Review of Banknote Distribution Arrangements: Issues Paper 2. The Cash Landscape in Australia

2.1 Demand for banknotes is strong …

Demand for banknotes in Australia has remained strong for many years. Over the decade prior to the COVID-19 pandemic, growth in the value of banknotes in circulation was around 6 per cent annually, outstripping nominal GDP growth. Since the onset of the pandemic, overall demand for banknotes has been extraordinarily high, with the value of banknotes in circulation increasing by around 20 per cent between February 2020 and October 2021. As at October 2021, the total value of Australian banknotes in circulation was $100 billion, double the value in 2010 (Graph 1).

2.2 … despite declining transactional cash use

Over the past decade, cash use for retail payments has been declining alongside growing use of electronic payments. The Reserve Bank's Consumer Payments Survey shows that the share of total retail payments – both in-person and online – made with cash fell from 69 per cent in 2007 to 27 per cent in 2019 (Caddy, Delaney and Fisher 2020). Part of this trend reflects the increasing use of online shopping, with the share of payments made with cash for in-person transactions a little higher, at 32 per cent in 2019 (Graph 2) (Delaney, McClure and Finlay 2020). Cash is used most often for low-value transactions, although this is rapidly changing with the uptake of contactless payment methods (such as tap-and-go cards and mobile wallets). As consumers switch away from cash for retail payments, demand for low-value banknotes ($5, $10 and $20 denominations) has been subdued.

The COVID-19 pandemic has accelerated the trend decline in the use of cash as a means of payment. Part of this decline will likely be temporary, with some transactional cash demand returning as lockdown restrictions ease. However, much of the decline is expected to be permanent, with part of the shift towards electronic payments and online spending persisting.

2.3 Cash is an important payment mechanism for some

While the share of transactions made with cash is declining, cash remains an important means of payment for some members of the community. In the 2019 Consumer Payment Survey, around 15 per cent of people used cash for 80 per cent or more of their in-person transactions (Graph 3) (Delaney et al 2020). These high cash users are more likely to be older, have lower household income, live in regional areas, and/or have limited internet access. The majority of these high cash users indicated that they would suffer a major inconvenience or genuine hardship if they could no longer withdraw cash or if retailers stopped accepting cash.

People who indicated that they would experience a major inconvenience or genuine hardship were asked why they used cash rather than another payment method. These people responded that they value cash for a variety of reasons, including that it is private, widely accepted, helpful for budgeting and for making payments to family and friends (Graph 4).

2.4 Cash is increasingly used as a store of wealth

The increase in banknotes in circulation against the backdrop of declining transactional cash use can be attributed to the growing role of cash for precautionary and/or store-of-wealth purposes. Around half to three-quarters of banknotes on issue are estimated to be hoarded (Finlay, Staib and Wakefield 2018). Reflecting this trend, much of the growth in banknotes in circulation has been driven by demand for higher-denomination banknotes (Graph 5). Around 73 per cent of the number, and 94 per cent of the value, of banknotes in circulation are accounted for by the $50 and $100 denominations.

The store-of-wealth function performed by banknotes is particularly important during times of financial and economic uncertainty, such as the global financial crisis (GFC) and the COVID-19 pandemic (Guttmann et al 2021). Consequently, cash demand often surges during times of economic stress, driven by an increase in high-denomination banknotes. The current low level of interest rates also makes holding cash relatively more attractive, due to the lower opportunity cost of holding physical cash (which earns no interest). Measured as a ratio to GDP, the value of currency in circulation reached a historic high in the March quarter of 2021 at 4.8 per cent (Graph 6).

2.5 Cash is circulating less

As a result of these trends in the use of cash, banknotes do not circulate through the economy as frequently as they used to. This has a significant effect on the cash distribution system and its participants as it means activity within the system has fallen substantially. For example, the value of ATM withdrawals has fallen by around 40 per cent since 2012, and the number of withdrawals has fallen by close to two-thirds (Graph 7). Cash withdrawals from other sources, such as over-the-counter and debit card cash-outs, have experienced similar declines. Likewise, lodgements at cash depots – in which cash is moved from a retailer to a financial institution via a commercial cash depot – have also fallen significantly. Both the number and value of banknote lodgements at major cash depots were around 55 per cent lower in September 2021 than in 2012. As noted in Section 2.2, the pandemic has accelerated these trends, and it is unlikely that ATM withdrawals or cash depot lodgements will return to pre-pandemic levels.