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FX International Payments

Negative Rates Part 5: In International Business, Trying to Avoid Them May Bring About a Cashless World

By Frances Coppola

Banks are starting to pass negative rates on to businesses and individuals who make deposits that exceed government deposit insurance limits.1 Though the U.K. hasn’t directly experienced negative policy rates, this would mean deposits above the £85,000 limit; in Europe (which has experienced negative rates), the deposit insurance limit for international businesses and individuals is roughly equivalent, at 100,000 euros (or £85,086 at current exchange rates). For international businesses that make large payments to suppliers or have large numbers of employees all paid at the same time, this means the money that must be present in a bank account when a money transfer payment is initiated can be subject to a negative rate. If the amount of money is very large, even a small negative rate imposed for a short period of time can mean a significant cost.

Obviously, international businesses want to avoid what amounts to a tax on their cash reserves. They may also be concerned that in the event of a bank failure, their deposits could be subjected to a haircut, especially in Europe. In 2013, for example, depositors in the Bank of Cyprus lost 60 percent of their holdings above 100,000 euros.2 So international businesses may only keep in bank deposit accounts the money needed to make overseas money transfers and other payments. The rest could be held in some form of safe liquid asset, such as government bonds.


But central bank action also is driving down yields on government bonds into negative territory. Since price is the inverse of yield, this means that government bonds are becoming increasingly expensive. And although much government debt is at fixed rate, countries such as Germany and Japan are issuing long-term debt at negative rates: anyone buying these is in effect paying a tax to hold them.3 Central bank action also pushes interest rates on other forms of liquid investment, such as money market funds, into negative territory, since these are a substitute for both bank deposits and short-term government debt. The range of zero or positive-yield liquid assets available to international businesses with cash reserves is shrinking rapidly.


International Businesses Increasingly Hoard Banknotes to Avoid Negative Rates


Tying up cash reserves in illiquid assets such as property, or investing them in riskier assets such as equities, doesn’t help international businesses that periodically need large amounts of cash for money transfers. So as negative rates go deeper, it could even become attractive for international businesses to hoard physical cash (banknotes).4 This is not cost free, of course: keeping large amounts of physical cash needs space and is a magnet for thieves, so storing cash requires tight security and insurance. In Switzerland, insurance companies report that businesses are increasingly looking for insurance to cover physical cash holdings.5 And in Japan, sales of safes are soaring.6


Central banks are fighting the move to physical cash. Earlier this year, the European Central Bank (ECB) announced that it would withdraw the 500 euro note,7 there have been calls for the Bank of England to withdraw physical cash8 and India officially banned 500- and 1,000-rupee notes in November 2016.9 The principal reason for doing so would be to discourage criminal use.10 But withdrawing high-denomination notes would also discourage physical cash hoarding, since it increases storage costs. Some analysts suggest that withdrawing these notes clears the path for imposition of much deeper negative rates, since negative rates would be harder to avoid.11


Economists say that widespread hoarding of physical cash would negate the intended effects of negative rates. Because of this, some call for the complete elimination of physical cash.12


Implications for International Business Payments of Eliminating Notes and Coins


Should physical cash be eliminated, there would probably be little effect on international payments and money transfers. After all, no one sends physical cash to foreign countries any more. However, if not all countries imposed deeply negative rates, we might see an increase in overseas money transfers as international businesses move cash reserves to countries where interest rates are higher. We might also see an increase in use of cryptocurrencies such as bitcoin, where identity can be hidden.13


The real impact would be felt domestically. Businesses would find customers making greater use of credit, debit and prepayment cards, as over-the-counter transactions that are currently made in physical cash move even faster to electronic media. Mobile payments using smartphones would also likely increase, and businesses may become more willing to accept unconventional forms of payment (again, bitcoin). There could also be an increase in electronic money transfers, as people who currently pay bills in cash at bank counters are also forced to use electronic payments. International businesses that currently pay workers in cash would also have to move to online or money transfers.


There are wider social implications, too, including the welfare costs of eliminating cash. Consider that around 6 percent of the population in high-income member countries of the Organisation for Economic Cooperation and Development (OECD) – and a far higher percentage in developing market countries – do not have bank accounts.14 Governments would have to ensure that these “unbanked” have access to payment systems. This might involve requiring commercial banks to provide basic bank accounts for the poor,15 or it could mean encouraging wider use of mobile money such as smartphone credits, peer-to-peer digital payment services such as Paypal and cryptocurrencies such as bitcoin.


More radically, it might mean that central banks will issue their own electronic transaction currency and provide secure wallets for all individuals and businesses.16 This alternative is already being actively discussed by central banks.




As the slowdown in global trade continues,17 central banks are looking for ways to support their economies. Eliminating physical cash in favour of electronic money could give central banks the flexibility to impose much deeper negative rates. For most international businesses, this would simply accelerate an existing trend, since cash B2B payments largely disappeared a long time ago and customers are increasingly using cards, mobile money and money transfers – although deeply negative rates would be likely to raise business costs. But completely replacing physical cash has wider social implications. Some economists believe it would amount to complete reinvention of the financial system for the 21st century.18

The Author

Frances Coppola

With 17 years’ experience in the financial industry, Frances is a highly regarded writer and speaker on banking, finance and economics. She writes regularly for the Financial Times, Forbes and a range of financial industry publications. Her writing has featured in The Economist, the New York Times and the Wall Street Journal. She is a frequent commentator on TV, radio and online news media including the BBC and RT TV.


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10. "Why $100 Dollar Bills and 500 Euro Notes May Soon Be Killed Off", Time magazine; http://time.com/money/4226174/kill-100-dollar-bill-500-euro-phase-out/
11. "Here is the real reason why authorities want to ban high-denomination bank notes", Zero Hedge; http://www.zerohedge.com/news/2016-02-11/here-real-reason-why-authorities-want-ban-high-denomination-bank-notes
12. "Costs and benefits to phasing out paper currency", Harvard University (Ken Rogoff); http://scholar.harvard.edu/files/rogoff/files/c13431.pdf
13. "Will International Payments Technology Move Us Towards A Cashless World?", American Express; https://www.americanexpress.com/us/foreign-exchange/articles/cashless-international-payments-new-trend/
14. "The Global Findex Database 2014: measuring financial inclusion around the world,", World Bank; http://documents.worldbank.org/curated/en/187761468179367706/pdf/WPS7255.pdf%23page=3
15. "Payment Accounts Directive", U.K. Financial Conduct Authority; https://www.fca.org.uk/firms/payment-accounts-directive
16. "Digital Cash: Why central banks should start issuing electronic money", Positive Money; http://positivemoney.org/wp-content/uploads/2016/01/Digital_Cash_WebPrintReady_20160113.pdf
17. "The economic implications of China’s import-export trade slowdown", American Express; https://www.americanexpress.com/us/foreign-exchange/articles/economic-effects-of-china-economic-slowdown-on-import-export-trade/
18. "Central bank digital money: the end of monetary policy as we know it", Bank Underground; https://bankunderground.co.uk/2016/07/25/central-bank-digital-currency-the-end-of-monetary-policy-as-we-know-it/

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