Casino Enterprise Management

Cash is Still King Globally

By Bassam Estaitieh, Product Manager

Introduction
You hear it everywhere and it seems to make sense: the future is cashless! In a number of years, nobody will use paper to pay for purchases. With the ever-increasing forms of cashless payment (debit and credit cards, mobile and now RFID payments etc…), how can one doubt that cash will fade away?

In fact, we’ve been hearing this for over a decade now, so it’s worth taking a look at what is really happening with cash usage in today’s societies.

In looking at cash usage over the past decade, one can examine the research reports available on the use of different payment methods (credit, debit and closed-loop cards, cash, etc…), but such reports usually target particular verticals. To get a better view from a macro perspective, an examination of the money supply in the different economic zones around the world is warranted.

In this whitepaper, the money supply in two major economic powerhouses is considered: the United States and the Euro Zone. There are of course other quickly emerging economic centers (namely China), but the argument has always been that cash is more favoured in developing countries than in the developed world (since a smaller percentage of the population is banked in developing countries), and that the developing world’s payment habits and credit use will eventually catch up with those of the developed world. The developed world, represented by the US and the Euro Zone, should therefore provide a good indication of where cash is going.

A portrait of the landscape of cash usage would also be incomplete without examining consumer payment preferences and taking a closer look at the different segments of the population and therefore the different payment methods at their disposal.

The US Money Supply
As with all sovereign Central Banks, the US Federal Reserve provides detailed statistics on the various measures of the money supply: M0, M1, M2 etc… Central Bankers of different countries may have slightly varying definitions of these money supply measures, and an analysis and definition of each of those measures is beyond the scope of this document. Of particular importance to us in this analysis, however, is the supply of currency in circulation.

The Board of Governors of the Federal Reserve System publishes the currency component of the M1 money supply measure. The currency component of M1 represents currency in circulation outside of US bank vaults, Federal Reserve Bank and the US Treasury. This is the perfect measure of the currency Americans use to settle transactions in their daily lives. The figure below provides great insight on this currency component since the 1940’s.

The US currency in circulation has steadily increased since the post-war era of the 1940’s. It can be clearly seen that the increase in the currency in circulation has actually accelerated in the 1990’s and over the last decade despite the number of recessions the US economy has been through in this time period. To be clear, the above figure shows only the currency in circulation and does not include the stimulus currency the Fed may have injected into banks as part of any bailout plan. One can notice a clear spike in currency utilization, as a matter of fact, as a result of the latest economic crisis that has started circa 2008. This is inline with various statements one hears about people throwing away their credit cards and dealing exclusively with cash to get their financial lives in order.

It is nevertheless premature to presume from the above figure that the popularity of cash is increasing in the United States. Before making that conclusion, a comparison needs to be made of the GDP growth rate to the growth rate of the currency in circulation. In times when the GDP growth rate exceeds the currency growth rate, one can conclude that the use of cash is decreasing. In times when the GDP growth rate is inferior to the currency growth rate, one can conclude that the use of cash is increasing. The table below tracks the dollar value of the GDP and the currency, along with their growth rates, over the past decade.

Research house Ovum states that there are 40% more US banknotes in circulation today than there was at the beginning of the millennium. While cash in circulation has steadily increased over the last decade, it was not always increasing at a rate equal to or greater than the rate of increase in the US GDP. It can be seen that in times of economic turmoil (2001 when the dotcom bubble burst, and 2008 when the housing market imploded), the rate of growth of cash significantly exceeds the growth in GDP. During times of economic recovery, it seems that Americans get more confident and therefore get more comfortable with credit. However, an argument can be made here that the time of economic recovery after the dotcom bubble (post 2002/2003) is not representative of a typical recovery period since it relied heavily on housing and its associated financial derivatives, two products that rely heavily on credit and that abnormally skewed the GDP growth rate over that of currency. Despite that, the Cumulative Annual Growth Rate (CAGR) of currency over the past decade still exceeds that of the GDP. Clearly, cash remains King in the United States.

To view the entire white paper, download the PDF below. For more information, visit www.craneps.com.