Over the past couple of days the Australian Treasury has moved toward two significant policy shifts in the cash and payments landscape. The first, officially announced move is a consultation to mandate cash acceptance by retailers – at least covering groceries and fuel, but with an as-yet undetermined reach. The second, now widely reported through industry sources, is a proposed levy on banks to support regional branch and ATM banking. These moves are the latest in a tumultuous year for participants in the cash ecosystem. If either, let alone both, become implemented policy, they will have a material effect on the way that cash is managed, and will be significant planks for the path forward in what is often seen as a declining payment instrument.
The long tail of cash
Predictions of the end of cash have been made for decades. This includes current commentators continually revising their predictions (for example, here and here). Perhaps a 100% cashless society will happen in the future, but there is enough data[1] to suggest that we are much more likely to have a long tail of low-cash usage, rather than a rapid change to complete cashlessness.
What does this mean? It means that somehow, as a society, we need to make a number of big decisions:
- Do we want to force cashlessness onto society? It is not happening naturally or even with nudges from competitors to cash or cashless advocates. If it is to come about on any foreseeable timeline, it must be forced through structural change and government policy
- If not, then how should the cash system operate in an optimal manner to reduce the cost of the system and therefore the societal cost (more on why it is a societal cost later)
- While it will ultimately be a societal cost, who should be responsible for managing that cost
The policy shifts that have just been made give the government’s answers to these questions:
- No, we don’t want to force cashlessness and in contrast we want to provide policy support for ongoing cash usage
- Industry needs to work out the solution
- Responsibility for managing the cost of cash sits with the banking industry and bricks and mortar retailers, skewing heavily toward the major grocery groups
Effects of the policy shifts
While there is little detail known for either policy, it is quite easy to see what they are intended to do as a first-level effect: support the availability of physical banking (particularly cash banking) in regional communities, and support the ability of consumers to use cash for basic goods and services. Any policy intervention will have effects well beyond their primary objective – that’s the nature of intervention. Some effects will be good, some won’t be. To prompt discussion, we have flagged a partial list of knock-on effects of these policies:
- The cost effect on banks and retailers. These policies will clearly impose a direct cost on banks and retailers, and will limit their ability to reduce costs over time.
- The availability effect. The availability of bank branches, ATMs, and retailers who must accept cash will support and potentially improve the availability of cash access and usage. The bank branch levy will support small retail acceptance of cash, as small retail typically relies on bank branches for the cash management rather than outsourced cash logistics providers.
- A clear push of obligations and responsibilities onto banks and retailers. This is an easy path for government to take – pushing the cost onto organisations that are (rightly or wrongly) targets of successive governments. We believe more consideration is needed, including answering some of the issues we raise here, before getting to a landed position on obligations and responsibilities
- A misalignment of incentives and penalties. From reporting so far, the levy will be determined by household deposits relative to regional physical presence (branches and ATMs). The nuance of regional vs metro customers does not appear to be recognised, and the need for multibank “utility” style networks does not appear to be incentivised. These and other distortions have the potential to do damage to creating a more efficient cash system
- Regional branch banking is supported, city banking is not. We are strong supporters of the need for regional banking. The needs are different to the cities, the economics are more challenging, and banking is absolutely essential in regional communities. However, the bulk of physical and economic activity in the cash system is in the cities. There is a risk that banks keep open or even open new regional branches due to the mechanics of the levy, and then close city branches to manage the overall branch cost base. At scale, this will be problematic for cash usage as a whole and could ultimately be damaging for regional banking
- “Digital banks” will have a role to play in supporting physical banking and cash. This is already a point of contention (as reported here and here). By and large, we believe that if the policy setting is that the banking industry carries direct cost responsibility for the cash system, then it should be all banks in a proportionate manner, not just those who have historically had physical networks. There is an argument around what metric should determine the proportionality (for example, lending balances may be more appropriate than deposits), but if the banking industry is responsible for cash, then it should be the whole industry. Of course, digital banks should also receive the benefit of their contribution through services to their customers
- Understanding who uses and needs physical banking and cash acceptance is not straightforward, and actual needs may get lost due to misaligned incentives and penalties. This is the most fundamental thing that needs to be understood for any policy settings, particularly where support for the cash system has reducing commercial attractiveness for banks and retailers. It is in answering the “who” and the “what” that we can then chart a course to the how around provision of services and responsibility for costs
- A potential diversion of resources back to cash which were removed. Most banks and retailers have diverted resources (spending, people, knowledge) away from cash to digital channels over the past decade. The new policy settings will force a reversal of this, as banks and retailers work through how to most effectively manage their obligations in a way that is – rightly – optimal for them. We have already seen this in the recent RBA-ABA-major customer-Armaguard ‘cash risis,’ where an inordinate amount of time, attention and money have been invested in finding short and long-term solutions for the cash system, with unclear tangible actions or outcomes to date from all of that resource usage
- A forced level of density in the physical cash network, which particularly supports cash logistics. With incentives to maintain or open regional branches, and widespread mandated acceptance of cash, this means support for, or even growth in the number of cash locations. This will support the economics of cash logistics – a direct benefit to a key cost of the cash system, albeit with that cost being carried by banks and retailers
- A likely reduction in innovation around making the long tail of cash more efficient, because it distorts the economics of the cash cycle. As use of cash declines and/or settles at a ‘low cash’ level, innovation is needed to challenge operating models, commercial models, and products and services. The more the government intervenes through policy, the more likely it is that existing models will continue without challenge. This will bake in suboptimal models which result in higher long-term costs for everyone. Care is needed to make sure that this is not a result
Returning to the decisions that need to be made
What are the key considerations on those decision points we identified? Working through each in turn:
- Do we want to force cashlessness onto society?
