Sean Gleeson

We live in an era of convenience. Humans tend to be lazy, and any invention that makes our lives easier will be used. In the payment world, contactless payments like Apple Pay have made transactions seamless and as convenient as possible. In short, the convenience of contactless payments is killing cash; cash is no longer king.

When was the last time you paid for something in cash? For many of us, myself included, it was admittedly a long time ago. ‘Girl Math’, a concept that has gone viral in recent years through social media, captures the irrational yet highly relatable thought processes that girls refer to in order to justify making certain purchases. One of the many facets of girl math is the justification of paying for items in cash where, because of the form of payment, it is seen as a bonus or almost as a free purchase. It’s as if we didn’t have to pay for the item at all. This is especially true when we use up our 10 cent and 20 cent coins; these coins have likely been gathering dust at home for years and may have never found an alternative use to the coffee you’ve just bought. Indeed, this heuristic, which has long been discovered in the behavioural economics world as a form of mental accounting, applies to us all. 

The effect holds for some more than others of course; for those that favour cash, such as older generations, the effect is not as illuminated compared to Gen Z and Millenials. Many shops in Dublin have gone cashless due to environmental considerations, inspiring a tendency to tap and go rather than fork out unfashionable coins that clog up our pockets. For instance, a friend recently received a 50 euro note from a relative on his birthday. Upon finding a 2 euro coin in his pocket, he offered this 52 euro of cash to anyone who would Revolut him 50 euro. His dad immediately agreed and questioned the rationality of the deal. The response? Too much of an inconvenience to lodge the cash in the bank.

This draws me to the conclusion that there is some sort of convenience premium on paying with cash. The utility we obtain from purchasing an item in cash is in some way higher than the utility we obtain from purchasing that same item with card. Similar to using a gift voucher when we were younger. Essentially, we consider our level of financial wealth as the amount that is in our bank account. Any amounts that we have in cash are almost ignored or deemed secondary. When we pay for something in cash, our bank balance will remain the same; it thus feels almost like a free acquisition.

In Theory: Mental Accounting

This particular subset of girl math has been explained to some extent in the behavioural psychology field. The notion of mental accounting refers to differing cognitive values placed on the same amount of money based on subjective criteria. Effectively we place different values on equal amounts of money; we equate 52 euro in cash with 50 euro on card, based on the convenience premium. This has similarly been described by Director of Behavioural Finance and Investing at Betterment, Dan Egan, who stated that “two dollars are not treated as equals”. Cash is not a perfect substitute for card, even when they are the same amount. This financial behaviour violates the fungibility notion of economics, the ability of an asset to be evenly exchanged with another asset of the same type. It may not make any rational sense but human behaviour can be unjustifiable. 

This mental accounting boils down to the allocation of money pools into different cognitive ‘accounts’. For example, you may have a savings account for your next holiday, even while you are still paying interest on a car loan taken out last year. This theory was explained by Richard Thaler in his 1999 paper “Mental Accounting Matters”. He explains that, when we make a purchase, we obtain two kinds of utility: acquisition utility and transaction utility. Acquisition utility, like the idea of consumer surplus, is seen when we obtain a good for a payment of less than the value of which we perceive it to be. Then there is transaction utility, under which the convenience premium falls. Transaction utility measures the perceived value of the ‘deal’, which is perceived to be better value if we use up our coins and loose change. As Thaler states, “this effect cannot be accommodated in a standard economic model because the consumption experience is the same in either case”. The actual consumption has not changed, but the perceived utility, however irrational, has changed.

This contradicts older hypothesised heuristics, where it was believed that paying with card was not as salient because tangible money was not exchanged and so the cost burden was not entirely felt. Thaler refers to Soman’s 1997 paper with the crucial statement: “Payment by credit card thus reduces the salience and vividness of the outflows, making them harder to recall than payments by cash or check which leave a stronger memory trace”. My principal argument is that this statement no longer holds and has been flipped; cash payments are actually less salient today, because we tend not to account for our cash balances and perceive our bank account balance as our level of financial wealth. Cash payments can be easily forgotten whereas checking online transactions in-app provides immediate access to all card payments made. We have become so used to paying with card that the initial mental bias has been worn down and, in effect, flipped. The psychology behind the girl math makes sense.

