Scrapping lower denomination coins does not signify the end of cash (Interview)

Last month the Central Bank of Ireland revealed that 1 cent and 2 cent coins would no longer be manufactured, with shop owners now rounding their customers’ change to the nearest 5 cents. Ireland became the seventh EU nation to adopt a symmetrical rounding policy after the likes of Belgium, Denmark, Finland and Sweden.

We caught up with Ronnie O’Toole, an economist at the Central Bank and programme manager of the National Payments Plan to learn more about the thinking behind the policy and what effect it will have on the future of payments.

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When did the idea of dropping 1c/2c come about?

At Central Bank of Ireland we’d known one and two cent coins weren’t largely used as much as other coins are. We produce 2.5 billion of them in Ireland and what’s happening is that retailers are giving them to consumers, consumers are putting them in jam jars rather than using them and retailers are coming back to us to ask to produce more and more, so we knew there was a problem. We trialled rounding in Wexford in the South of Ireland and the response was overwhelmingly positive, 85 per cent of consumers and 100 per cent of retailers wanted rounding up rolled out nationally. It all stemmed from that.

 

Why were the retailers so happy about the rounding?

The consumer reaction was paramount for a lot of them. How well would the consumer react [to the rounding], would the consumer be annoyed? Would consumers take to it well? But, the consumer reaction was so positive, I think that was a huge help. The fact that it was reducing the cost of accessing the coins, reducing the cost of counting down coins at the end of the day, the fact that it reduced the cost of depositing the coins all helps as well. These coins buy very little. A kilogram is worth about €4. They are heavy, of very little value, very time consuming and just another problem the retailer. So here was a way, run in many countries before, that has proven to be hugely successful.

 

How much money will the policy save?

It’s not going to be huge. At Central Bank, our job is to produce money to facilitate transactions, if we invest 1.7c in a 1c coin that’s used 10,000 times then that’s great value for money, because it has facilitated a huge number of transactions. That wasn’t the problem and we continue to do that. The problem was that we produced them and they had one use: they go from retailer to consumer and then they drop into a big black hole of the consumers’ jam jar. There is a small cost saving for the Central Bank, it’s not nothing but it’s pretty small. The major reason for why we did this was simply because the consumer didn’t want to use them. That high demand for these coins from retailers was essentially perverse because it showed that consumers didn’t want them.

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Is the 5c coin next?

If you look at other countries that have rounding, for many of them the lowest denomination is somewhere around eight or 9 cents, if you look at Sweden or New Zealand. It’s a decision that could be taken in the future, but not the near future for Ireland, certainly. We’re going to have to take 5-10 years to get used to this. It’s an obvious next question, what ultimately happens to coins? Their purchasing power erodes, people find them more cumbersome, less value and ultimately they all go. The last time Ireland demonetised a coin was the half pence back in the mid-1980s and it now would have been worth more than the Euro cent.  It will all happen to coins ultimately, and it will happen to the 5c coin, but not any time soon in Ireland.

 

Will the rounding policy, combined with introduction of new technological ways of paying, accelerate the rate at which countries become cashless?

I don’t think so. Ireland is an under-user of electronic payments like debit cards, and an over-user of cash. However, we recognise cash has been around for three thousand years and likely to be around for a very long time. This [rounding] measure’s focus was to make cash easier for people. It was just recognising that cash is going to be around for a very long time. If we were really anti-cash, we would have left one and two cent coins as they were and just let people use them and be annoyed by them. By actually tackling it and making cash more efficient, easier for retailers, we probably helped cash a little bit. But the overall aim is to make all payments easier and we’re doing that by both making payments more efficient, but also by migrating to more electronic payments whilst recognising cash will be around for a very long time.

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What are your thoughts on the future of payments?

The National Payments Plan in Ireland has been very much focussed on the near-term future rather than the far-term. To make payments reform relevant to people, you have to show them that there is a better way of doing things – increasing their choices rather than reducing them. Our concentration has been the continued roll out of a technology that has been rolling out for 20 years now – the debit card as opposed to worrying more about the medium to longer-term payment technologies. We’re very much focussed on consumer experience today:  how easy is it to pay by card, how much does it cost to pay a card, how much does it cost to get money out of the ATM? Those are the near term consumer issues. There is good reason for this – debit card and cash are likely to remain important for some time and making it work for people was an important way to ground the National Payments Plan.

New technologies will fight their way in and consumers will decide which one they want. What we can do is make sure we as a society are getting the best use out of the right choices.

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