by Preslav Raykov
In recent years, the conventional production of paper and paper products has faced a number of challenges and unexpected problems. The pressure on the industry comes from a very wide range of factors, incl. from the rapid pace of digitization of information content, changing consumer habits in packaging materials, environmental considerations of the pulp and recycling industry, as well as a number of changes in supply chains in the basic raw materials for production.
Paper, along with oil, still drives the world economy, however much we strive to be digital. One segment that is currently booming is banknote paper. And despite the fact that banknote printing is a long-standing industry, and many of the participants in the sector are centuries-old companies, the things that are happening in the industry are quite interesting and technologically advanced.
Banknotes, as we know them today, appeared in the 7th century and are still developing technologically - mainly because of the fight against counterfeits. With each advance in technology, counterfeiters are given new tools, and banks and licensed banknote printing entities are forced to come up with ever more ingenious innovations to thwart them. Part of these innovations are related to the paper on which they are printed.
Banknotes are here to stay Despite the digitization of a number of financial flows over the past 15 years, the emergence of numerous digital and crypto currency projects by central banks, and governments' desire for greater control over the circulation of money in the economy, today in the world of finance, the phrase "cash is king" still holds true. It is true that in recent years the decline in the use of cash is a fact. We should mention that according to a study by the British company "De La Rue", which has over 200 years of history in printing banknotes and is responsible for over a third of all banknotes worldwide, the demand for physical cash is at its lowest levels since 20 years ago. And yet, globally, 75% of person-to-person payments are still made in cash.
A factor that strongly predetermines this development is the asymmetry in the maturity of the financial systems around the world. Still, an estimated 1.6 billion people around the world lack access to bank accounts and basic financial services, suggesting continued trends toward cash transactions and bank notes due to a lack of alternatives. Every year, the production of banknotes, and accordingly, the special paper for them, increases by between 2% and 3% per year. According to a number of market reports, the size of the global banknote market is projected to reach $11.1 billion in 2023, up from $9.7 billion in 2018, or a growth of 2.7% over the period.
On the other hand, in more financially developed societies, cash payments continue to flirt with unparalleled security in terms of protecting the personal data of real users, compared to the data collected by digital participants during payments and their questionable use afterwards. Moreover, banknote transactions do not involve any additional charges.
These two trends suggest that cash transactions will be here for a long time to come, and accordingly, banknote paper companies will need to continue to operate and grow the sector to provide the necessary amount of banknotes to economies. Although many central banks are implementing measures to limit cash, their programs to physically maintain the quality of money in circulation is one of the main factors driving the demand for new banknotes. Although this market is under the control of companies that are part of the state authorities, this does not prevent them from developing innovations in paper production, printing technologies and banknote protection methods.
A subtle sense of paper innovation A vivid example in this regard with a 200-year history is the Central Bank of France - Banque de France. The bank's production capacity consists of two main centers operating in perfect industrial synergy - a paper mill and a printing house. This integrated production model, which is unique among EU central banks, ensures optimal concentration along the banknote value chain, giving the Banque de France significant expertise in banknote design and production. In this context, in 2015 the Banque de France decided to spin off its paper mill to create a public banknote production center within the Eurosystem. The aim of this ambitious strategic and industrial project was to turn its subsidiary Europafi into the most advanced banknote paper mill in Europe and a leading producer of banknote paper in the Eurozone, by supplying paper to several European printers. The bank is investing heavily to make the paper division a market leader for Europe. Currently, Europafi produces the paper for 22% of all euro banknotes in circulation.
Another successful example of innovation in the sector comes from Germany's Giesecke+Devrient GmbH – G&D, which successfully develops innovative and hybrid banknote technologies (polymer substrate mixed with standard banknote paper). The company aims to develop the optimal materials to guarantee a longer life of a banknote anywhere in the world. The durability of banknotes is affected by conditions in circulation, including dirt, heat, moisture and mechanical stress. The company has developed unique patented banknote paper technologies that provide maximum protection against contamination, durability and at the same time are compatible with all security features. Hybrid banknotes are an innovation in technology and offer the best of both worlds. They are based on a cotton substrate covered with polyester films on both sides. This construction makes the hybrid banknote paper more durable, stronger and extremely resistant to contamination. In addition, hybrid substrate banknotes create a familiar touch - similar to standard cotton paper banknotes, while offering high counterfeit protection. Hybrid banknotes are highly recommended for countries with difficult climatic conditions. The technology was successfully applied by the company to Armenia's new banknotes, which use a hybrid substrate for some of its new issues of the Armenian dram, the country's national currency, after the Russian ruble was withdrawn from circulation. The Kingdom of Bhutan, Jamaica and South Africa have also successfully benefited from G&D's hybrid banknote technologies.
The Battle of the Polymers The new polymer banknotes launched by the Bank of England herald a serious battle between conventional banknote manufacturers and their technological rivals developing polymer substrates and printing technologies. Without a doubt, the next five years will witness dramatic changes in both end-user requirements and commercial technologies that will influence the further entry of new technologies into the banknote market. It is not certain whether central banks will completely replace cash payments in the next 10 years, but it is almost certain that they will increasingly use new technologies in their banknotes.
Currently, most central banks are moving to more durable solutions, including pure polymer substrates, paper mixed with polymer composites and chemical varnishes and coatings. Despite their higher cost to produce, the extended life cycle of banknotes, because they are harder to tear, waterproof and more resistant to folding, contamination and micro-organisms, means that switching to polymer can lead to significant savings for the issuing authorities, and the cache to continue to be king.
THE BOTTOM LINE Paper, along with oil, still drives the global economy, however much we strive to be digital