The Liquidity of Cash

With this in mind, how easy is it to use our 10 cent, 20 cent, even 50 cent coins? Even for larger values, there is a significant element of inconvenience in terms of carrying around coins, and even notes too, which can be easily mislaid. The development of modern wallets such as the Dutch brand Secrid illustrates this change in habits: plenty of card space is provided in the wallet, but no clear space for cash holding is present. Additionally, many stores in Dublin are cashless, to prioritise environmental concerns and perhaps also to subtly make their own accounting lives easier. How liquid is cash in today’s world?

This question requires redefining how we view the concept of liquidity. In broad terms, liquidity is defined as “the ease with which a resource can be converted to cash”. For the sake of this argument, I am going to change this definition to the ease with which a resource can be converted to a resource capable of readily making payments. We cannot convert cash to cash, so to assess the liquidity of cash we must make this definition alteration.

Traditionally, cash is the most liquid asset; in fact, liquidity revolves around cash. But in realistic terms, how many payments, regardless of size, are made in cash today? The vast majority of payments are made via bank transfer, card payment and so on. With this new definition, cash is no longer the most liquid asset. Cash in hand cannot be used to instantly make a payment in many cases. It is simply easier to track and manage if we just use the card, better still if it’s on our phone as we don’t even need to carry our card around in that case. In the era of convenience, often all we need to carry around is our phone. In this regard, online account holdings are becoming the most liquid asset, yet holds the assumption that we can have complete trust and reliance in banks. Admittedly, this is a big ‘if’.

Future Considerations

Perhaps most importantly, we must evaluate where we are now and what future developments are likely to occur. With recent news that 2024 broke the 1.5 degree warming threshold, environmental action will become more and more intertwined with economic action, which may see a rise in cashless business and activities to reduce the turnover of cash. We previously saw the removal of 1 and 2 cent coins from circulation; it is quite probable this will expand to 10 and 20 cent coins in the future, depending on whether high inflation rates continue. With high inflation, these coins become effectively worthless. Additionally, 1 and 2 euro coins could be turned into 1 or 2 euro notes, much like the US dollar system. This could give these notes a higher perceived value than their equivalent coin counterpart in the mind of the consumer, and are significantly easier to carry around than coins.

Another interesting point to note is that, currently, some businesses will charge a lower price for paying in cash, given that they must pay a charge for use of a card machine. The Auld Triangle on Dorset Street charges €4.80 cash for a pint of Guinness, whereas if you pay with card it is €5.30. This price discrepancy is uncommon but certainly not unheard of. My prediction is that, like Soman’s 1997 statement, this price discrepancy will also flip to offset the convenience premium. A consumer may be willing to pay 7 euro for a pint of Guinness by cash (especially if they can pay with a 5 euro note and a 2 euro note), but equivalently will only pay €6.50 by card. The cash cost is not accounted for in the same way as the card’s cost would be, highlighting the presence of mental accounting. A price discrimination strategy like this could be seen in stores in the not-so-distant future.

We can also expect to see more competition for the likes of Revolut, which has taken the digital payment world by storm in recent years (see my colleague Patrick Calma’s article for an apt review). Increasing regulation to protect consumer interests should not inhibit innovation; the development of digital and contactless payments has huge potential and can contribute to a more sustainable and cost-considerate world, if developed in the right way. Moving away from cash should be embraced; in the utilitarian sense, if something is designed to make your life easier, why wouldn’t you use it? The great Bill Gates once said “I choose a lazy person to do a hard job, because a lazy person will find an easy way to do it.” In a way, it is our laziness and desire for convenience that creates so much of the innovation that spurs on the world. Expect to see more of this innovation in the digital payments world over the following decade, which will continue to kill off cash.Something to consider the next time you get your morning coffee at The Forum; they may not thank you for handing them the 20 cent coins you found in your old piggy bank from when you were a child, but consider how you feel about the value for money transaction compared to the usual tap of the Revolut card. The girl math adds up.