First Published on 22nd January, 2018
By Lance Blockley, The Initiatives Group
As Australia rapidly adopts electronic payments, give a thought to what is happening to all of those coins that we once used, but which are now replaced by eTickets on transit, eTolls on the roads, payment cards at parking meters and vending machines, and the soon to be launched New Payments Platform - let alone the loose change that you used to receive at the retail check-out, which has now been replaced by the exact tender you pay on a contactless card.
A 2014 report written by our payments consulting team at The Initiatives Group for the Australian Payments Clearing Association (The Australian Payments Association changed its name in 2017 to Australian Payments Network. The report was called “The Evolution Of Cash, An Investigative Study”, published in July 2014) noted that, even at that time, 50% of both 5 cent and 50 cent coins on issue were being stored in jam jars rather than used in everyday payment usage - what might those percentages be today at the start of 2018?
A coin is a piece of metal or, rarely, some other material (such as leather or porcelain) certified by a mark or marks upon it as being of a specific intrinsic or exchange value. Coins have been around for a long time, and also last a long time (Roman ones are still being found). The use of cast-metal pieces as a medium of exchange is very ancient, and probably developed out of the use in commerce of ordinary ingots of bronze and other metals that possessed an intrinsic value. Until the development of bills of exchange in medieval Europe and paper currency in medieval China, metal coins were the only such medium of value exchange. Despite their diminished use in most commercial transactions today, coins are still indispensable to many modern economies.
But given the longevity of coins, does Australia already have enough coins on issue today to last it forever more? If so, what happens to the Royal Australian Mint (and other Mints in a similar position in economies where electronic payments are eroding the use of cash), whose job for many decades has been to produce coins from bare metal? Is another part of Australian manufacturing prowess to disappear?
Fortunately management at the RAM has been rapidly diversifying its business, and today the RAM generates significant revenue from tourism, the production of commemoratives (coins, medals & medallions) and the production of circulating coins for other countries less far along the adoption curve of electronic payments. But it does still produce new circulating coins for Australia, albeit in ever reducing quantity.
Given that the RAM (unlike the Reserve Bank of Australia with its banknotes) has no legal requirement to take back surplus Australian coins, what is going to happen to all of that “hip pocket shrapnel” as it starts to build up in bank vaults around the country?
There were 11 billion coins, worth $3.7 billion, in circulation in 2015, with the value of coins in circulation increasing by 2.8% in 2014/2015, slightly below its 5 year growth rate of 3.4%. As shown in the diagram below, 40% of the circulating coins are 5 cent pieces (albeit only accounting for about 6% of the value of the coins in circulation) , which are rarely seen in retail commerce today and are likely to end up in the jam jars referenced above rather than being re-used in payment for a purchase.
Figure 1: The number of Australian coins in circulation by denomination in 2015
The problem of what to do with those coins in circulation in Australia that may now be surplus to requirements is compounded by seigniorage. Seigniorage is the difference between the face value of the coin or the banknote and its production costs. In the case of the RBA, the issuance of a new banknote leads to a liability being raised on its Balance Sheet in case that banknote is returned, and the seigniorage held as an asset to help fund (at least part of) the potential repurchase of the banknote; hence the RBA should be relatively ambivalent as to whether “excess” banknotes are returned to it or not.
In the case of the RAM, the issuance of a new coin into circulation sees the seigniorage booked as a profit for the enterprise, as in a normal manufacturing business: Revenue (face value of coin) less Cost of Goods Sold (cost of coin production) equals Profit (seigniorage)
Hence the RAM is potentially “reluctant” to the concept of taking back “excess” coins due to the loss that will be incurred on its Income Statement (with a commensurate outflow of funds), as it will need to pay face value for each coin and the coin’s metal content is almost certainly worth a lower amount. This understandable lack of interest by the RAM in “repatriating” the surplus coins is therefore likely to see a build up of coins held by the commercial banks around the country. One could surmise that, as the commercial banks’ investment in this unnecessary and unproductive working capital of surplus coins grows, the commercial banks will begin to energise requests to the Department of the Treasury (to which the RAM reports) for a “buy back” - albeit one which is likely to see the RAM generate a loss. In the meantime, a period of stalemate might occur until this pressure builds.
With Australia leading the world in the adoption of contactless card payments at retail (in terms of the number of transactions per adult per year), which have been very potent at eroding the use of cash, the experience of the RAM over the next few years in handling the surplus of circulating coins will be watched closely by many other Mints around the world, who may themselves be in a similar situation before too long.