Banknotes: more than a mere means of payment

Prof. Dr. Pitters, do you actually remember the moment when you held euro banknotes in your hands for the first time?

Yes, and I was really looking forward to that moment. My current husband is from Austria and when I visited him, I first had to exchange D-marks for schillings. That was not the only reason why the launch of the euro cash on New Year's Day 2002 was an eagerly awaited event for me. The new notes really did come out of the cash dispenser. Even today, I am fascinated by how smoothly the logistics of making the new currency available in so many countries at the same time worked. That was really a masterful performance!

Twenty years is a period in which relationships grow and adapt to change. How do people express their relationship to banknotes? Quite apart from the consideration of how much we own.

Banknotes are much more than a mere means of payment. Dealing with them also has many psychological facets that have to do with haptics, among other things. We associate many traditional values with money. Just think of gifts of money or ritual acts - whether that is tossing a coin into the wishing well or for the church collection bag. In some countries there is a ritual at weddings of decorating the bride with banknotes. All this evokes images that are directly related to the feel of the banknote. We are not willing to give up these images so easily. This may not be as deeply rooted in some places, but here in the German-speaking world this tradition is still very strong.

The abolition of cash is met with more acceptance in Scandinavian countries such as Sweden, for example, than it is here. This would be explained, among other aspects, by the fact that traditional values are less important there than the value of progressiveness. This also reflects why the Swedes were among the first in Europe to introduce paper money. While people in German-speaking countries associate the feel of banknotes with a valuable tradition, Scandinavians are perhaps quicker to identify with innovative cash alternatives. Of course, traditions also need to be passed on. Currently, at least, its popularity is still very high. Most of us have grown up with the knowledge of cash as the dominant means of payment, or at least have watched our parents pay in cash.

In retrospect, the D-Mark in particular is valued as an anchor of stability with its identification potential. Are there signs that euro banknotes could also develop a similar potential?

Yes, because in an increasingly uncertain time it is a human reflex to fall back on the tried and tested. The older generation in particular initially compared the euro with their original currency, e.g. the Germans with the D-Mark. Accordingly, many initially expressed their scepticism. Fundamentally, however, the euro has proven its worth and was also, until recently, a currency in a long-lasting era of low inflation.

I would think that generations that have grown up with the euro will once again have a similar affinity to it as the Germans had to the D-Mark. They rate the common currency as a stable, safe currency. Moreover, this medium, the euro, will contribute much more to identification. That is what you try to do. For example, by involving the population in the design of the euro notes and considering what to print on the banknotes so that people will perhaps identify with them more strongly in the future. Compared to the D-Mark, this is a greater challenge, as back then well-known personalities created identification which made it easier for people to recall. The decision in the design of the euro banknotes, however, was a conscious one, for example for fictitious buildings ...

... or bridges.

Yes, exactly, abstract bridges. So that no one, I would almost say, argues over which personality is depicted on which banknote. That was a diplomatic decision at the time. Today, you hear more and more about a rethinking in the direction of more concrete symbols in order to make the motifs more memorable and to further strengthen the cross-border function of the banknotes from a psychological point of view as well. You could capitalise much more on the haptics I was referring to in the whole euro area. I think we are almost a little unassuming about that! All in all, the euro has great identification potential. It is a good medium because it builds trust, because it works and people are able to rely on it.

Initially, the "Teuro" was mocked by the media and the public, but later the corona pandemic shifted payment to the digital realm. Now the volume of cash is rising again. What do you see as the reasons?

Back in corona times, we experienced what is known as the cash paradox. The demand for cash rose despite the fact that the lockdowns caused more people to shop online and that people were encouraged to pay without cash at the checkout for reasons of hygiene. The underlying reason is that cash served as a store of value for many and was therefore practically hoarded. I too observed this reflex at the beginning of the pandemic to want to get cash from the cash dispenser. You already had the feeling that the haptic of the banknotes first promised security. In addition, of course, this also had to do with the low or zero interest rate policy. The latter, at least, will ease a little, because interest rates on savings will rise again as a result of key interest rate hikes, but the reflex to fall back on the haptic forms of assurance in times of crisis will probably remain.

