Despite the digital acceleration caused by Covid-19, cash still holds a significant chunk of the payments market
by Bethan Rees
European Central Bank's executive board member Fabio Panetta said at a Deutsche Bundesbank conference that the digitisation of Europe's economy, which has been accelerated by Covid-19, does not mean the end of cash, according to a Finextra article.
Since early 2020, the "volume of cash being lodged at central and commercial banks has fallen by up to 25% in the euro area", the article says. It points to a mid-2020 survey commissioned by the Eurosystem, the monetary authority of the eurozone, which reports that approximately 40% of respondents are using cash less frequently than before.
However, according to the article, there's been a "huge rise in demand for euro banknotes over the past year: an increase of €190bn – or €550 per capita – between March 2020 and May 2021". Panetta is quoted as saying that a possible reason for this is that during the pandemic, people may have turned to cash to manage uncertainty.
"Given its many functions, I expect cash to survive the digital revolution" and that if a digital euro were to be launched, it would be a "complement to cash, not a replacement", he says.
Finextra article
Hoarding cash for higher inflation
JPMorgan Chase's CEO Jamie Dimon "believes cash is king", for now, and has been "effectively stockpiling" cash, according to an article by Hugh Son for CNBC. This is due to the possibility that higher inflation could force the Federal Reserve (Fed) to boost interest rates, Dimon said at a conference on Monday. By doing this, the investment banking firm has positioned itself to take advantage of rising interest rates, "which will let it buy higher-yielding assets", Son writes.
"If you look at our balance sheet, we have US$500bn in cash, we’ve actually been effectively stockpiling more and more cash waiting for opportunities to invest at higher rates … I do expect to see higher rates and more inflation, and we’re prepared for that," said Dimon. JPMorgan Chase is expecting US$52.5bn in net interest income in 2021, down from the US$55bn it announced in February 2021, reports Son.
But when will rates increase? Dimon spoke on whether inflation is a result of reopening post-pandemic, such as supply chain issues, or if it's more lasting. According to Son, Fed officials have said the current spike in inflation is temporary and short-lived. However, some economists and hedge fund billionaires have warned of consequences if the Fed ignores inflation.
CNBC article
El Salvador's digital divide
Meanwhile, in moves towards digital payments, El Salvador has announced it’s the first country to make bitcoin legal tender. However, due to low internet rates and access to technology in some parts, cash might still dominate payments in the Central American country, according to a Reuters article.
The article focuses on the El Salvadoran beach town of El Zonte, which is "visibly poor, with dirt roads and a faulty drainage system". This "offers a glimpse into the potential pitfalls to popularising bitcoin nationally".
A 38-year-old mother of three, Zulma Rivas, is used as an example in the article. Rivas started accepting bitcoin payments for bags of fruit she sells to tourists as part of an experiment. But she prefers cash. She said that her battered smartphone struggles with the payments app, and her phone was broken at the time she spoke to Reuters.
The article also mentions the "notoriously patchy" internet connection in rural places such as El Zonte. It refers to a 2020 study by Microsoft and the Inter-American Development Bank, which finds that "El Salvador had the second-lowest internet penetration of 20 countries in Latin America and the Caribbean … In rural areas barely one in ten people have internet access".
Oscar Picardo, director of science, technology and innovation at the University of Francisco Gavidia is quoted in the article. "The digital divide is enormous, access to the internet is limited for many poor families and there are other priorities and needs," he says.
Reuters article