Does Banknote Quality Affect Counterfeit Detection? Experimental evidence from Germany and the Netherlands

Counterfeit prevention is a major task for central banks, as it helps to maintain public confidence in the currency. It is often maintained that a high quality of the banknotes in circulation helps the public detect counterfeits. However, there has not been any scientific evidence in support of this assertion so far. The present study is a first attempt to fill this research gap.

To investigate whether banknote quality affects counterfeit detection, De Nederlandsche Bank (DNB) and the Deutsche Bundesbank (DBB) conducted a field study in 2014 and 2015 amongst 250 consumers and 261 cashiers in the Netherlands and Germany. Participants received a set of 200 banknotes with either a high or a low average soil level, based on the actual circulation in two different countries. Real-life circulation in both Germany and the Netherlands is in between these values. Each set contained 20 counterfeit notes, which testees were asked to detect.

On average, untrained consumers detect 79% of the counterfeits, whereas retail cashiers detect 88%. Cashiers are found to detect more counterfeits when the set is clean, even after controlling for a wide range of personal characteristics in a regression. The estimated effect of cleanliness on the cashiers’ detection rate is an additional 0.87 out of 20 counterfeits (4.4%) For consumers, the quality of the sets does not change the hit rate in a statistically significant way.
 
While a high detection rate is crucial, a low false alarm rate, i.e. the share of banknotes that is incorrectly classified as counterfeit, is important as well. A high detection rate discourages counterfeiters, while a low false alarm rate reduces the financial and non-financial costs for the public and retailers for checking banknotes. Both contribute to maintaining trust in the currency, which is a prerequisite for the functioning of central banks’ policies. Consumers have a false alarm rate of 8.3% (14.9 out of 180 banknotes), whereas cashiers incorrectly declare 4.8% of the genuine banknotes (8.6 out of 180) to be counterfeits. In the clean sets, the false alarm rates are on average 1.5 percentage points higher than in the less clean sets.
 
The ability to tell apart genuine notes from counterfeits, also called sensitivity, combines detection and false alarm rates. It appears that cleanliness makes neither consumers nor cashiers more sensitive when differentiating between genuine banknotes and counterfeits. At the same time, cleanliness increases bias, i.e. people are more suspicious if the average quality of banknotes is high. This results in higher detection rates for cashiers, as mentioned, but also in more false alarms.
 
A cleaner circulation proves to help cashiers check banknote authenticity by hand, but central banks’ costs for the replacement of soiled banknotes are considerable. A less clean circulation in a country reduces societal costs considerably, but makes it harder for cashiers to authenticate banknotes by hand. This implies that even more attention should be given to training and the use of automatic detection aids. Central banks may well assign different priorities to this. In addition, it must be remembered that banknote quality has implications beyond counterfeit detection and costs. For example, a high level of banknote cleanliness contributes to the smooth functioning of banknote equipment machinery.
 
The experience people gain during the test proves to matter to a great extent. At the start of the test, it appears that clean banknote circulation facilitates detection. Later on, this positive effect of cleanliness disappears, while the detection rates rise considerably. The study also shows that the more security features of the banknotes are reported as having been checked, the more counterfeits are detected. Elderly people perform significantly worse on the task. Furthermore, the study shows that genuine banknotes that look brand new are very often mistaken for counterfeits (14.7% false alarm rate versus 6.5% overall).
 
Our findings further suggest that central banks should continue their efforts aimed at informing the public and cashiers about banknote security features. It might be a worthwhile strategy to target their communication campaigns specifically at the elderly, since they perform worse and use cash more often than younger people.
 
Keywords: banknotes, counterfeits, banknote quality, signal detection theory.
JEL classifications: E40, E41, E50, E58.

Working paper no. 499.