So let me get this straight, I have to PAY my bank to hold my money? Yes, you do. That is, if you live in Japan, Denmark, Sweden or Switzerland.
In a development few could have predicted, interest rates in many countries have recently turned negative. This means that rather than paying depositors for their savings, banks actually take money from depositors each month! Central banks in many countries have reduced interest rates into negative territory in an attempt to stimulate economies and to increase inflation. They want banks to lend more and people to spend rather than to save. The verdict is still out on whether or not negative interest rates will accomplish these results. What is not in doubt is that retirees, savers and the banks themselves are being punished by negative interest rates and that the use of cash in these countries is growing.
In the U.S., interest rates on deposits are already well below 1%, meaning that customers are essentially letting banks use their money for free. Consumers also know intuitively that if inflation is running at 1-2%, real interest rates are already negative. So what would happen if nominal U.S. rates were to actually turn negative? What would be the ramifications if even a modest percentage of the estimated $11 trillion in U.S. bank deposits were to move away from banks? A quick glance around the world tells an interesting story.
Negative interest rates help to foster a false impression that banks are less safe.Many people assume that if banks take interest from borrowers rather than paying it, they must be less stable. Rumors of widespread Italian bank insolvencies and recent Cyprus deposit confiscations have done nothing to assuage global concerns about banks. When consumers decide that the risks of depositing funds in banks outstrip the rewards of security and return on investment, they will find other alternatives, including holding cash. To be clear, we have yet to see any indication of depositors headed for the exits but if they do, the demand for cash could surge.
The cost of holding cash is now very, very low. Near-zero or negative rates mean that cash holders are not forgoing a return on investment in order to personally hold cash. In Japan and other negative interest rate economies, sales of home safes have outstripped supply as consumers balk at leaving cash in the bank at negative interest rates. Presumably, these safes are being filled with physical cash. In the U.S., a 10% reduction in the amount of total bank deposits would result in demand for over $1 trillion in additional cash. With many disincentives for keeping cash under the mattress no longer in place, watch for a spike in the demand for cash.
EMV hiccups may also drive an increased use of cash. For anyone who has followed the rollout of EMV in the U.S., the results to date have been less than stellar. Despite an October 2015 POS liability shift, EMV cards are still being issued to cardholders. Most merchants have yet to upgrade their POS terminals to EMV. For those merchants who have, many terminals have yet to be activated due to processor certification delays, manufacturer issues or just plain slow performance. In just over a year, the EMV liability shift for gas pumps is scheduled to take place. Industry estimates are that 50% of all gas pumps are in single-location stores, many with older pumps which require wholesale replacement for EMV. Given the lack of remaining time and the prohibitive cost of fuel island replacement, there is a fair chance that a large number of gas stations may have to abandon “pay at the pump” for the foreseeable future, further increasing the demand for cash.
Customers simply like cash. Cash remains convenient, anonymous and a store of value. Cash convenience is generally understood to mean that cash is nearly universally accepted for the purchase of goods and services. Cash anonymity shields purchases which, for whatever reason, the buyer wishes to avoid any financial record of the transaction. Cash as a store of value replaces bank deposits, certificates of deposit, money market and other investments in times of negative interest rates, political unrest, war or financial crises. Customers around the world have consistently stated that they want a variety of payment options, including cash.
While the growth in cash has recently stalled at 1-2% per year and rumors of its death persist, the stars may be in alignment for a near-term explosion in the demand for cash.
By: Daryl Cornell
SOURCE: ATM Atom
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