is there such a thing as having too much cash?

Global Insights
IS THERE SUCH A THING AS HAVING
TOO MUCH CASH?
BY HUGH THOMAS AND KEVIN MELLYN
An Examination of the Links Between Cash Usage and Bad Behavior
Anyone who has ever negotiated a purchase knows why it might be preferable to pay for it
with cash. Sellers often ask to be paid in cash because it constitutes an immediate transfer
of funds that can be put to use right away. Because of this, sellers are often willing to lower
their prices for buyers willing to pay cash. Cash also eliminates the risks associated with
partial payments or credit, and it offers anonymity to both buyer and seller.
The considerations above make a strong case, then, for using cash when buying stolen
goods or when seeking to avoid giving the tax man his due, but for most of the purchases
we make every day, considerations like financing and anonymity are rarely top of mind. For
the vast majority of payments we make, how we choose to pay depends mainly on habit
and convenience. Cash is almost always an option for payment (except when buying online),
but its convenience often depends on how much of it you have in your wallet. Other factors,
such as card rewards or purchase insurances offered on credit cards, mean that cash is
very often the least beneficial payment instrument for the purchaser. Online shopping and
online banking have fundamentally changed the way we buy things, suggesting that deeply
ingrained purchasing habits can change. So why does so much cash usage persist?
$8.3
*
TRILLION
ADVISORS’ PRELIMINARY ESTIMATES OF GLOBAL CASH USAGE SUGGEST THAT 8.3 TRILLION
DOLLARS ($US) OF CONSUMER PURCHASES ANNUALLY ARE MADE OUTSIDE THE FORMAL
ECONOMY, USING CASH. THIS INCLUDES AN ESTIMATED $US 6.8 TRILLION OF UNDERGROUND
ECONOMY PURCHASES AND APPROXIMATELY $US 1.5 TRILLION IN ILLEGAL PURCHASES.
In many places the persistence of cash is symptomatic of a large informal economy. Such
economies can only run on cash, and this preference for cash feeds, and is in turn fed by,
bad behavior such as corruption and bribery. This bad behavior can be a substantial drag on
the overall economy, suggesting that governments benefit by moving their citizenry away
from cash. In recent years several countries, notably Korea, Mexico, and Argentina, have
done just this, taking regulatory measures to persuade both buyers and sellers to reduce
their use of cash.
In this article we will look at the links between cash, bad behavior, and negative economic
consequences, and conclude by discussing some of the solutions governments around the
world have implemented to solve the problem of too much cash.
* Transparency International 2010, havocscope.com 2010, MasterCard Advisors’ analysis.
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Global Insights
HEAVY CASH USAGE IS NOT RESTRICTED
TO DEVELOPING MARKETS
Countries around the world fall into four broad categories of cash usage
patterns. Places such as Canada and the U.K. are examples of developed
markets with low cash usage, while Germany and the U.S. are examples of
developed markets with high cash usage. Places such as Australia, Turkey,
and Korea are considered markets in transition, where regulatory measures
impacting payment choice have been initiated. The final category, which
includes the majority of the world’s countries and population, fall into the
category of developing markets with high cash usage.
FIGURE 1: GLOBAL CASH USAGE CATEGORIES
Developed Markets
with Low Cash Usage*
Developed Markets
with High Cash Usage*
Developing Markets
with High Cash Usage*
Markets in
Transition*
Canada
Sweden
Germany
Japan
Brazil
India
Australia
France
U.K.
Italy
U.S.A.
China
Russia
Korea
Kenya
Turkey
South Africa
*Example markets. Source: MasterCard Advisors’ Analysis
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CASH USAGE VARIES SUBSTANTIALLY EVEN WITHIN
COUNTRY CATEGORIES
The charts below set out Advisors’ preliminary estimates of the percentage, by
value, of consumer purchases that are made using cash in different countries
around the world. The figures show that even in developed markets, where all
the requisite infrastructure and incentives to move away from cash exist, cash
use varies substantially. In some countries it accounts for less than 10% of all
consumer payments, while in others the figure is greater than 40%.