How would you define what is called "cash stimulus" in the public and professional debate?

Psychology and behavioural economics deal a lot with this appeal of cash and with the effect of money on people in general. You observe even with young children that they react to coins at a very early age. Incidentally, not yet to notes, as banknotes first need to be interpreted as money. Experiments have shown that coins trigger a very specific reflex, which is then also evident for older people when it comes to banknotes. This reflex causes a part of the limbic system, the nucleus accumbens, to be activated. The neurotransmitter dopamine is released in this region, which is important for the reward system within the brain. A very similar reaction to that of food consumption or drug use. When I see money, it triggers a reflexive sense of attainment.

Early experiments on this were conducted by Kathleen Vohs, a psychologist in the United States. She was able to show that people who were exposed to a money stimulus automatically became more selfish and self-indulgent. When compared to the control group without the money stimulus, these individuals chose to keep a greater distance from the communication partner, asked for help less and offered less help. This money stimulus is an unconscious process, a process though that has a very specific effect on us and our brains. The interesting aspect: Alternatives to cash are not yet able to trigger this effect. This has yet to emerge in the evolutionary process.

Keyword evolution: How much weight is attached to factors such as age, regional or sociological differences? Is Generation Z, which is growing up with smartphones, also redefining its relationship to banknotes?

When we were growing up, we watched our parents use cash. This is receding or fading away in "Generation Z" and those born even more recently since 2010, "Generation Alpha". Their parents have themselves grown up mostly or exclusively with smartphone payment functions. And you can only miss what you actually know.

I now see we have arrived at a crossroads. About half of the generations have now grown up with purely analogue payments, while the other half have grown up increasingly digitised. Now it is interesting to take a look at young people. I would not make a blanket assumption that young people have anything against cash. Studies also show the same. Then again if young people simply are no longer familiar with cash, then it will disappear just like that. Then alternative payment methods are easily accepted and nobody complains any more because nobody actually misses it.

The decision-makers who want to preserve cash as a means of payment need to look at young people right now, ask what appeals to them in terms of design, for example, and work out niche functions. All the alternatives for action in the digital space are very similar. This means that cash is actually the only means of payment with this particular haptic. I believe that this can and must be expanded in the future.

Are there also regional or sociological differences?

Our trend research institute works with typologies such as "urban", "young and urban", "grown up with and surrounded by new technologies". In these cases, of course, the likelihood of me switching to alternatives is high. Whereas in rural areas, things are still done a bit differently and many traditions that have to do with cash and that I mentioned at the beginning are more likely to subsist. Whether that is the collection bag or the box for the coins in savings clubs: Traditionally, in rural areas there is more emphasis on the tried and tested, whereas in cities people are more open to new approaches.

So, bitcoin or digital euro aside: Do printed banknotes have a secure future in spite of everything? What prospects do you see for printed banknotes with the highest production and security standards and for the digital euro?

If people are asked whether something should be abolished, then normally everyone is always against it, as no one likes to give something up. We are more sensitive in the loss area than in the profit area. This is one of the central lessons of business psychology. We know that it hurts people more to give something away even if they gain the same thing in exchange.

Let us take as a current example the 10,000-euro cash ceiling that Federal Minister of the Interior Faeser spoke of in the course of the debate on organised crime: There was an outcry, even though this probably had no effect on very many people because they never pay such large bills in cash. However, when something is to be taken away from us, we initially do not want to accept it.

This alone is why I see no problem at all with offering several parallel forms of payment, provided one of them is not restricted. This is exactly what you need to keep reminding yourself. There is no reason not to have digital central bank money as long as cash continues to exist. If people asked for the complete substitution of cash, there would probably be an outcry again. If, however, you stick with cash and also introduce digital central bank money, a so-called Central Bank Digital Currency (CBDC), as is currently being discussed, then you cannot really object.

Prof. Dr. Pitters, thank you very much for the interview!