not only dollars in the box, but also affects more general questions, like theft and justice.

Another researcher found that people are not as negative about "white collar" crimes (money laundering, fraud, forgery, electronic and computer fraud), that is, when we are not talking about the theft of material objects.

At the same time, "blue-collar" crimes (the "common" crime), in particular, the theft of material things, are perceived less favorably.

Other studies have found that people are more likely to embark on cheating when they cheat with money substitutes - tokens and chips, etc., than when doing a fraud with real money. If you leave unattended a can of Coke, it will be stolen rather than a forgotten dollar.

Of course, there are limits. "If your bank withdraw money from your account, you still feel that you have been robbed," - says Ullman. However, when the two amounts are the same, there is an obvious difference in the feelings that we experience in relation to real money and their digital surrogates.

"This reveals something very interesting in the human mind - he says - and the difficulties that we are experiencing, in spite of our logical constructions."

Mobile call

While talks about the technology of the future shortsightedly focus on America and Europe, most advanced innovations in the field of money are committed not there. In some developing countries, cash is being rapidly supplanted by digital payments via mobile phones.

If you are in the United States and in 2025 will likely be able to buy coffee for cash, this operation has the potential to be impossible in Kenya by this time. In 2007, the Kenyans started to move to the mobile payment system called M-Pesa. Today it covers 17 million of Kenyans or more than two-thirds of the adult population.

Members replenish their accounts and transfer money by sending text messages. Recipients with their phones go to merchants and money changers to get the money. All is done without banks participation.

"Kenya provides mobile payments better than anyone else - says Benjamin Mazzotta, an expert on the use of cash from Tufts University in Massachusetts. - With M-Pesa, it is possible not only to carry out large payments, but also to pay for food, clothing and school fees. Today, you can perform many things that may seem like a fairy tale five or 10 years ago".

Perhaps, a system similar to M-Pesa will be difficult to settle down in places like the US or Europe. The success of this technology owes to the fact that the system was implemented by Safaricom, the country's largest cellular operator, way ahead of all the others. Competition is more acute in other countries.

If each operator will conceive implement their own system of mobile payments, it can be very inconvenient and faulty transactions process.

Take, for example, a system of Apple Pay. Apple has bumped into one obstacle after another, trying to achieve the implementation of their payment systems, both in the US and in other places. Apple led a hard struggle to make a deal in China, where one single company controls all transactions between banks.

We should not forget that the M-Pesa is a system designed to move cash from one place to another, but not to eliminate natural money. Members continue to hand cash to retail M-Pesa agents to replenish the accounts and also receive money from other senders.

Try as they might, the adepts of the new technologies cannot globally replace the use of cash with transactions and digital Bitcoin. The truth is much more complicated, and the difficulties cannot be overcome solely by technological means.

Our psychological attachment to money, banks infrastructure, the need to create systems that are compatible with the army of retailers and users of services - all this makes the process of withdrawal of cash a marathon rather than a sprint spurt.

original by Rose Eveleth, BBC Future

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