FIGURE 2: ESTIMATED PERCENTAGE OF CONSUMER PAYMENTS
(BY VALUE) MADE WITH CASH
DEVELOPED MARKETS / HIGH CASH
0%
20%
40%
60%
80%
DEVELOPED MARKETS / LOW CASH
0%
100%
20%
40%
60%
80%
100%
The figures show that even
AUT
BEL
CZH
CAN
GER
DEN
GRE
FIN
from cash exist, cash use varies
HUN
FRA
substantially. In some countries
ITA
IRE
it accounts for less than 10% of
JPN
NED
all consumer payments, while
POL
NOR
in others the figure is greater
PORT
SLV
SING
SWE
SLVK
SWI
SPA
TAI
US
UK
DEVELOPING MARKETS / HIGHEST CASH
0%
20%
40%
60%
80%
IND
CHI
INDO
CHN
ROM
PERU
RUS
THL
MARKETS IN TRANSITION / HIGH CASH
40%
60%
80%
and incentives to move away
than 40%.
0%
BRA
20%
all the requisite infrastructure
DEVELOPING MARKETS / LOWER CASH
100%
BUL
0%
in developed markets, where
20%
40%
60%
80%
100%
MARKETS IN TRANSITION / LOW CASH
100%
0%
ARG
AUS
MEX
KOR
20%
40%
60%
80%
100%
Sources: World Bank Database 2011 and MasterCard Advisors’ analysis; figures exclude black and gray
market spend.
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CASH AND CORRUPTION TRAVEL TOGETHER
With an idea of how prevalent cash use is on a country by country basis it
becomes possible to observe correlations between cash usage and other points
of known data. Looking at the level of cash usage alongside measures of
corruption, a strong link emerges between the two. In many parts of the world,
a preference for cash may be driven by a need for anonymity for payer and
payee, in order to operate in economies where bribery is a part of everyday life.
FIGURE 3: CASH USAGE AND CORRUPTION
10
THE GLOBAL CORRUPTION PERCEPTIONS INDEX SCORE
1=MOST CORRUPT, 10=LEAST CORRUPT
9
8
Looking at the level of cash
CORRELATION: -0.72%
DEN SWE
FIN
CAN
AUS
HK
NED
NOR
SWI
IRE
AUT
UK
JPN
7
FRA
between the two. In many parts
of the world, a preference for
GER
CHI
CHN
SLV
6
corruption, a strong link emerges
SING
US
BEL
cash may be driven by a need for
anonymity for payer and payee,
PORT
in order to operate in economies
SPA
TAI
KOR
5
POL
where bribery is a part of
HUN
CZH
MLY
4
usage alongside measures of
everyday life.
SLVK
BRA
ITA
PERU
3
MEX
ROM
IND
GRE
ARG
BUL
INDO
RUS
2
1
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
CASH AS A PERCENTAGE OF ALL CONSUMER PAYMENTS BY VALUE
Sources: Transparency International’s 2011 Global Corruption Perceptions Index and MasterCard Advisors’
analysis, figures for cash exclude black and gray market spend.
The tight correlation shown here offers the first piece of evidence that cash
feeds, and is fed by, bad behavior. Corrupt officials don’t take credit cards for
bribes, so the payments that grease the wheels in more venal economies may
account in some part for the high prevalence of cash. The Global Corruption
Perceptions Index develops its ratings by asking questions such as: “Do you
trust the government?” and “Is corruption a big problem in your country?”; the
lower the rating, the less the citizens trust their governments. In countries
where mistrust is high, citizens may elect to operate primarily in cash and
outside the formal economy because they do not wish to expose themselves to
taxation, fines, or fees from corrupt officials.
