The pandemic has not spelled the death of cash as many suspected it would. In fact, demand for hard currencies as a savings vehicle has gone in the opposite direction as demand reached its highest level in 60 years.
Cash withdrawals surged at the onset of the pandemic as circulating notes increased twice as much as expected in 2020 and remained elevated in the following year, according to an April 14 Bank of Canada report.
The Royal Bank of Canada noted in a May 9 report that cash was used more as a savings vehicle rather than for transactions. The Bank of Canada’s data tracking transactions found that the volume of cash purchases dropped precipitously from 54 per cent in 2009 to only 22 per cent in 2020.
RBC analyst Josh Nye has a few reasons why Canadians are clutching onto cash: for one, there is an overall correlation with crises and the need to have hard cash on hand. Nye wrote that the demand for cash was pronounced over 20 years ago amid fears that the Y2K programming bug would wipe out the worldwide network of ATMs and digital payment systems. This “dash for cash” also resurfaced during the global financial crisis in 2008 when consumers were unsure of whether banks could stay afloat.
“On that basis, Canadians appear to be driven by a desire to stash, not spend cash,” Nye wrote.
Nye added that low interest rates, which have been in play during the pandemic, also motivated the demand for larger notes as a store of value. Since 2014, most of the currency demand (as a share of gross domestic product) were taken up by $50 notes. The report added that the $100 bill now account for 60 per cent of all currency in circulation, rising from 50 per cent back in 2010.
While Canada has the second-most ATMs among the countries in the Organization for Economic Co-operation and Development, this number has been steadily declining since 2017 with deposits and withdrawals falling even faster, according to RBC.
No consumer should be refused the right to pay with cash
As Canadians flocked online during the pandemic for everything from banking, to shopping, and everything in between – cybercrime had also become a stronger concern. To some Canadians, keeping cash on-hand has been a form of cybersecurity in itself.
Rising interest rates and inflation running at multi-decade highs could take some demand away from cash as a savings vehicle, but it won’t pull out all demand any time soon.
Canadians increasingly relying on e-commerce as the world shut down led many concerns that Canada would go cashless. This was a particular concern for cash-dependent organizations like the Canadian Association of Secured Transportation. In December 2020, CAST had been calling on retailers to continue accepting cash as a form of payment.
“Bank notes are legal tender in Canada, and many citizens rely on cash to obtain essential goods and services, which has become more important than ever in the context of the COVID-19 pandemic and its ongoing social and economic repercussions,” said CAST president Steven Meitin in a press release at the time. “No consumer should be refused the right to pay with cash.”
However, most Canadians plan to keep cash on hand, with 62 per cent of Bank of Canada survey respondents saying they made a cash transaction in the previous week and 81 per cent saying they had no plans to go cashless.
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Canada’s commitment to cash has economic implications: a 2019 report by the Boston Consulting Group found that moving to a cashless model could add about one percentage point to the annual GDP for mature economies like Canada. While a benefit, Nye noted that this figure may be an overestimate for Canada given its lower cash-to-GDP ratio compared to other countries in the OECD.
An increasingly digital economy raises questions over what role Canada’s central bank could play in public money. This conversation around the digitization of money comes as the Bank of Canada is exploring its own central bank digital currency (CBDC), a digital currency issued by a central bank rather than a private company.
Most recently, Bank of Canada deputy governor Timothy Lane told a Financial Times panel in late April that he sees the Bank establishing a basic format before the private sector would add innovations to the product.
Nye noted the preference to use cash as a savings vehicle could boost the case for a hybrid of a cash and CBDC future while taking into account this decline in cash as a payment method.
“As hard currency becomes less relevant as a payment method, the Bank of Canada risks losing its role as a payment provider—a role that could prove valuable should private players come to dominate the market for digital payments.”