Bulletin – March 2021 Payments Cash Demand during COVID-19

Trends in banknote demand

The COVID-19 pandemic significantly affected cash demand in Australia. Demand for banknotes was extraordinarily high over 2020, despite a sharp decline in the use of cash in day-to-day transactions. The pandemic has accelerated trends in banknote demand that had already been occurring for many years. Namely, the use of physical currency as a means of payment has continued to decline, while demand for cash as a store of wealth has grown (Caddy, Delaney and Fisher 2020; Finlay, Staib and Wakefield 2019). This article explores how banknote issuance evolved during the pandemic so far, what factors drove the increase in demand for cash and how this compares to historical and international experiences.

The sharp rise in the demand for currency began in mid March 2020, around the time that the federal and state governments began imposing containment measures – such as travel restrictions and social distancing rules. The value of banknotes in circulation grew by 17.1 per cent over the year to February 2021 reaching $97.3 billion (Graph 1). This compares with average annual growth in banknotes outstanding of around 5 per cent over the previous decade. As a result, the value of banknotes in circulation, measured as a percentage of GDP, has reached a historic high of 4.9 per cent.

The bulk of the increase in banknotes issued by the Reserve Bank of Australia (RBA) occurred over the first 6 months of the pandemic ($13.1 billion in gross issuance from March to August). The large spike in demand in mid March coincided with a period of acute uncertainty during the early stage of the pandemic. Cash demand grew at a more moderate pace in April as strict pandemic containment measures limited economic activity. Demand for cash picked up again between May and August as government restrictions were gradually eased, giving households more opportunities to use cash. Since then, the value of banknotes in circulation has continued to grow at around its average pace.

The strong growth in banknotes in circulation was driven by demand for the higher denominations ($50 and $100 banknotes) (Graph 2). Around 70 per cent of the volume of banknotes issued since mid March 2020 were $50 banknotes and almost 20 per cent were $100 banknotes. At the same time, returns of poor quality or old series banknotes to the RBA were lower than usual throughout 2020, but have picked up in early 2021. Further, banks stopped returning banknotes that were surplus to their requirements after the onset of the pandemic. This is likely due to the sharp drop in economic activity leading to a slowing in the movement of cash around the economy, as well as some precautionary holdings by banks. The increase in high-denomination banknotes in circulation, coupled with reduced transactional cash use, suggests an increased desire in the community to hold banknotes as a precaution or store of wealth.

Drivers of cash demand during COVID-19

Transactional demand for cash

The use of cash for day-to-day payments has been in trend decline. The share of total retail payments made in cash has fallen from 69 per cent in 2007 to 27 per cent in 2019 (Caddy, Delaney and Fisher 2020). For in-person transactions, the share of payments made with cash was a little higher before the onset of the pandemic, at 32 per cent in 2019 (Delaney, McClure and Finlay 2020). COVID-19 has accelerated this trend; the decline in transactional cash use was most apparent at the times when lockdown restrictions were acute (and there was less opportunity for in-person spending), but survey data suggest that the shift away from day-to-day cash use may become permanent for many consumers. There is a range of data sources that point to weak demand for cash for transactional purposes, including: subdued issuance of low-value banknotes ($5, $10 and $20); declines in cash lodgements at cash depots; lower ATM withdrawals; a sustained shift to online spending; and survey data on banknote use during the pandemic.

There has been little issuance of low-value banknotes during the pandemic (Graph 3). These denominations are typically used for in-person transactions and for merchants to provide change, so subdued demand for these banknotes reflects reduced use of cash for consumer spending. This is particularly the case for the $5 and $10 denominations. There was no issuance of these denominations in the first half of 2020 and subdued issuance over the remainder of the year.

The value of cash that is moved from a retailer to a bank via a commercial cash depot provides an indication of cash spending in the economy. These lodgements at cash depots fell sharply at the onset of the pandemic as businesses received fewer cash payments and took longer to deposit their cash floats into commercial banks. The value of cash lodged at depots fell by around a third between February and May, and remains well below pre-pandemic levels.

Lower transactional demand for cash is also evident from the sharp decline in the number and value of cash withdrawals, particularly at ATMs and in the early stages of the pandemic (Graph 4). The number of ATM withdrawals fell by around 50 per cent in the first 2 months of the pandemic in Australia. By the end of the year, withdrawals were still 20 per cent lower than before the pandemic in February 2020. The average withdrawal size increased at a slightly faster pace than its trend increase, which points to some demand for cash as a store of wealth. Access to cash also declined due to closures of ATMs and bank branches. This decline in access was mostly temporary, with venues being inaccessible due to lockdown restrictions and banks adjusting their operations through reduced trading hours.