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CASH-HEAVY ECONOMIES ARE HARDER PLACES TO
DO BUSINESS
If cash begets (and is begotten by) corruption, then corruption appears to
beget difficulties in doing business. Looking again at the estimates of cash as
a percentage of consumer payments, we see a tight correlation between cash
and the ease of doing business in the economies considered. Countries where
it’s harder to do business appear to also be countries where consumers make
more payments using cash.
FIGURE 4: CASH USAGE AND EASE OF DOING BUSINESS
CORRELATION: 0.70%
160
of cash as a percentage of
140
EASE OF DOING BUSINESS SCORE
1-160, 160=HARDEST TO DO BUSINESS
Looking again at the estimates
IND
BRA
120
consumer payments, we see a
RUS
tight correlation between cash
INDO
GRE
100
and the ease of doing business
in the economies considered.
80
ITA CHN
Countries where it’s harder to
POL
CZH
60
SPA
SLVK
SLV
40
BEL
FRA
AUT
SWI
SWE
DEN JPN
GER
CAN
AUS
IRE
FIN
UK HK NOR
20
0
0%
10%
BUL
PERU
PORT
NED
do business appear to also be
ROM
HUN
CHI
countries where consumers make
MEX
more payments using cash.
GER
KOR
US
20%
THL
SING
30%
40%
50%
60%
70%
80%
90%
CASH AS A PERCENTAGE OF ALL CONSUMER PAYMENTS BY VALUE
Sources: The World Bank’s 2010 Ease of Doing Business Index and MasterCard Advisors’ analysis; figures
for cash exclude black and gray market spend.
The World Bank calculates its Ease of Doing Business scores as a product of
several other measurements of business difficulty. These include factors such as
how hard it is to start a business, access to credit, enforceability of contracts,
and insolvency laws. It is easy to imagine how getting credit or starting a
business would be harder in more corrupt, cash-intensive economies. Credit
and the ability to adjudicate credit are particularly hurt in cash-intensive
economies, where data on revenues and even assets are faulty or nonexistent
because so much of the economy happens in cash and off the books.
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USING CASH ISN’T NECESSARILY ABOUT AVOIDING TAX
In countries with consumption taxes, value-added taxes, or taxes on goods
and/or services, cash payments are often used as a way to avoid paying these
local levies. Higher taxes do not, however, appear to be correlated to higher
cash usage. Cash intensive economies may have larger gray market economies,
but this does not appear to be a result of higher taxes (See Figure 5 below).
FIGURE 5: CASH USAGE, GREY MARKETS, AND TAX AVOIDANCE
In countries with consumption
SIZE OF THE BUBBLE INDICATES ESTIMATED % OF CONSUMER PAYMENTS, BY VALUE, MADE USING CASH
55%
HIGHER TAX: SMALLER GREY MARKET
HIGHER TAX: LARGER GREY MARKET
45%
AUT
AVERAGE TAX BURDEN
40%
FRA
NED
GER
UK
30%
US
AUS
BUL
SPA
ARG
BRA
RUS
however, appear to be correlated
to higher cash usage. Cash
ROM
GRE
SLVK
25%
intensive economies may have
KOR POL
larger gray market economies,
PORT
20%
but this does not appear to be a
INDO IND
CHN
result of higher taxes.
CHI
15%
TAI
SING
10%
5%
local levies. Higher taxes do not,
SLV
CAN
IRE
JPN
as a way to avoid paying these
ITA
HUN
CZH
SWI
cash payments are often used
BEL
FIN
NOR
35%
taxes, value-added taxes, or
taxes on goods and/or services,
DEN
SWE
50%
MEX
LOWER TAX: SMALLER GREY MARKET
0%
5%
10%
15%
LOWER TAX: LARGER GREY MARKET
20%
25%
30%
35%
40%
45%
50%
ESTIMATED % OF THE ECONOMY THAT IS ‘GREY’ OR ‘UNDERGROUND’
Sources: The Heritage Foundation 2009, The Tax Justice Network 2009, and MasterCard Advisors’
analysis; figures for cash exclude black and gray market spend.
