Cash in crisis: the diminishing role of physical money in the digital age

If the humble and ubiquitous use of cash was a business, it would be widely considered to be really struggling at the moment.

And the struggle could be existential, with the underlying economics of cash itself now looking highly suspect as its usage dwindles dramatically.

The new forms of payment are now all the rage and despite issues such as the cost of surcharges, tap and go and cards are taking over and cash use is on a downward spiral that it doesn’t look like pulling out of.

Even the Reserve Bank Governor, Michele Bullock, admits she is worried about the future of cash, warning that the shrinking use of cash was putting strain on the entire payment system.

The use of cash as the share of payments is literally falling off a cliff.

It has fallen from 70% in 2007 to just 13% last year, as digital payments boomed and the trend is unmistakably bad.

Government vows to keep cash going, but who will pay?

Both the RBA and Treasurer Jim Chalmers have vowed to keep banknotes in circulation, saying it was an obligation to make sure those who wanted to access cash – especially in the regions – would be able to do so if they wanted.

However, cash comes through the banking system.

It is no secret that the “on the ground” banking branch system is shrinking rapidly and particularly in rural and remote areas.

Branches and ATMs closing

Australian Prudential Regulation Authority figures show that during 2022-23, banks closed 400 branches and 700 ATMs.

Even the remaining ATMs are changing, with bank networks shrinking fast, leaving private ATMs that charge fees to fill the gap.

In some towns, the only source of cash is not even a bank but Australia Post, with Australia Post chief executive officer Paul Graham recently revealing that the postal service was paying $4000 a week to keep up the supply of cash to the opal mining town of Coober Pedy.

He told the Senate, Environment and Communications Legislation Committee that the national postal service would back the ongoing use of cash as bank branches close in regional areas but noted that this was not a sustainable solution.

“Where we are the only banking service in town, we will work with that community to ensure that the basic services are provided, but it will become increasingly difficult … in terms of finding people to actually work in those places,” Mr Graham said.

Banks quite rightly point out that the cost of operating a massive physical branch network is unsustainable, with the increasing use of point-of-sales transfer and online payments resulting in a massive drop of customer activity at branches.

Many businesses also are prioritising electronic payments to both move transaction costs on to customers through surcharges or higher prices and also to reduce the cost of security and costs around counting, storing, moving and banking cash.

Macquarie Bank no longer accepts cash deposits at its physical branches in Sydney, Melbourne and Brisbane and other banks now have some branches that no longer handle cash.

Bankwest, which is owned by Commonwealth, is reducing the size of its branch network which is reducing the ability of some customers to withdraw cash from branches near where they live.

The business of moving cash is failing

However, it is in the basic movement of cash that the issue of cash might eventually come to a head, with the profitability of moving cash around in armoured cars evaporating as the use of cash dwindles rapidly.

Last year the Australian Competition and Consumer Commission (ACCC) gave the green light for the tie-up of two of the country’s biggest cash transporters – Armaguard and Prosegur – which created a near monopoly.

Both were operating at a loss at the time and the ACCC found the industry was in structural decline, raising the risk of a “rapid exit” by either of the two suppliers which would reduce the availability of cash.

That prediction has come to pass with banks being advised by Linfox Armaguard that its viability was being put at risk by the rapid decline in cash usage, leading to emergency talks between the banks, the Reserve Bank and the Federal Treasury.

A gentle run off for cash or a final decision?

All of which begs the question of whether the Government will allow cash usage to naturally run off or whether it will be forced into the situation Sweden encountered which led to a law that enabled merchants to make customers pay electronically.

In some ways it is a bit like the final years of the car industry in Australia.

All sides of the industry and politics could see that the car industry was doomed but nobody wanted it to die on their watch.

Perhaps the demise of cheques, which are set to finish in Australia in 2030 is a sign of what is to come for cash at some time in the future.

There are still many arguments in favour of cash – its use as a store of value, utility when technology fails and use as a tool to teach children and others how to plan their finances just a few.

However, the sheer underlying economics of its use and distribution in the face of the rapid adoption of alternative payment options now make it look like an absolutely terrible business to be in.