Social Distancing and Keeping Hands Clean Won’t Lessen Banknote Need
Through the 2020 coronavirus pandemic, health officials have inundated us with messaging about washing our hands thoroughly and regularly. This has morphed into a culture of not touching anyone or anything, including paper money. Some businesses fear that paper money carries the coronavirus and can transmit it to whomever handles it. Some businesses have gone as far to disinfect banknotes they accept (a new form of money laundering).
These precautions weren’t part of our behaviour during prior pandemics. Figure 1 shows that Americans continued to withdraw ATM cash and European usage remained flattish during the 2009 Swine Flu, 2012 MERS-Cov, and 2014 Ebola outbreaks. However, Covid-19 has people worried; Figure 2 shows an increase in searches regarding coronavirus transmission via paper and coin money. Should these folks be concerned? Will societies across the globe discard physical money in the future because of the pandemic? Will we one day see a cashless society for any reason? Read on.
The Un- and Under-Banked
From a cost perspective, cashless transactions are faster, less error prone, transparent, and convenient, making them ideal to lift society’s underprivileged. For these reasons, the idea of a cashless society is a tenet championed by fintech companies. Yet, this premise is false, since physical cash already is a financial tool of inclusion. Not everyone has a bank account, and these folks are dependent upon physical cash to survive; according to a 2017 Federal Deposit Insurance Corporation (“FDIC”) study:
- 6.5% of American households comprising 14.1 million adults and 6.4 million children did not have a chequing or savings account. These are the “unbanked”;
- 18.7% of American households comprising 48.9 million adults and 15.4 million children that had an account at an insured financial institution also obtain financial products and services outside of the U.S. banking system. These are the “underbanked”.
Although these metrics had declined since 2011, we believe that they will worsen due to the coronavirus pandemic. We’re not economists and can’t estimate by how much; however, with 32 million continuing unemployment claims as of June 27, 2020, we’d wager that the number of unbanked and underbanked will grow rather than decrease.
FDIC collected the reasons cited by unbanked households (Figure 3) as to why they did not have a bank account. Some of these like “inconvenient hours” and “inconvenient locations” could sway the unbanked to adopt fintech solutions. Other reasons such as “do not have enough money to keep in an account” and “don’t trust banks” and ”avoiding bank gives more privacy” may be insurmountable.
The Lowest U.S. Wage Earners Use Cash the Most
Nearly 46% of Americans that earned an income of less than $75,000 per year still use cash (Figure 4). And 29% of those earning les than $30,000 per year make almost all their purchases with cash (Figure 4). Who are the people making less than $30,000 per year in the U.S., and how has the pandemic affected their employment?
Table 1 shows who in America was earning less than $30,000 annually in May 2019. Scanning the list, many of the occupations are in the services industries, especially those like retail, tourism, and restaurants that were (and are still) hit hard by the pandemic. Will reliance on cash become more prevalent? We’ll have to see.
Table 1: Occupation and Wage Data for Americans Earning Less than $30,000 Annually
Other Countries Cash Usage
According to the 2018 G4S World Cash Report, cash represents over 50% of payment transactions, globally. In 2017, the World Bank claimed that 1.7 billion people – 31.5% of all adults – were unbanked (see graphic below). And 24% of these adults were in China and India, the two most populous nations. Recall, too, that in 2016, the Indian government voided 86% of the cash in circulation in an attempt to reduce corruption and black market transactions in order to increase tax receipts. Although Indians turned in about 97% of the banknotes before the deadline (thereby making their wealth more transparent), this didn’t stop black market transactions. Some 72% of transactions in India (in 2019) were still cash-based, partly because many merchants (especially rural merchants) don’t accept or have the network connectivity to accept cashless payments.
Cash is Here to Stay
Pandemic or not, cash transactions will be with us for awhile. Although cash payments are decreasing, we have identified cultural, technological, and economic reasons why we believe we’ll likely never achieve a cashless society and “financial inclusion” for all. Certain people don’t want. Others can’t have it. And given how the pandemic has wrecked the livelihoods across the world, we believe cash usage will increase as a form of payment.
How Investors Can Cash In
Investors who believe that demand for physical money will endure may want to consider Sophic Capital client Nanotech Security (TSXV:NTS), a leader in the development of secure security features used for banknotes, government documents, and brand protection products. These products are made from collections of holes, each less than 1 billionth of a meter in diameter. Nanotech can arrange holes to provide any colour, 3D-depth, movement, and even short videos. Best of all, these features are near impossible to copy, which is why governments and brands have come to Nanotech to develop authentication solutions.
An unnamed top 10 Central banks has signed Nanotech to a $30 million banknote security feature development contract. The customer cannot be named (yet) but having a security feature on a prominent banknote is in circulation, will further validate Nanotech’s leading technologies in the banknote industry.
Nanotech Security has about a $20 million market capitalization, $9.2 million of cash and essentially no debt. The Company has 69.2 million shares outstanding and no immediate needs to raise capital to support growth. It is also important to know that Nanotech has significant assets on their balance sheet beyond cash and today the stock is trading at about 0.8x price to book value. Management and insiders are aligned with shareholders and own ~22% of the Company, and the CEO has added to his position over the last several quarters. Investors who think cash in here to stay may want to look at investing in Nanotech Security.
Disclosures
Nanotech Security has contracted Sophic Capital for capital markets advisory and investor relations services.
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