Coronavirus is disrupting our lives in unexpected ways. The payments industry, the basis for all economic activities, is one of the first to see an impact. There are three major areas in payments where a change is already taking place: the reduction in use of physical payment media, the shift towards virtual delivery of content and services and the potential for economic slowdown necessitating effective monetary policy measures. All three have a clear potential to drastically and rapidly reduce the use of cash, amid already widely voiced concerns of continuing cash decline.
Safety of physical cash
It was reported recently that the World Health Organisation (WHO) is advising against using physical banknotes and coins, due to the coronavirus surviving on hard surfaces for up to nine days. Since then WHO issued a statement that they have not advocated avoiding cash but rather suggested that contactless payments may be ‘a good idea’, and the risk posed by handling a banknote is no greater than touching any other common surface, such as handrails, doorknobs or credit cards.
Yet the statement about the virus surviving on surfaces for days still stands, making their advice about cash somewhat ambiguous.
According to the US Centers for Disease Control, ‘it may be possible that a person can get COVID-19 by touching a surface or object that has the virus on it and then touching their own mouth, nose, or possibly their eyes, but this is not thought to be the main way the virus spreads.’
In the meantime, a number of governments, including China, South Korea, US, Iran and Thailand, have implemented a series of measures to ensure cleanliness of circulating currency, ranging from quarantining it for a period of time before recirculation, using heat to kill the virus or destroying all returned currency and replacing it with newly printed notes. There is no evidence to suggest that either quarantining or heat treatment is protective against the spread of the disease. Currency printers may see an uplift in orders as more banknotes are destroyed, while polymer banknote users will have to think of methods other than heat to disinfect their currency, should such measures be found necessary and effective. Cash may suddenly become considerably more expensive.
Not enough is known about how the COVID-19 virus survives on different surfaces, but it’s not just cash payments that potentially carry a risk. Using PIN keypads for card payments might be an even more direct way of transmitting the virus. Contactless payments obviously reduce some of that risk, although their practical use is limited by the amount threshold set by financial institutions, which is often too low for a typical purchase (around €15-30 in most European countries, albeit that the level is likely to rise to promote their use).
It is doubtful that the undetermined potential risk will change our use of cash overnight, but it certainly does not help promote the use of this already endangered payment method.
As public events are cancelled, postponed and discouraged, more and more services, from education to gym membership, are hurriedly transitioning into virtual delivery channels. We are advised, or (increasingy) required to work from home, limit social gatherings and have groceries delivered. All this adds to the shift from physical to digital payment methods, another blow to the prospects of cash as a going concern.
While we live in hope that an outing with friends is not something we’ll have to avoid for too long, other virtual activities may find its audience and stay with us even when the crisis is over. There is vast potential for a permanent behavioural change and the emergence of new types of non-contact, on-demand services that may be found more convenient and accessible than the traditional services they replace.
While this shift from physical to digital has been taking place for a long time, the restrictions caused by the outbreak of the coronavirus could greatly expedite this transition, which may now happen out of necessity rather than by choice. And cash is likely to become an obvious casualty in this transition.
Response of central banks
The unprecedented spread of COVID-19 is having a major impact on the global economy, with governments and central banks intervening to an unprecedented extent.
The Bank of England, the Federal Reserve and a number of other central banks have already made emergency interest rate cuts, resulting in zero or near-zero rates. Japan and the European central banks may not be able to match it without going into the negative interest rates territory. And cash is one thing which by its mere existence prevents deeply negative interest rates. If depositors have to pay banks for keeping their money, they have a costless alternative to keep excess liquidity in cash instead. Thus, the central banks have very limited means of responding to economic downturn while a non-interest-bearing instrument such as cash exists.
The efforts towards development of retail central bank digital currencies (CBDC) in many countries have progressed sufficiently to make it a reality at short notice. While some countries, eg. Canada, stated before the outbreak that there is ‘no compelling case’ to issue a CBDC at this time, it could now be reviewed if it becomes necessary to provide the public with a digital alternative to cash earlier than it may have otherwise occurred.
Lihui Li, a former president of the state-owned Bank of China, recently argued that in light of the epidemic, China’s central bank should speed the release of its planned digital currency, which is supposed to replace physical cash.
It would be interesting to see which route the central banks choose: to eliminate cash in order to have more leeway over interest rates in responding to the economic downturn, to accelerate development of CBDCs but still maintain cash for those who need it, or to maintain the existing payment instruments and attempt to influence the economy by other methods available to them. If the latest UK budget is any indication of the government’s intentions, it seems that elimination of cash is not in the immediate plans, as the Chancellor confirmed that legislation will be brought forward to protect access to cash for those who need it.
If we were thinking that the world of payments was changing at a breath-taking speed before the news of the coronavirus, the changes we see now are just extraordinary, and there will be more unexpected ways we will feel the effect of these events on payments. As is the case with any rapidly developing situation, watch this space.