The introduction of €100 banknotes in Dutch cash machines appears to be catching on. In a pilot scheme, 57% of customers offered the option to choose the green banknote. The findings are particularly interesting in light of earlier research by Philip Hans Franses, Professor of Applied Econometrics at Erasmus School of Economics. Twenty years ago, his research concluded that the €100 note was not really necessary. Today, the demand for higher denominations appears to be changing.
Inflation is changing the demand for cash
Geldmaat is testing the availability of €100 banknotes at 46 locations across the Netherlands to establish whether they are a useful addition to the range offered by cash machines. Until now, €50 was the highest denomination customers could withdraw. The initial results are encouraging: 57% of customers offered a choice of denominations opt for a €100 note. The larger the amount withdrawn, the more likely customers are to choose the higher denomination.
De Nederlandsche Bank (DNB), which is the Dutch central bank, and Geldmaat are using the pilot to investigate whether there is sufficient demand for larger banknotes in the Netherlands. The question is particularly relevant given that prices have risen by approximately 70% since the introduction of the euro in 2002. A €50 note therefore buys considerably less than it did more than two decades ago.
However, paying with a €100 note can be inconvenient for retailers, particularly when they do not have enough change available. DNB is therefore encouraging consumers to use the larger notes primarily for more expensive purchases. A decision on whether to continue the pilot is expected early next year.
Why do we need particular banknote denominations?
These developments bring renewed attention to research conducted more than twenty years ago by Philip Hans Franses, together with external PhD candidate Jeanine Kippers (DNB), into the use of cash. The starting point was an unusual report from Germany: a cashier had offered to give change for a non-existent €300 banknote. Franses began wondering why we use the particular range of banknotes and coins that we do, and whether people use them as efficiently as possible in everyday transactions.
Franses investigated how people pay in cash. Econometrics students Merel van Diepen, Claudia Laheij en Niels Tromp visited DIY stores, including Gamma, and asked customers whether they could look inside their wallets. They then observed how customers used their money to pay for purchases. The researchers compared these payment practices with the theoretically most efficient combinations of banknotes and coins.
They also played Monopoly to investigate what happens when particular denominations are removed from circulation. By taking away the €20, €50 or €100 note, they could observe how players adapted their payment behaviour.
€20 and €50 notes proved essential
The research found that people generally try to pay as efficiently as possible. At the time, the €100 note proved unnecessary. Even the €10 note was less important than expected, whereas €20 and €50 notes were found to be crucial.
The findings were relevant to banks and central banks, which need to decide which denominations to make available in cash machines and how to manage the composition of cash in circulation. The research demonstrated that a theoretically optimal range of banknotes and coins does not automatically mean that every denomination is equally important in practice.
From unnecessary to potentially essential
According to Franses, his research remains relevant because cash payments continue to be part of everyday life. The current pilot involving €100 banknotes offers a new opportunity to investigate how consumers adapt their payment behaviour to changing economic circumstances. ‘Twenty years ago, we concluded that the note was unnecessary, but that no longer seems to be the case,’ says Franses in a recent interview with Erasmus Magazine.
The results of the current pilot will determine whether the €100 note becomes a permanent feature of Dutch cash machines. The changing purchasing power of the euro may play an important role in that decision. Whether higher denominations, such as the €200 note, will also become more widely used in the Netherlands remains to be seen.
- More information
Of particular interest are the articles ‘More efficient payments with the euro’ and ‘Greater convenience in euro payments’, which were published in the Dutch economics journal Economische Statistische Berichten in 2003. For more information, please contact Ronald de Groot, Media & Public Relations Officer at Erasmus School of Economics: rdegroot@ese.eur.nl, +316 53 641 846.
