Abolishing cash will not solve problems of weak growth

At this year’s Bundesbank symposium on payments, Bundesbank President Jens Weidmann came out clearly against the idea of abolishing cash. He rejected the claims made by critics of cash that abolishing it would be a way of intensifying the effects of negative interest rates. Their line of reasoning is based on the idea that savers withdraw money from their accounts and hold cash instead in order to avoid negative interest rates on their deposits. Without cash, the argument goes, consumers would not hang on to their money but would invest and consume instead, thus stimulating the economy. The Bundesbank President noted, in front of an audience of 250 representatives of the financial and banking industry, that this debate was entirely missing the point.

Instead of performing acrobatic feats of daring-do in wanting to abolish cash, Weidmann noted, the answer lay more in addressing weak growth in the euro-area countries, adding that the sluggish outlook for growth afflicting many economies was one of the key causes of the current low-interest-rate environment. Demographic change, high government debt and the attendant high burden of taxes and levies are, in Weidmann’s opinion, among the causes of this weak growth and will present an enormous challenge to economies, now and in the future, along with private debt in many countries. In addition, Weidmann added, it was by no means certain that a moderate negative interest rate would necessarily lead to a "flight to cash."

"Everyone should be able to pay as they wish"

The Bundesbank President sees another reason against abolishing cash. "Everyone should be able to pay as they wish – by cash or other means," he said. He observed that coins and notes were still a popular means of payment among the general public. A recent Bundesbank study shows that, in 2014, cash was still used to pay for more than half of all sales of goods and services (53%) in Germany; the Girocard was used for pay for 29% of sales, with credit transfers accounting for 5%, consumers pulling out their credit cards for 4%, and direct debits being used for 3% of payments.

Ensuring security without suppressing innovation

Weidmann explained that communication was being driven today by the internet, social media and smartphones, and that the rapid growth of communication technology had also changed many of the workings of the economy and society. He noted that "even so, up to now this development has had scarcely any impact on payments in Germany". However, he added, there was a perceptibly increasing dynamism in the traditionally conservative German market for payment services. Mobile telephones with greater processing power were now permitting contactless payments at participating retail outlets. These new developments were being fostered by a new generation of consumers for whom having a smartphone as their constant companion was a matter of course.

Competition from non-banks

Looking at new trends in payments, Bundesbank Executive Board member Carl-Ludwig Thiele, in his remarks, alerted the representatives of the banking industry to competition from non-banks. As a case in point, many non-bank sellers had now begun to develop their own payment apps. "The banks know this much: those who do not go with the times will sooner or later be gone for good," Thiele said. He emphasised that, when such new services were being used, payments were still being settled through bank accounts. "Even Apple Pay, PayPal etc ultimately have to receive payment from a customer’s account," he noted. Weidmann highlighted the importance of ensuring that these new payment methods had the necessary degree of security without suppressing competition and innovation in payments.

At the symposium, the experts also discussed TARGET2-Securities (T2S), the new Eurosystem-operated platform for the harmonised and centralised settlement of securities in central bank money. One of the main purposes of T2S was to improve the cross-border settlement of payments in central bank money. It was noted that the European settlement market currently is predominantly national in character and therefore highly fragmented. T2S is scheduled to go live on 22 June.