The countries with more cash payments and larger gray markets (seen in Figure 5
as the countries with the larger bubbles to the right of the chart) do not appear
to have larger average tax burdens than those with fewer cash payments and
smaller gray markets (smaller bubble size/left of the chart). Indeed, many of
these countries have substantially lower average tax burdens, suggesting that it
is something other than a desire to avoid taxation that underpins the preference
for cash.
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CASH-INTENSIVE ECONOMIES ARE LESS PRODUCTIVE
PER CAPITA
Basic economics tell us that corruption and impediments to business will have
a negative impact on the productivity of a given economy. This can also be
observed in the direct correlation between cash usage and national per-capita
GDP seen in Figure 6 below.
FIGURE 6: CASH USAGE AND PER-CAPITA GDP (2011 FIGURES/$US THOUSANDS)
CORRELATION: -0.67%
PER CAPITA GDP IN USD, AVERAGE OF 2009-2010, IN THOUSANDS
$90
This correlation between lower
productivity and a preference for
NOR
$80
cash suggests that governments
$70
may want to investigate deeper
SWI
$60
into whether there are any causal
DEN
$50
links between the preference for
IRE
cash and economic productivity.
SWE
US
FIN
UK
BEL CAN AUT
GER
FRA NED JPN
SING
$40
AUS
ITA
SPA
HK
$30
GRE
SLVK
$20
SLV
KOR
PORT
CZH
POL
CHI
$10
MLY
CHN
$0
0%
10%
20%
MEX
30%
ARG
THL
BRA
PERU
HUN
RUS
INDO
40%
50%
60%
ROM
BUL
IND
70%
80%
90%
CASH AS A PERCENTAGE OF ALL CONSUMER PAYMENTS BY VALUE
Sources: Oxford Economics 2011 data and MasterCard Advisors’ analysis; figures for cash exclude black
and gray market spend.
This correlation between lower productivity and a preference for cash suggests
that governments may want to investigate deeper into whether there are any
causal links between the preference for cash and economic productivity. It may be
worth considering the knock-on effects of a preference for cash when attempting
to tally up the social and private costs of different payment instruments.
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Global Insights
SOME GOVERNMENTS ARE ALREADY GETTING INVOLVED
Many governments appear to be acknowledging the benefits of moving away from cash, and are getting
involved in payment choices by creating incentives to go electronic.
FIGURE 7: GOVERNMENT ELECTRONIC PAYMENT INITIATIVES AROUND THE GLOBE
BOLETAZO
INITIATIVE
MULTIPLE ELECTRONIC
PAYMENT INITIATIVES
M-PESA
VAT DISCOUNT FOR
ELECTRONIC PAYMENTS
Developed Markets with Low Cash Usage
Developing Markets with High Cash Usage
Developed Markets with High Cash Usage
Markets in Transition
COUNTRY
INITIATIVE
DETAILS
Argentina
VAT Discounts
for Electronic
Payments
In Argentina, under regulations designed to reduce the size of the underground economy, cardholders receive
a five-point reduction in the country’s 21% basic VAT rate for debit card transactions, and three points for
credit card transactions. There is a separate two-point reduction for purchases of gasoline. Reimbursement
is monthly, with the amount credited to the cardholder’s credit card account or bank account.
Kenya
M-Pesa
Conceived and launched by the U.K. government Department for International Development (DFID) and
Vodafone’s Kenyan affiliate Safricom, the initial concept of M-Pesa was to create a service that allowed
microfinance borrowers to conveniently receive and repay loan rates to their users by reducing the cost
of handling cash. Once launched, customers previously lacking access to baking services began using
it for a variety of financial applications. The main focus of M-Pesa today is payments and remittances.
M-Pesa customers can deposit and withdraw money from a network of agents that includes airtime
resellers and retail outlets acting as banking agents.
