A new banknote classification method is proposed by using phase concept of reduced quaternion wavelet transform (RQWT) to improve the banknote recognition rate and feature extraction. Banknote is preprocessed including edge detection and slant correction. And image is decomposed by reduced quaternion wavelet. The statistical characteristics of the decomposition coefficients are used as features of the banknote image for classification. Finally, the support vector machine is applied as classifier in the banknote classification system. The experimental results show that the proposed method can obtain better results compared with other conventional methods and satisfy the real time requirements.