“Serious risks of sleepwalking into a cashless society before we’re ready – not just to individuals, but to society.”
By Don Quijones, Spain, UK, & Mexico, editor at WOLF STREET.
Ten years ago, six out of every ten transactions in the UK were done in cash. Now it’s just three in ten. And in fifteen years’ time, it could be as low as one in ten, reports the final edition of the Access to Cash Review. Commissioned as a response to the rapid decline in cash use in the UK and funded by LINK, the UK’s largest cash network, the review concludes that the UK is not nearly ready to go fully cashless, with an estimated 17% of the population – over 8 million adults – projected to struggle to cope if it did.
Although the amount of cash in circulation in the UK has surged in the last 10 years from £40 billion to £70 billion and British people as a whole continue to value it, with 97% of them still carrying cash on their person and another 85% keeping some cash at home, most current trends — in particular those of a technological and generational bent — are not in physical money’s favor:
Over the last 10 years, cash payments have dropped from 63% of all payments to 34%. UK Finance, the industry association for banks and payment providers, forecasts that cash will fall to 16% of payments by 2027.
In 2017, there were 13.2 billion debit card payments in 2017, compared to 13 billion cash payments, knocking cash down to second place in the rankings for the first time ever.
The number of LINK ATM cash withdrawals in 2018 fell 5% from 2017, the total value of cash withdrawn fell 3.5%. One obvious reason for this is that ATMs — or cashpoint machines, as they’re termed locally — are disappearing at a rate of around 300 per month, leaving consumers in rural areas struggling to access cash. Banks want to drive consumers toward alternative payment methods that are cheaper and easier for the banks to manage and offer more succulent fees than cash.
The decline in access to ATMs is just the tip of the iceberg. Lessons from Sweden and China suggest that the issue of cash acceptance by merchants and retailers represent an even greater threat than issues around cash access.
Use of contactless cards in the UK grew 99% in 2017, to 4.3 billion payments. It’s particularly popular among the 25-34 age group, as too are mobile payments. By the end of 2017, nearly 119 million contactless cards had been issued in a country of just 66 million people.
Things could soon get even worse for cash. The report identified eight factors that could further dampen its use:
- Increased acceptability of cards.
- Shops and others stop accepting cash.
- Increased use of online shopping.
- Increased use of cards, mobile apps etc on public transport.
- Problems and costs of processing and banking cash for retailers, especially as it becomes less common.
- More of UK covered by broadband and mobile connectivity.
- Accelerated closure of bank branches and ATMs.
- New innovative services that make digital payments even easier, such as biometrics.
By contrast, the authors could only come up with four factors, albeit potentially significant ones, that could drive up cash usage:
- Consumers losing faith in digital payments because of repeated systems failures.
- Increased consumer concern over privacy.
- Significantly negative interest rates.
- Major economic crisis.
Financial Exclusion and System Vulnerability
The UK isn’t alone in facing this challenge of dwindling cash use. Across many advanced economies, from Sweden, Denmark and Finland to the Netherlands, Canada, France, and the United States, cash usage has fallen well below 50%. There are some important exceptions, of course, including Germany, Austria, Italy and Spain, where cash still accounts for over 80% of point of sale purchases.
But where cash usage is falling fastest, major risks are already becoming apparent, including financial exclusion and system vulnerability.
“There are some serious risks of sleepwalking into a cashless society before we are ready – not just to individuals, but to society,” said the review’s chair, former UK financial ombudsman Natalie Ceeney. “We identified risks to the viability of rural communities, the loss of personal independence and increased risks of financial abuse and debt.”
Of respondents to the Review’s survey, 47% said they would struggle to live without cash. While 34% of respondents appeared to be comfortable with the prospect, there is a clear danger of millions of people being left behind, especially the most vulnerable. The elderly are widely perceived as the most reliant on cash, but the authors of the report found that poverty, not age, is the biggest determinant of cash dependency.
There’s also the risk of system vulnerability. Recent IT failures in the UK, from Visa’s day-long outage last June to TSB’s never-ending IT nightmare upgrade, have left chaos in their wake. When a digital or online system goes down cash becomes the automatic fall-back for consumers, since it’s both widespread and works without power or internet. But the less it’s used, the less effective it becomes as a back up. Even now, there’s not enough cash in all the right places to keep a cash economy working for long if digital or power connections go down, warns the report.
“It’s no longer good enough to see cash as just a commercial issue. It needs to be treated as a core part of the UK’s infrastructure,” says Ceeney. “We can’t wait long for action. Once infrastructure has gone, or communities have been harmed, rebuilding is very hard. But if we act now, we can take steps to stop harm happening, and prepare for a world of lower cash, without societal and economic damage.”
To that end, the report makes five recommendations for ensuring cash’s continued survival for the foreseeable future, as well as eventually including everyone in a society where digital payments dominate:
Guarantee consumers access to cash. Consumers should be able to get cash wherever they live or work. Crucially, this is about access to cash, not just access to ATMs, as the authors see “huge potential for new ways of providing cash access which could both widen access and help keep the high street alive.”
Take steps to keep cash accepted, whether by a local coffee shop or a large utility provider. If shops and service providers stop accepting cash, the economics of processing it will collapse. This will trigger a domino effect where the costs for the remaining cash businesses climbs and cash use quickly fades, eventually leaving those who rely on cash excluded from those services. Fifty-one percent of survey respondents said it is a good idea to force businesses to accept cash, while just 24% were opposed.
Implement radical change to the wholesale cash infrastructure. This means transitioning from a commercial model to more of a “utility” approach that can help reduce cash handling costs for businesses and banks, as recently proposed in Sweden.
Government, regulators and the industry must make digital inclusion in payments a priority, ensuring that solutions are designed not just for the 80%, but for 100% of society.
A clear government policy on cash, supported by a joined-up regulatory approach which treats cash as a system.
Even on the off-chance that the UK government and financial regulators will take the recommendations on board and turn them into speedy action, they’re going to have their work cut out given the forces stacked against physical money, including some of the world’s most powerful financial institutions, credit card companies and tech giants. By Don Quijones.
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