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the future of money

The Canadian five and 10 dollar bills, made of polymer, are displayed following an unveiling ceremony at the Bank of Canada in 2013.Chris Wattie/Reuters

How Canadians interact with money - both physical and digital - is changing as financial technology evolves.

The Dominion of Canada $4 note is an officious souvenir from late Victorian times, as quaint and useless as today's polymer bills may one day become.

An early version depicted in semi-profile the Marquess of Lorne, Canada's fourth Governor-General, a curl of hair set high on his forehead. A later version showed the Earl of Minto, the eighth Governor-General, bedecked in medals with his wife. The $4 note was equal to one Canadian pound, another denomination in Canada's piecemeal monetary back story, so a $4 bill was convenient for a while.

But a century later, it's a collectors' oddity, like today's plastic-like notes decorated with the Canadarm (on the back of the $5 bill) and a VIA Rail train ($10) might one day become when money may have long gone completely digital.

But the day when cash disappears, if it does come, is unforeseeable at the moment. Despite the rush to digital, physical cash isn't going away any time soon, say researchers, even though it's an economic burden.

More than an inconvenience, the real pressures on physical money is the sheer cost of cash. "For a number of reasons, cash is a drag on the economy. It imposes costs on consumers. It imposes costs on businesses. And most significantly, it imposes costs on the Treasury," argued Bhaskar Chakravorti, senior associate dean of international business and finance at the Fletcher School at Tufts University in Medford, Mass.

Dr. Chakravorti and fellow researchers have studied the movement by governments and central banks around the world to do away with physical money. In a 2013 study, they found that the cost of paying for the distribution and use of cash in the U.S. economy alone amounted to $1,739 (U.S.) a household, or 3.3 per cent of median household income.

And for the very poor who deal predominantly in cash or who don't have bank accounts, cash can rack up higher costs, such as payday-lending and check-cashing fees. The argument is that this alienates those who don't have a credit card or chequing account, worsening social inequalities.

Cash can also reduce tax revenue, for all the shadow-economy, under-the-counter, cash-only work that goes undeclared. And then there is the sheer cost of printing and distributing cash from bank to bank, from shop to bank, from bank to ATM. For a country the physical size of Canada, those distribution and transportation costs are high for banks, businesses and consumers. "There are a number of different arguments that are being made by experts all over to phase out cash," Dr. Chakravorti said.

Yet the most pressure for getting rid of cash may come in the future from governments themselves, looking for tighter fiscal control, which cash allows less. When a government wants to spur the economy by keeping interest rates low or even dropping into negative rates, it doesn't want people hoarding cash in response. It wants them spending money.

"Many economists have argued that we should start phasing out cash so that people don't have the option of sticking it under their pillows, but that they spend it, which is the original purpose of driving toward negative interest rates," he said. "A number of European countries – Denmark, Sweden and Norway – are already considering eliminating cash, and the European Central Bank has made several moves toward getting rid of large denomination bills."

The €500 note will stop being issued around the end of 2018, the European Central Bank announced this month. "I think every major monetary system has been looking at trying to phase out cash," Dr. Chakravorti said.

The flip side is that as an economy grows, so grows the need to print more money, because a larger economy simply uses more of it. At the same time, replacing damaged notes remains the principle reason for the Bank of Canada to print new notes.

"Of course you do need to grow the amount of cash that is circulating. But at the same time, because of these other reasons, people are actively looking to reduce the amount of cash, and to reduce certainly the higher denomination bills," Dr. Chakravorti said.

In Canada, cash use has declined in terms of the volume of payments, but not in terms of their dollar value. Cash represented 44 per cent of payment volume in 2013, according to the latest survey by the Bank of Canada. This volume is down from 54 per cent in 2009. Yet, while cash made up just 23 per cent of the value of payments in 2013, this number has stayed more or less unchanged since 2009.

Older Canadians between 55 and 75 used cash more often, about half the time, compared with about 40 to 41 per cent of the time among younger adults. Those with lower incomes used cash 52 per cent of the time, compared with high-income earners using cash 36 per cent of the time. Similarly, those with only a high-school education also used cash half the time, compared with those with university educations using cash 39 per cent of the time, the Bank of Canada reported.

Not surprisingly, cash was found to be used mostly for travel, parking, entertainment, meals and other types of goods and services, such as financial-service transactions, for charities and for payments in specialty shops, the Bank of Canada reported. And on average, Canadians tended to have $84 cash in their wallets, roughly enough for five small cash transactions.

Expectations are that the use of cash will keep dwindling. Yet there are a number of factors keeping it around.

"There's an age thing going on. Younger people tend to be more inclined to use credit cards and debit cards," said Laurence Booth, professor in structured finance at the University of Toronto's Rotman School of Management.

But using cash is more than just an old habit. As the Bank of Canada study found, there is a strong perception among the general population that the cost of cash is still inexpensive compared with fees and interest charges for debit and credit cards. And there is also a continuing sense that cash is secure, as opposed to other payment methods.

That's a good thing, because cash has a psychological element, principally the ability to see the impact any time money is spent, said Jeff Schwartz, executive director of Consolidated Credit Counseling Services of Canada Inc. "The physical element of cash often provides a mental break from a purchase."

There are so many technological options being developed, however, to bypass cash, that cash is increasingly becoming a means of last resort, that is, the only option when other options aren't available.

But to do away with cash, "You do need to have the drive from the government. And in many countries, the drive has to be paired with a drive toward producing or creating viable, credible and trusted electronic alternatives," said Tufts's Dr. Chakravorti.

And so, as with the bygone $4 note, the future elimination of cash, if it happens, may come down to the will of the government to implement tighter fiscal controls on money and come up with alternate forms of it. It won't be decided merely by the public's new spending habits.