Cash repression – the paper money squeeze

There is growing criticism of paper money and coins, and a small but increasing number of companies and service providers no longer allow for cash payment. Today, technology enables cashless payments beyond credit and debit cards, including mobile devices and a variety of payment services. Additional traction comes from the emergence of bitcoin and other cryptocurrencies.

The insurance industry is investigating scenarios of cash repression, ranging from writing business digitally, to an entirely cashless economy. Cash repression poses a significant risk for insurers, because it deprives them of the option to store cash physically, and allows for even more pronounced negative interest rates.

Meanwhile, Greece and Italy have introduced caps on cash payments, to curb the use of paper money and coins in order to fight tax evasion, Denmark has proposed a law that would no longer oblige restaurants, petrol stations and small shops from accepting coins and cash.1

A partial repression of cash occurs through limits on cash payments above a certain amount – currently in place in 12 EU countries – and the withdrawal of large denomination bills: For example, the European Central Bank has announced the phasing out of the 500 Euro bill.2 Recently, India (a very cash-oriented society) and Venezuela abruptly withdrew and exchanged bills to fight financial crime and inflation respectively. However, those most hurt were the poor, who held their small amounts of savings in cash.3

However, cash remains popular in transactions, because people trust the cash in their hands: In Germany, over 80% of daily transactions continue to be in cash, and even in the US, it remains the most popular way of settling payments.4

Potential impact:

  • An end of paper money could pave the way for even lower negative interest rates, with severe assets risks for insurers.
  • Predominantly cashless transactions would increase efficiency of operations considerably.
  • The withdrawal of paper money from circulation could lead to a further erosion of trust in governments and institutions in general, that could transiently also affect the insurance industry.
  • As a benefit for governments, the fight against tax evasion could lead to a broader tax base and higher tax revenues.
  • The positive impact on fighting terrorism, drug trafficking and other organised crime is likely to be small.
  • Digital payment networks are highly dependent on security and stability, as they are more susceptible to cyber-attack, identity fraud etc.
  • The recent case of India demonstrates that – if not properly executed – reforms to the payment system and the relative transition to digital payment systems can have detrimental effects on the poor and deepen the digital (and economic) divide between less and more digitally enabled regions (generally a rural-urban divide) with potential short-term drag on economic growth.

This text is an excerpt from the "Swiss Re SONAR, New emerging risk insights", June 2017.

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1 https://www.nzz.ch/finanzen/private-finanzen/sechs-gute-gruende-fuerbargeld-1.18559816
2 https://www.nzz.ch/finanzen/devisen-und-rohstoffe/devisen/beliebtes-zahlungsmittelanhaltende-hexenjagd-auf-bargeld-ld.135999
3 http://www.economist.com/news/leaders/21711040-narendra-modi-needs-take-measuresmitigate-damage-his-rupee-reform-has-done-indias, http://www.bbc.com/news/world-latinamerica-38339479
4 https://static.nzz.ch/files/7/5/8/bm_Anhaltende-Beliebtheit-von-Bargeld-Kopie_001_1.18775758.png


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