Government proposes phasing out cash, but BCE says: “You can't do that”

But the Central European Bank (BCE) has told them they cannot do that.

Until a few years ago, card payments in most of Spain outside big cities, restaurants and major chain stores were the exception rather than the norm, with many retailers setting a lower limit of €25 to €30 and others not accepting anything but cash at all.

This has changed dramatically in recent times, especially since it became law that cards must be accepted for payments of at least €30, and that any cash payment of €2,000 or more had to be accounted for – both in a bid to make life easier for the consumer and to combat money-laundering, which had been an historic problem in Spain for decades.

And with the Covid-19 pandemic, all businesses permitted to open during the most restrictive period of lockdown – newsagencies, tobacconists', chemists', petrol stations and supermarkets – were required to accept cards or mobile phone payments for even the smallest amount to prevent the virus being transmitted through touching coins and notes.

Now that lockdown is all but over and practically all businesses have reopened, card payments continue to be the preferred choice, with even local bars now allowing customers to use their debit or credit cards to pay for just one coffee.

Also, lower limits for PIN-free contactless transactions have been mostly lifted in Spain – previously, anything over €20 required a PIN to be entered, but at present, anything less than around €50 does not.

Pre-pandemic, BCE figures showed that an average of eight in 10 payments in the common-currency nations were made in cash, although this depended largely on the amount spent: Two-thirds of transactions were for €15 or under, and 88% of these were made with notes and coins, but between 92% and 98% of payments for €50 or €100 or over were made by card or electronic means.

Any study carried out post-pandemic may, however, show that non-cash payments are now in the majority, or at least, considerably more frequent than before.

And axing cash would only be possible where a country's banks charged little or nothing to traders for card payments, and also allowed free bank transfers below a set figure so that, if someone owed a friend a few euros, they could pop it into their account without paying commission.

But in any case, the BCE says Spain cannot phase out cash – all it can do is make non-cash payments as easy, widely-available and cheap as possible to encourage these in preference.

Otherwise, Spain would be in breach of the EU Treaty, which establishes that notes and coins in euros are legal tender.

Back in 2010 – a time when cash payments in Spain were almost compulsory in most cases, except in supermarkets, most restaurants and chain stores – the European Commission said: “The rule should be for euro notes and coins to be accepted as a method of payment in retail transactions,” and that any other form of payment 'should only be possible if it is based upon reasons related to the principle of good faith', such as 'the retailer not having sufficient change available'.

The BCE, last year, also warned Spain's government to desist from its intentions to reduce the maximum permitted payment in cash between individuals – even friends or family members – from €2,500 to €1,000, stressing that this 'disproportionate reduction' born out of an attempt to curb tax avoidance would, in fact, 'make it harder to settle legitimate transactions' and 'jeopardise the concept of cash as legal tender' enshrined in the EU Treaty.

According to the BCE, scrapping or limiting cash payments would hit several social groups – particularly the most vulnerable communities – hardest, namely the elderly, immigrants and rural dwellers.

Also, as former BCE chairman Mario Draghi pointed out in 2019, eliminating cash could create a huge problem in the event of technical faults, such as electricity or internet being cut off.

Indeed, a few of Spain's most isolated rural spots have no internet connection or phone line available, meaning card payments would be impossible.

“Cash is valued as an instrument of payment because it is accepted by everyone, is quick, and allows control over spending on the part of the person paying; additionally, it is the only method of payment that allows individuals to carry out instant transactions without having to pay commissions or fees for this payment method,” the BCE states.

It points out that if card or electronic transactions were the only ones available, banks could apply commissions or costs to these in the knowledge that they cannot be avoided.

The BCE said last year, furthermore, that Spain's intention of reducing the maximum cash payments made by individuals who were not tax-resident in the country to €10,000 was 'not justifiable', and also warned that the fine proposed for those breaking the rule – a whopping 25% of the full payment – was 'disproportionately high'.

This said, the notion that 'cash is free of charge' is slightly misleading, especially in the case of traders: Extra security, including couriers for transporting the day's takings to the bank, are needed, which come at a cost, and owners or employees opting to do so themselves are at risk of massive losses if they are robbed or they lose their money bag.

Moreover, they can lose trade where a potential customer is a few cents short of being able to buy a given item or pay for a particular service; card payments being accepted mean the person is not limited to how many coins are physically in his or her purse.

Not carrying cash or keeping it in the home is also, arguably, safer, as is not having physical money in a till, which can all be lost in one hit in the event of a hold-up on a shop, bank or petrol station.

And where a cashpoint for a person's own bank is not available, they need to withdraw funds from an ATM belonging to another entity, which usually comes with commission costs that can range from a few cents to up to 20%.