A shift to cashlessness will disproportionately hurt the most vulnerable. Most would say that cash users are ‘mostly’ older people, and so cash will die out as cash users naturally reduce in number. But this misses many other groups: low-English speakers, lower socio-economic groups, people who are trapped in domestic violence situations, to name a few. There are many other problems with a genuinely cashless future which digital payments need to confront and deal with before we are ready for such a future
- How should the cash system operate in an optimal manner to reduce the cost of the system
The current cash system is essentially the same as it was in 2001. Since then, cash usage (measured by withdrawals) has grown, then declined, to be at about the same level as 2001. Card payments have grown by 535%. Real GDP has grown by 101%. Currency in circulation has grown by 247%. It is abundantly clear that the cash system was built for a different time, and it needs to change. Radically. This change must start with what is known as the wholesale cash system, but extend into retail banking, retail cash acceptance, cash logistics, and cash distribution and access. There is too much inefficiency and cost in the system for the present day, let alone into the future
- Who should be responsible for managing the cost
One of the loudest arguments so far against the proposed bank levy is that in penalises “digital disrupters.” While this argument is simplistic and fraught with problems, it does open up the question of who should be responsible for the cost of the cash ecosystem. As we have discussed, we are at a stage in the evolution of cash where it is a societal cost, rather than a commercial cost matched against commercial benefit. This is patently clear when considering the ACCC deliberations around the recent Armaguard-Prosegur merger, and the subsequent calls from Armaguard for financial support. The commercial value and viability of these services no longer exists. Regardless of the approach taken to negotiating an outcome, the underlying point is that we are now at a point where ‘society’ at large must decide what value it places on the cash system as a whole, and how it is paid for.
Forcing banks and retailers carrying the cost is one option (the industry approach). The other two are the government in some form carrying the cost (the government approach), or users of cash carrying the cost (the direct cost approach).
In the end, consumers/taxpayers will always ultimately carry the cost, in one way or another. If the direct cost approach is adopted, then users of cash pay directly, though this would skew toward the most vulnerable in society. If it’s the industry approach, then customers of banks and retailers will pay through increased fees, interest rates and prices, reduced interest rates on deposits, or if none of these happen then our superannuation balances will pay through reduced earnings, dividends and capital growth. And if it’s the government approach, then of course we ultimately pay through either increased taxes or reduced services elsewhere. It is not a simple decision as to which of these paths should be taken. The implications of each must be properly mapped out and considered if a balanced and best-alternative decision is to be made.
Where to from here?
The proposed policy shifts are important in opening up a broader discussion around the future of the cash system. While the detail of each policy is undetermined, there are a number of fundamental questions that need to be asked and answered as part of this process. At the same time, there is a lot that can be done now to optimise the cash system – actions that involve the government and the RBA, the banks and retailers, and industry participants such as cash logistics providers and ATM deployers.
By global measures, Australia is unique due to our geography, population, cash usage, and historical policy settings and regulatory stance. Every country will need to deal with a transition to long-term low-usage of cash. In our view, no country is transitioning well. Australia has so far done a poor job of this transition, for a wide range of reasons. There is now a chance to get it right. We hope that this move by the government forces the heavy lifting of expansive thinking and action to move to a sustainable low-cash future.
[1] For example, using the RBA’s monthly payment statistics, monthly cash withdrawals have averaged $9.98bn each month from November 2021 to September 2024, with a standard deviation of $0.14bn, or 1.4%. It is exceedingly rare to see such “sameness” in payments data