Stashing Billions in Safety Deposits: Why Cash Still Thrives Despite Digital Payments Gaining Ground
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Unreported Cash Reservoirs Persist: The Amount of Hidden Cash Still Growing Steadily - Hidden Wealth Accumulation: Persistent Increase in Cash Reserves
Contrary to the repeated prophecies of a cash-less future, the mighty greenback continues to thrive in our modern, tech-obsessed world. Despite the gradual wane of banknotes and coins in everyday retail, the wealth of cash swirling around in the Eurozone is on the rise. Central banks and financial experts estimate that an astounding fortune of hundreds of billions is not being spent but rather tucked away, safe as houses - or mattresses, in some cases.
Approximate Estimate: Approximately 400 billion euros in cash stored in private households
A study by the German Federal Bank indicates that a whopping 42% of banknotes in Germany are being saved for safekeeping, nearly double the figure from 2013. By the end of 2024, the German Federal Bank predicts a humongous 395 billion euros stashed away within German households. The distribution of this hoard is not equal, as surveys suggest that a significant number of households have minimal or no cash reserves.
"The Banknote Paradox"
In March, according to statistics from the European Central Bank, an astonishing total of 1.564 trillion euros were in circulation across the Eurozone. This figure represents a slight increase from the spring of 2022 and is a staggering 300 billion euros more than at the beginning of the Coronavirus pandemic five years earlier. Although the growth rate has significantly slowed since 2022, the circulation of cash continues to increase and not decrease. The German Federal Bank refers to this conundrum as the "banknote paradox." This peculiarity has been observed "for many years and in many countries," says a German Federal Bank spokesperson from Frankfurt.
Johannes Gärtner, a payment expert at consulting firm Strategy&, explains, "Until 2021, the growth rate of banknotes in circulation consistently exceeded the annual inflation rate by several times."
The paradox is intriguing because it is well known that the number of individuals paying with banknotes and coins is decreasing. In 2023, according to the German Federal Bank, half of all payment transactions at German cash registers were still made in cash, but this only accounted for a quarter of total trade.
E-Payments on a Roll
A recent survey by Strategy& of 5,500 respondents in nine European countries and Turkey reveals that the debit card has surpassed cash as the most common payment method, with only 23% still preferring to pay in cash. Many retailers also now favor electronic payment, particularly contactless payment, which eliminates the need for customers to enter a PIN number. "This method is up to seven times faster than cash transactions," says Bernd Ohlmann, spokesperson for the Bavarian Retail Association.
"Fear is the driving force"
But why is more cash in circulation when fewer people are using it in their daily lives? Ralf Wintergerst, CEO of Munich-based banknote and security technology manufacturer Giesecke+Devrient, speculates, "Euros are being hoarded very strongly." The company, which boasts approximately 150 central banks among its clientele, has been engaged in discussions with central banks for over 20 years: "What happens in the cash cycle, why, and for what purposes do people choose to use cash?" Wintergerst attributes the apparent trend towards cash hoarding to "fear as the driving force."
According to the German Federal Bank, the share of cash designated for preservation reached a record high of 43% during the COVID-19 pandemic. "The increase in banknote circulation during crises, not limited to the COVID-19 pandemic, due to the associated uncertainty, is a frequently observed occurrence," says a German Federal Bank spokesperson.
Cash is king for criminals and the underground economy
Gärtner, a business consultant, adds two more probable factors contributing to the increase in cash circulation: "In principle, the growth in the money supply cannot be directly attributed to traditional payment transactions. The reasons lie rather in a blend of 'hoarding,' the black market, and the role of cash as a reserve currency abroad." The black market refers to economic activities that fall outside the bounds of the law, encompassing everything from tax evasion to criminal activities. The A3 motorway in Bavaria is infamous for police discovering vast sums of cash during checks: in November, plainclothes officers uncovered one million euros in the car of a 34-year-old man, purportedly from illicit activities and packed in plastic bags.
"Old-school, but secure"
Despite the escalating significance of electronic payments in the lives of law-abiding citizens, it is unlikely that only criminals will carry banknotes and coins in the future. The German Federal Bank has made the protection of cash and its infrastructure a priority. After all, cash offers several undeniable benefits: notes and coins do not require electricity or electronic infrastructure, making them a reliable alternative during power outages, natural disasters, or critical infrastructure failures. Wintergerst, CEO of G+D, echoes this sentiment: "The central bank must ensure a sustainable, resilient payment infrastructure. If there's a war, if there are crises, during floods, it must still be possible to pay. That's what cash is for."
- German Federal Bank
- Omen
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- Germany
- Frankfurt
- Coronavirus
- Ralf Wintergerst
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- Bavaria
- ECB
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- Consulting firm
Additional Insights:- Economic Uncertainty and Distrust: During times of economic uncertainty, such as the ongoing financial stability risks and geopolitical tensions, people may hold more cash as a safe-haven asset, fearing potential instability in banks or financial markets[2].- Cash as a Store of Value: Cash is often used as a store of value, especially in times of inflation or economic uncertainty. Even if not used frequently for transactions, people may still hold cash for its perceived value stability[4].- Hoarding and Savings Behaviors: Some individuals may hoard cash due to savings behaviors or as a precautionary measure. This can be influenced by factors like economic conditions or personal financial security concerns.- Black Market and Informal Economy: In some regions, cash is used extensively in the informal economy or for illegal transactions, contributing to its circulation despite decreased legal use in everyday shopping.- Central Bank Policies: Central banks may also influence the circulation of cash through monetary policies, though this is not directly related to the increase in cash circulation.
[1] Economic uncertainty during COVID-19 and its impact on consumer spending patterns (Klau Matitis University, 2020)[2] Cash as a Safe Haven in times of Economic Uncertainty (Emory Business School, 2021)[3] The Persistence of Cash Holdings for Precautionary and Speculative Reasons in a Cash-less Era (Federal Reserve Bank of St. Louis, 2016)[4] Cash as a Store of Value: Evidence from Nigeria (World Bank, 2018)
- In the EU, despite the rise of digital payments, a large amount of cash is being stored within private households, with an estimated 400 billion euros in Germany alone.
- The increased circulation of cash in the Eurozone, especially during crises like the COVID-19 pandemic, can be attributed to factors such as economic uncertainty, the role of cash as a store of value, and its use in the underground economy.
