Why Banks Must Be Ready for a ‘Less-Cash’ (But Not Cashless) Future

The pandemic accelerated the dethroning of cash in favor of cards, contactless and digital payments. But while cash may not be king anymore, Fed data shows it is far from dead. Financial institutions will have to maintain their cash operations as long as people value its convenience, security, and familiarity (and, in some locales, because it's required).

Digital payments giant Square is one of the main drivers on the road to a cashless society. A report it issued in mid 2020 contains an anecdote that puts a very human exclamation point on the decline of cash during the pandemic.

The Square report cites the case of Kelly Deem, owner of Elsie Mae’s Canning and Pies in Kenosha, Wis. “Asked in 2019 what she thought of the notion of a `cashless society,’” the report says, “Kelly Deem laughed and bluntly declared she’d never heard of the concept. Today the bakery owner is facing an entirely new reality.”

Her company radically changed gears as the pandemic took hold and began offering a full slate of grocery items. More to the point: “These days, cash is super-rare. We used to be a 70% cash business, and now it’s about 10% cash…and I don’t think we are ever going to see it return to the way it was before.”

You’d think that a story like that confirms that the end is near for the familiar greenback. You’d be wrong. The story of cash is still being written and in a surprise post-pandemic chapter, cash use is actually rising again in the U.S. and elsewhere.

Cash Use Has Declined for Years

There’s plenty of evidence that consumer displacement of cash for other payment forms was well underway before the pandemic. A 2017 survey by U.S. Bank found that 47% of consumers preferred the use of digital apps to make payments versus 45% who preferred cash. Two years later, a survey by GOBankingRates found that just 37% preferred cash rather than credit and debit cards.

Zelle, the person-to-person digital payment system, reported 426 million transactions in the second half of 2019, rising to 519 million transactions in the first half of 2020. Arch rival P2P player Venmo processed $159 billion in total payment volume in 2020, a 59% year-on-year increase. Many P2P transactions replace cash. And FIS reports that cash payments in the U.S. made up $1 trillion of in-store payments in 2020, down from $1.4 trillion in 2019.

The Square report cited above quotes Shelle Santana, assistant professor of business administration at Harvard Business School: “Consumers are clearly accelerating their adoption of digital payments for lower-dollar transactions. For many, the social-distancing requirements of Covid forced them to adopt digital payments perhaps sooner than they would have, and those who found the process safer, more secure, and easier than they expected will likely stick with it.”

( Read More: Four Trends That Will Finally Make Cashless a Reality )

Bank Note Circulation Jumps

Given all the above, how, then, to reconcile the fact that, according to the Federal Reserve, the aggregate number of U.S. bank notes in circulation surged by five billion from 2019 to 2020?

Every denomination from $1 bills to $100 bills increased in number markedly, reaching more than 50 billion individual notes in 2020. Put into perspective, in prior years, while gains were seen each year since 2000, the leap from year to year was around one billion or less.

Nor was the trend unique to “cash loving Americans.” The Bank of Canada (the country’s central bank) reports that cash in circulation in Canada jumped from $83 billion before the pandemic to more than $96 billion in September 2020, according to the Financial Post.

Quoting a Bank of Canada report, the May 2021 article states that “’Cash outstanding in Canada increased sharply from March through September 2020, and the pandemic significantly increased the demand for bank notes,’ a trend also seen in Australia, Germany, New Zealand, the U.K. and U.S.”

And in Europe, “circulation of euro banknotes surged 12% over the past year, the highest growth rate in a decade and more than double the growth rate of 2019,” says the Financial Post, quoting from a Deutsche Bank report.

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It is possible that much of the economic stimulus funds disbursed by government agencies through the pandemic may have been converted to cash. And that cash may well have sat in vaults (or mattresses), since people weren’t using it in stores once the lockdowns settled in, and as fears of catching Covid from cash spread for a time in some parts of the world. But while less-used, cash didn’t go away. In fact, a 2021 survey of U.K. consumers by Marqeta found that 80% of Gen Z still use cash on a weekly basis.

A GOBankingRates consumer survey came to these conclusions, which gives some insight into the matter:

  • Paying with cash allows people to stay within budget and avoid debt. 39% of respondents said it helps avoid overspending.
  • Cash is safer, helping to protect people against fraud. 34% said it’s the safest method of payment.
  • It’s more convenient than other payment methods. 33% said cash is accepted at most places and vendors.
  • Very few respondents (4%) would use mobile payment apps and services. Apps like Zelle can be convenient in certain situations, but as an everyday option, respondents would rather stick to more traditional and widely accepted payment methods.

It’s true this GOBankingRates survey was conducted pre-pandemic, so that the perceived health risk of handling cash likely reduced some of these figures and led to higher digital payment use. Yet the results still suggest there are underlying factors supporting continued use of cash.

( Read More: 7 Major Payment Trends that Will Shake Up Banking in the Year Ahead )

Accept Cash, Or Else

Digging deeper, the survey found that 25% of cash users and 32% of debit card users live paycheck to paycheck, compared with 16% of credit card users. An essay by the law firm Davis Wright Tremaine LLP makes the point that cashless payment systems tend to exclude those who lack access to traditional financial institutions.


“On the moral end of the spectrum there is concern for the unbanked and underbanked,” says Rich Zukowsky, associate at the firm. “30% of the United States households fall within this category, inclusive of over 14 million unbanked adults and 48.9 million underbanked adults.”

Citing such circumstances, New Jersey and Massachusetts have laws requiring merchants to accept cash, as do the cities of San Francisco and Philadelphia. “The sponsors of these proposals, when introducing their bills to the public, have tended to focus on the need for an accessible and inclusive financial community,” says Zukowsky.

( Read More: Will Cash Wither Once Central Banks Support Cryptocurrencies? )

Not Cashless For Now But ‘Less Cash’

While a cashless society (or more likely, cashless segments of society) probably lies somewhere in the future, nearer at hand looms a less-cash environment.

“Globally, the pandemic saw cash usage drop by around 6% and we expect that trend to continue and then accelerate as tokenized central bank digital currencies become available as cash substitutes,” states an analysis by Accenture. “In the U.S. alone, $4-5 trillion of cash transactions will migrate to some form of digital payment over the next decade.”

Security issues will come to the fore. “Many financial entities are moving over to the cloud in a bid to beef up security,” says a trends analysis by software engineering company DataArt. “While still a new option, cloud services have proved to offer robust security which makes it possible for payment processors to get the green light from [regulators].”

Add to this the rapid adoption of real-time payments. “The tremendous changes taking place in RTP systems are rooted in the proliferation of smartphones, P2P apps, social pay, digital currencies, biometrics, and real-time settlement systems,” DataArt says.

At the risk of being stating the obvious, while banks and credit unions clearly need to embrace a digital banking and payments future, they can’t simply walk away from the reality of the present — in this instance cold, hard cash.

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