While aggregate retail spending has remained resilient throughout most of the pandemic, it does not appear to have translated into the usual level of cash transactions. Households have adapted to restrictions by making more of their purchases online, with one-third of Australians preferring to shop more online now than before the pandemic (ABS 2020). The share of retail sales conducted online has sharply increased from an average of 6½ per cent in the second half of 2019 to an average of 10 per cent since March 2020 (Graph 5). It has remained elevated even after physical-distancing restrictions eased, which suggests that consumers' change in shopping habits will endure. The shift towards online transactions is also clear from data on debit and credit card use. Both in-person and remote card transactions declined sharply during March and April, reflecting lower household spending. But the number of in-person transactions fell 3 times more than remote transactions in percentage terms in the early part of the pandemic. In-person transactions returned to pre- COVID-19 levels in late 2020, while the volume of remote card transactions recovered more quickly.

A survey commissioned by the RBA – the RBA Online Banknotes Survey – identified the broader shift away from transactional cash use over 2020. (See ‘Box A: Consumer Cash Use during COVID-19: Evidence from the Online Banknotes Survey’ for more details on the survey of individuals' attitudes towards cash.) Cash was used for 23 per cent of respondents' most recent in-person transactions. Although not directly comparable, this is lower than the 32 per cent of in-person payments made in cash in 2019 from the Consumer Payment Survey (CPS) (Delaney, McClure and Finlay 2020). Forty-four per cent of individuals reported using less cash since the start of the pandemic, compared with only 12 per cent using more cash (Graph 6). Two-thirds of individuals said this change in payment behaviour was likely to continue even after the pandemic was over.

One reason for this dramatic shift in payment preferences and behaviour is community concern about transmission of the virus via banknotes. Of those people who preferred not to use banknotes in transactions, 28 per cent said one reason was because they thought of cash as being unhygienic. The RBA also responded to a small number of public enquiries about the potential health risks of using cash, recommending that banknotes be treated like any other surface and to follow good hand hygiene (RBA 2020a). Concern over cleanliness also drove some businesses to discourage cash use. The consumer survey found that 45 per cent of respondents had encountered a business that did not accept cash in the month of September 2020, a substantial increase from 23 per cent in 2019. Furthermore, almost a quarter of respondents cited concerns about cash acceptance as a reason for preferring not to use cash, compared with just 7 per cent in 2019.

An RBA survey of retail businesses during September 2020 identified a small but statistically significant decline in cash acceptance (See ‘Box B: Merchant Acceptance of Cash and Cards’ for more details on the survey methodology and results). Although the vast majority of retail businesses continued to accept cash during the pandemic, the acceptance rate decreased by 3.6 percentage points to 95.8 per cent, compared with near-universal cash acceptance in February 2020. As such, the merchant and consumer surveys both highlight a decline in cash acceptance. Note that a small decline in cash acceptance by a few merchants could potentially lead to a larger decline in the ability for people to use cash.

Precautionary holding of cash and store-of-wealth motives

The significant increase in outstanding banknotes in the economy against the backdrop of reduced cash payments implies that the demand for cash during the pandemic has likely been driven by hoarding behaviour. The relatively strong demand for high-value banknotes suggests a significant precautionary savings or store-of-wealth motive by households and businesses.^[1] Since mid March 2020, almost 90 per cent of the volume of banknotes issued were $50 and $100 banknotes.

Both cash held by the community (outside banks) and bank deposits increased strongly over 2020, but growth in cash holdings outpaced that of deposits. As such, the currency-to-deposits ratio is around its highest point in a decade (Graph 7). The strong growth in deposits suggests that confidence in the banking sector as a whole was sustained, but it is possible that some people held more cash because of a general sense of uncertainty or because they were concerned about possible disruptions to electronic payment systems during the pandemic. For example, in March, the average value of over-the-counter cash withdrawals from banks spiked, although the amount of withdrawals were lower. This points to a precautionary motive by a subset of the community during the initial stage of the pandemic.

Holding cash also became relatively more attractive as interest rates declined, because this lowered the opportunity cost of holding cash, which pays no interest.^[2] However, the scale of the response in March was much larger than lowered opportunity costs can explain, so other factors must have been at play.