Korea
Multiple
Initiatives
The South Korean government has a long history of creating incentives to move away from cash. The
first of these began prior to the 1988 Seoul Olympic Games, and offered tax incentives for businesses
that accepted cards, coupled with audits for those who refused to accept them. Incentives to
consumers included lotteries and tax breaks. Recently the government has spurred further expansion
by allowing the payment of school tuition and utilities with cards.
Mexico
Boletazo
The Ministry of Finance launched this program to promote the use of cards. It is funded with taxdeductible contributions from commercial banks to a trust fund. The program’s two main components
are a lottery system (Boletazo) that enters every card transaction into a raffle for prizes and a program
that promotes deployment of POS terminals at no cost to the merchant.
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CONCLUSIONS
There will always be a need for cash in some form. In places where infrastructures
do not exist, or have been compromised, its portability and stored value can mean
that cash is the only way to pay. Cash in some form is here to stay, whether we like
it or not.
So while there may be good reasons to ensure that we are always able to use cash, its
predominance in some economies suggests that cash usage feeds, and is being fed by,
bad behavior. The estimates of cash usage prepared for this paper suggest that cash
usage in many economies far outstrips what would be expected of consumers making
rational micro-economic choices, and inasmuch as cash seems to be facilitating bad
behavior, this preference for cash is not a good thing.
The estimates of cash usage
The information presented here can in no way be seen as implying any causation
between cash usage and bad behavior. To blame bad behavior like corruption on
a preference for cash would be like blaming high unemployment on too many job
seekers. It would be blaming the symptoms for the disease. The most we can imply
from the data reviewed is that a preference for cash appears, in many cases, to be
symptomatic of broader economic problems and bad behavior. Data on the effect
that reducing cash (i.e., through incentives such as M-Pesa or Boletazo) has had
on this bad behavior are difficult to interpret and cannot be seen to imply a causal
relationship between the two. This said, few governments that have undertaken
initiatives to reduce the use of cash would question that they had had a positive
overall effect on their economy.
choices, and inasmuch as cash
prepared for this paper suggest
that cash usage in many
economies far outstrips what
would be expected of consumers
making rational micro-economic
seems to be facilitating bad
behavior, this preference for cash
is not a good thing.
NEXT STEPS
This is the first in a series of articles on the cost and consequences of cash. Planned
future topics include:
SUBJECT
SUMMARY
The World Beyond Cash:
Cash Transaction Pools
Delving still deeper into the pools of cash transactions
identified in “Is There Such a Thing As Having Too Much
Cash?” this short paper will provide estimates of the size
of cash pools around the globe by payment locale (country
and expenditure type) and offer ideas as to why these
volumes persist as cash.
Factors Affecting Payment
Choice
Cash is still used in a variety of situations where pure
rational micro-economic considerations among stakeholders
would suggest that other solutions would be preferred. This
short paper offers a framework by which to think about
all the considerations that go into stakeholder payment
preference.
Merchant Considerations
For Cash Usage
Cash is often perceived as the cheapest means by which to
receive payment because it lacks any ad valorem element
of cost (elements present in other methods of payment,
such as credit and debit). This point of view only considers
payment vehicles from a cost perspective, whereas a more
balanced, P&L-type perspective is required. This study
will flesh out the full list of factors to be considered as
merchants seek to qualify the cost associated with different
payment instruments.
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ABOUT THE AUTHORS
Hugh Thomas
Senior Managing Consultant, MasterCard Advisors
Hugh_Thomas@MasterCard.com
Kevin Mellyn
Principal, MasterCard Advisors
Kevin_Mellyn@MasterCard.com
For additional insights, please visit www.mastercardadvisors.com and insights.mastercard.com.
©2012 MasterCard. All rights reserved. Proprietary and Confidential.
Insights and recommendations are based on proprietary and third-party research, as well as MasterCard’s analysis
and opinions, and are presented for your information only.
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