RBS is to start charging some large corporate customers to hold their cash. We may be seeing the beginning of the end of physical cash – notes and coins.
What do you do when interest rates are negative? Ever since it has existed as an academic discipline, economic theory has assumed people will just stop using banks. So if your bank charges you for a deposit account, you won’t let it have your money, you will instead tuck your cash under your mattress, bury it in a hole in the ground, or maybe you will carry it around in a suitcase.
Oddly enough, this does not seem to be happening. Interest rates are negative in many parts of the world, indeed across the world no less than $11.7 trillion is tied up in bonds that return negative yields. RBS may be threatening to charge some of its corporate account holders for minding their money, but there is no sign of any mass exodus – yet.
Perhaps economic theory is wrong, or perhaps it is partially wrong. It is possible customers are willing to tolerate mildly negative interest rates, but that there is a limit, and if rates fall much further we will indeed see a mass exodus from banks.
There are three ways this can go, or possibly a combination.
Scenario one: people will start looking for an alternative to cash, one that does not involve banks. So maybe people will turn to independent currencies, such as bitcoins. Or maybe they will start making transactions in diamonds. Seeing as the UK is winning so many medals at the Olympics these days, maybe they can act as the bases of a modern UK currency: with gold medal worth four year’s hard work, a silver worth two and a bronze worth one: and then people can start independently issuing paper worth a fraction of an Olympic Medal – (I am being a tad facetious.)
Scenario two: central banks, in an effort to ensure that they can charge interest rates as low as they like, may force the issue and introduce a blockchain currency that has to be stored electronically. The Bank of England’s chief economist, Andrew Haldane, has often suggested such a scenario is possible. If this were to happen, it is possible that retail banks would be squeezed out of the money chain, central banks would distribute emoney, and algorithms would do all the background work, leaving no role for retail banks in the process.
Scenario three: interest rates start to go up, making the issue somewhat redundant. Interest rates may rise if there is a change in the dynamics of global savings, output and investment. At the moment, global planned savings are high, meaning money sloshes around the global banking system, pushing down on interest rates, but also meaning that global production is below capacity. This could change if baby boomers around the world start saving less and spend more once they retire, if China does what it says it wants to do, and manages to get its savings ratio down, and consumption ratio up. Or if we see a change in the relationship between corporate profits and wages. Maybe technology will lower barriers to entry, creating more competition, releasing money into the labour market.
But it may be worth considering the pros and cons of emoney. Forget about negative interest rates, if the advantages of emoney outweigh the disadvantages, then it will evolve to make hard cash obsolete, anyway.
And to consider how this may go, take a look at Sweden. In the land that gave us Ikea, and Abba, cash point machines were introduced before anywhere else. But now the country is appearing to be moving towards emoney, adopting a system called Swish. The amount of cash in circulation in Sweden has dropped by around 50% in the last half decade or so.
Or consider some of the costs of cash. According to McKinsey, cash reduces economic output. It does this for several reasons, but the two main ones are: Firstly: it makes banking less efficient – for example, in Russian banking, cash transactions make-up a much higher proportion of banking business than in the US, and this apparently explains around 30% of the productivity gap between the highly efficient US banking system and the inefficient Russian system. Secondly, cash supports a shadow economy.
Let me end with one big advantage of emoney and one big disadvantage.
The advantage: it may just become easier. Do you remember what it was like queuing in a supermarket, when the person in front paid by cheque? It seemed to put an age on the time you spent queuing. Paying by cheque went out of fashion, there was no act of parliament, retailers did not suddenly ban cheques overnight. Instead, customers stopped demanding cheque books and then we saw some retailers introduce rules to say that they wouldn’t take cheques. The point is, the change was led by the customer. Think how much easier emoney is becoming, with products such as Apple Pay. How much easier will it become when we all have smart watches or even smart tattoos, and paying just involves touching our wrist. There may be a security advantage too, as payment by smart phone often requires finger print recognition and generates a unique, one-off, number. So unlike with the system we have today, there is no advantage to criminals is finding your PIN number.
The disadvantage, however, may relate to a bigger risk of fraud, as computer hackers try to hack into computer systems and steal remotely. Imagine what might happen when we have quantum computers, which, with their fantastically fast pace at searching numbers, will apparently be able to hack into anything. Maybe old fashioned cash will be the only thing that quantum computers can’t cheat.
