Toxic Cash

The long awaited annual customer satisfaction survey on the banking industry was published this week. It was a harsh verdict on the bankers. The satisfaction index slipped to its lowest level in recent years in both the retail and corporate segments. But I think that the testimonials from the retail customers are the most painful, especially to the top management at those banks that recently proclaimed that they will “go back to basics”. The survey indicates that they have failed with the basics. The customers complain about fewer human touch points, technical problems with self-services and fewer branches with cash handling. Ouch! But there are two exceptions and top performers according to the report, i.e. ICA Banken and Handelsbanken. It might be a coincident that both of them “go all in” on cash handling, but it got me interested, so I will devote this blog post to the subject.

The chart below supports the complaints from the retail customers that the number of branches has been reduced with close to 50% during the last five years according to statistics from the banking association. And those customers that look for a branch to deposit cash may be provoked by the fact that 45% of the branches are cashless. At the same time, we have to acknowledge that we use cash less often now days. So the question that I wanted to dig into is whether this development is justified. Are we experiencing an inevitable side-effect of the transition to a cashless society?

Cash handling is costly to society, especially to the retail and banking industry. Scholars estimate the cost for cash to 0,25% of GDP as opposed to 0,09% for debits cards. Just like many retailers have experienced, the costs are more or less fixed. As an example, a store owner has to pay the same price for having a security company to pick up the cash regardless of the amount. The fact that the amount of outstanding cash relative to GDP has been slashed from 10% to 2,6% since the 1950’s has academics to talk about a tipping point where costs exceed the benefits of cash as a mean for performing financial transactions. There are zillion reports on the subject of this “tipping point” but no one has dared to quantify and predict when the costs and benefits of cash intersect. But the Swedish central bank, Riksbanken, has made a bet. They have decided that they will print new notes in 2015. So, given the usual life span of a note, it is fair to assume that they do not forsee a cashless society prior to year 2030.

So, let me revert to my initial question: is it justified that banks reduce their number of branches that handle cash? Personally, I find it hard to accept that banks that were bailed out by the government during the financial crisis because they were considered crucial to the financial system can opt-out from handling cash that still is an integral part of the financial system. Evidently, cash in not king any longer, but I sincerely hope that the customer still is.

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