Aggregate household disposable income has increased substantially, largely because of government income support policies, while loan repayment deferrals and early withdrawal of superannuation have also supported household cash flow more generally (RBA 2020b). Government income support has also assisted businesses to build considerable liquidity buffers. Given that household consumption declined significantly in 2020, it is likely that some of the higher cash flows of households and businesses have been retained in the form of physical currency, thereby contributing to the strong increase in currency held by the private non-bank sector. In addition, those earning their income in cash would have had less opportunity to spend or deposit it in their usual way.^[3]

The role of precautionary cash holding in banknote demand is supported by the findings from the RBA's 2020 Online Banknotes Survey, which found that 56 per cent of respondents stored cash outside of a bank. This is higher than the almost 40 per cent of CPS participants storing cash outside of a wallet in 2019. Although the 2 surveys are not directly comparable, it suggests that precautionary demand for banknotes remains a factor in banknote demand. Of the respondents who were storing banknotes, the majority kept around the same amount of cash compared with the previous year, while 18 per cent kept more and 23 per cent kept less. This means that around 10 per cent of households held more cash, while 13 per cent reduced their cash holdings, although we do not know by how much. Nonetheless, Finlay, Staib and Wakefield (2019) argue that surveys are likely to understate cash hoarding for a range of reasons. Finally, almost one-fifth of those who stored cash outside a bank said that the pandemic – and related factors such as potential lockdowns – was one of their reasons for doing so.

The banking sector may also want to build up currency holdings to manage risks related to meeting the demands of their depositors. With strong demand for physical cash and logistical challenges in moving money around Australia, the wholesale banknote distribution system experienced increased pressure at times during the pandemic (see ‘Box C: The Impact of COVID-19 on the Cash Distribution System’ for more detail). Commercial banks' currency holdings were quickly run down with the sudden strong increase in demand for banknotes at the onset of the pandemic, coupled with fewer banknote deposits flowing into the banking sector. In response, the RBA opened its banknote distribution contingency site to help the banks replenish their banknote holdings. This saw cash holdings of the banking sector peak in March and again in July/August (Graph 8). Apart from these brief spikes, cash holdings at banks have mostly remained around pre-pandemic levels. This suggests that the precautionary behaviour of banks was temporary and related to banks managing their stocks to meet customer demand. Overall, cash holdings at commercial banks account for a relatively small share of the extra cash in circulation since March.

A sizeable share of Australian banknotes is estimated to be held overseas, perhaps as much as 15 per cent (Finlay, Staib and Wakefield 2019). Restrictions on international travel have disrupted cash spending from tourism, so any overseas demand for banknotes since early 2020 would be mostly to hoard. Information from liaison suggests that overseas banknote demand has not been a factor in driving cash demand during the pandemic. Overseas wholesale currency shipments in March and April were not out of the ordinary, even allowing for the initial depreciation in the exchange rate. And since May there has been almost no overseas demand for Australian banknotes. As such, the usual strong relationship between $100 banknotes outstanding and the exchange rate has not held up (Flannigan and Parsons 2018).

Historical and international comparisons

Demand for cash has historically been strong during periods in which Australia has experienced economic or financial stress, such as during a recession (Cusbert and Rohling 2013). In real terms (that is, after allowing for inflation) year-ended growth in banknote demand peaked at 12 per cent during the recession in the early 1990s, and 9 per cent during the global financial crisis. This compares with growth of 3 per cent on average over 1960 to 2019. Banknote demand also increased in earlier recessions, but to a lesser extent.

These past episodes highlight that banknote demand is strong during times of economic uncertainty. Greater demand for high-denomination banknotes suggests that individuals hoard cash for precautionary and store-of-value purposes. For example, as the global financial crisis intensified, demand for high-denomination banknotes increased by around 16 per cent over the year to March 2009, compared with 4 per cent for the lower denominations. Similarly, demand for high-denomination banknotes was strong during the 1990s recession, while the amount of low denomination banknotes in circulation fell.

While strong cash demand is typical of periods of economic stress, the strength of demand during COVID-19 has been unprecedented. Not only has the growth in banknotes in circulation exceeded that encountered in the past, it has been the most sustained period of strong growth.

The experience of strong cash demand during the pandemic is not unique to Australia, with currency in circulation rising sharply across many economies during the pandemic (Graph 9). Across most advanced economies, currency growth has been significantly higher over 2020 than in 2019. The Anglosphere countries, including Australia, experienced particularly strong demand. Some Nordic economies that have experienced falling cash demand in the recent past saw positive growth in 2020.

Like Australia, strong precautionary demand coupled with weak transactional cash demand have been a common experience across many economies. Reports from the central banks of Canada, the euro area, the UK, and the US all highlight a sharp decline in transactional cash use during the pandemic, with a noticeable shift towards contactless payment methods (Chen et al 2021; European Central Bank 2020; Caswell et al 2020; Kim, Raynil and O'Brien 2020). For many countries, demand for high-denomination banknotes has outstripped that for lower denominations. And there has been some survey evidence of greater cash holdings during the pandemic. There is also some evidence that lower banknote deposits have led to commercial banks maintaining an elevated level of cash holdings during the pandemic to meet consumer demand and protect against further disruptions to the cash distribution system.

