Cash and Catastrophe – Are note and coins really the best backup?

an article written by David Birch

(…) When a massive tsunami hit Japan in 2011 there were some temporary problems with the card networks because of the disruption, but Japan has quite a rich retail payment landscape, so the offline electronic money systems (such as Edy and Nanoco) carried on working so long as there was power and the backup battery systems or generators were working. In that particular disaster, in fact, it was the people who kept their money in cash who suffered the most when there homes were hit by a wall of water and their safes were washed out to sea. Electronic payments can be the more resilient option!

When China was hit by huge floods in 2022, mobile base stations in drones were sent up to keep things moving (these drones are capable of providing communications for a day for an area of more than 50 square kilometres) and now with constellations of satellites whizzing over our heads we soon won’t need the drones either.

(Frankly I’m much more worried about saving my identity from flames and floods than any small amounts of cash that might be trapped in crevices and cushions. If my cash or my cards go missing, it would not inconvenience me in slightest—I know, because I left my wallet in a hotel recently, and it really didn’t matter). But if my passport and driving licence vanish, that would be a real hassle for a few days, especially since with no passport I wouldn’t be able check back in to hotel after being refused permission to fly at the airport (but still nothing like the hassle of recovering from the destruction of a truly self-sovereign digital identity).

What about wars though? In the near-cashless realms of Sweden and Norway, some are calling for rethink about electronic payments because of their fears of Russian aggression.

(Remember that great TV show “Occupied”? It was political thriller that explored a near-future scenario in which Russia, with the backing of the European Union, occupies Norway to reinstate its oil and gas production following a halt intended to combat climate change.)

They are looking at how to ensure that cash remains in circulation and are telling their citizens to keep cash at home in case of emergencies. However, in the particular case of Sweden, Hans Liwång, a professor at the Swedish Defence Uni, said there was a lack of evidence about whether cash was better than digital payments in the face of modern threats.

Indeed. And the professor pointed at Ukraine where both artillery bombardments, bombing and cyberattacks are an almost daily occurrence to note that digital systems have proved vital to the country’s resilience, saying that

Ukraine is a very good example of moving into the future when there is war rather than backwards.

What an interesting perspective. This makes it rather interesting to look at the Ukrainian experience to learn about hardening the payment system by moving into the future.

Ukraine

Central to the Ukrainian response was the National Bank of Ukraine (NBU) recommending that stores, pharmacies and petrol stations give preference to cashless payments (which was vital because it reduced people’s demand for cash) and to continue the continued operation of the System of Electronic Payments (SEP), the ISO 20022 Real Time Gross Settlement (RTGS) system for interbank payments. SEP has been processing more than 98% of interbank payments in Ukraine and has been operating normally since the Russian invasion, handling more than 1.5 million payments per business day, but the system has the capacity to process ten times as many transactions.

Ukraine’s largest acquirer is PrivatBank, which has around two-thirds of the market. Since the Russian invasion they have seen their POS estate climb by a third (their merchant service charge was reduced to zero immediately following the invasion to drive up merchant use) and their e-commerce customer base climb by a sixth. But most interesting of all (to me) they have seen their softPOS estate quadruple. This is because softPOS (where payments are accepted using POS software on a standard mobile phone) has become central to the resilience of the payments network and the softPOS offering has expanded to include tipping, buy-now-pay-later, invoicing and other functions. When the power goes out, retailers switch to using their own mobile phones to take payments. (I’ve often wondered why retailers don’t do that in the UK instead of shutting the supermarket doors when the POS network goes down.)

With the ATM network threatened, cash acquisition at POS expanded dramatically and now accounts for something like 8% of cash withdrawals. Despite repeated blackouts, the POS network was up for 98% of the time in 2024 (with nine in ten transactions made using contactlesss and NFC technologies) and a backup system of QR codes was introduced to continue purchases via customer handsets when the POS network was out.

This offline ability has been very important in maintaining the Ukrainian economy, which seems to me to be a key lesson and suggests to me that central to the future resilience of European retail payments is just such an offline capability but not using cash or QR codes, rather using offline central bank digital currency (CBDC).

Offline Alternatives

The lesson that I draw from these various disasters is not that we should rely more on cash but that we should put in place is a means for person-to-person (or actually, device-to-device) payments that work in the absence of mobile networks, electricity and clearing systems. Some form of central bank digital currency (CBDC), for example.

To be a useful adjunct to cash and not simply another form of prepaid debit card, such a digital alternative must be able to function in the absence of network connections. Even if I am out of coverage or in the midst of a cyberassault or suffering an extended power cut, I should still be able to use a mobile phone (the one object that most people would grab when feeling a collapsing building or a crashed plane) to buy milk at the shop around the corner. This is hardly a moonshot idea. For one thing, it is not an aspiration: it how the Chinese digital currency has already been implemented. You can pay in shops, or send money to a friend, provided they have a device with the necessary secure microchip and if you don’t have phone with one of these in it, the bank will get you a smart card that does.

No need to stop and bury your cash, just grab your mobile phone and run.