Conclusion

Demand for cash has increased substantially during the COVID-19 pandemic. The value of banknotes in circulation rose 17 per cent since mid March 2020, around the start of the pandemic uncertainty in Australia. Transactional cash demand has fallen due to lockdowns and other restrictions, a shift towards online spending, and concerns over transmission of the virus via banknotes. Against the backdrop of lower cash use for everyday transactions, the strong demand for banknotes can largely be attributed to precautionary or store-of-wealth motives. A disproportionate increase in demand for high-denomination banknotes, as well as RBA survey findings, support this. Historical experience suggests that precautionary motives tend to come to the fore during periods of economic and financial stress. Australia was also not alone in seeing a substantial increase in demand for banknotes, with many other countries experiencing similar patterns of cash demand.

Footnotes

The authors are from Note Issue Department. Thank you to the team at the National Banknote Site in Melbourne who assisted in conducting the merchant cash and card acceptance survey, and Matthew Tsikrikas for organising the Online Banknotes Survey. [*]

High denominations are also used for transactions, with the $100 note increasingly so (Flannigan and Parsons 2018). But their use as a store of value is an important driver of their growth, especially relative to low denominations. [1]

Cusbert and Rohling (2013) found that 20 per cent of the sharp increase in currency demand during the global financial crisis could be attributed to the fall in interest rates and federal government stimulus payments. [2]

If unreported for tax purposes, these payments would be part of the shadow economy. Illegal production (such as illicit drug sales) also forms part of the shadow economy; this activity was likely disrupted due to COVID-19 but it is difficult to say whether this would have increased or decreased aggregate cash holdings. Finlay, Staib and Wakefield (2019) attribute 4–8 per cent of banknotes in circulation to be part of the shadow economy. [3]

Teenagers (16–19 years old) are an exception, as they had high cash use. This could be because some of them are paid cash for casual work. However, the sample size is small, so we focus on broader age groups to draw conclusions. [4]

References

ABS (2020), ‘Household Impacts of COVID-19 Survey’, November. Available at <https://www.abs.gov.au/statistics/people/people-and-communities/household-impacts-covid-19-survey/nov-2020>.

Caddy J, L Delaney and C Fisher (2020), ‘Consumer Payment Behaviour in Australia: Evidence from the 2019 Consumer Payments Survey’, RBA Research Discussion Paper No 2020-06.

Caswell E, MH Smith, D Learmonth and G Pearce (2020), ‘Cash in the Time of Covid’, Quarterly Bulletin, 24 November. Available at <https://www.bankofengland.co.uk/quarterly-bulletin/2020/2020-q4/cash-in-the-time-of-covid>.

Chen H, W Engert, KP Huynh, G Nicholls and J Zhu (2021), ‘Cash and COVID-19: The Effects of Lifting Containment Measures on Cash Demand and Use’, Staff Discussion Paper, March. Available at <https://www.bankofcanada.ca/2021/03/staff-discussion-paper-2021-3/>.

Cusbert T and T Rohling (2013), ‘Currency Demand during the Global Financial Crisis: Evidence from Australia’, RBA Research Discussion Paper No 2013-01.

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European Central Bank (2020), ‘Study on the Payment Attitudes of Consumers in the Euro Area (SPACE)’, December. Available at <https://www.ecb.europa.eu/pub/pdf/other/ecb.spacereport202012~bb2038bbb6.en.pdf?05ce2c97d994fbcf1c93213ca04347dd>.

Finlay R, A Staib and M Wakefield (2019), ‘Where's the Money? An Investigation into the Whereabouts and Uses of Australian Banknotes’, Australian Economic Review, 53(1), pp 22–34.

Flannigan G and S Parsons (2018), ‘High-denomination Banknotes in Circulation: A Cross-country Analysis’, RBA Bulletin, March, viewed 20 February. Available at <https://www.rba.gov.au/publications/bulletin/2018/mar/pdf/high-denomination-banknotes-in-circulation-a-cross-country-analysis.pdf>

Kim L, K Raynil and S O'Brien (2020), ‘2020 Findings from the Diary of Consumer Payment Choice’, July. Available at <https://www.frbsf.org/cash/files/2020-findings-from-the-diary-of-consumer-payment-choice-july2020.pdf>.

RBA (2020a), ‘General Questions’, RBA Banknotes site. Available at <https://banknotes.rba.gov.au/questions-and-answers/general-questions/>.

RBA (2020b), ‘Household and Business Finances in Australia’, Financial Stability Review, October.

RBA (2020c), ‘Reserve Bank of Australia Annual Report – 2020’, Annual Reports, pp 87–95.