What does the future hold for cash?

As technology advances, the choice of payment options expands, and societies’ preferences change – we look at the role cash still plays in society, and what the future might hold.

Are we moving to a cashless society?

The landscape of payments in the UK, and indeed around the world, has been evolving rapidly since the turn of the millennium. 2003 saw the introduction of chip and pin machines in the UK, with the advent of contactless technology following in 2007. The first mobile phone payments took place in 2011 [1] and the rise of mobile card readers from companies such as iZettle began in 2015. Each of these technological changes has contributed to a steady decline in the use of cash over the last 20 years. In 2017, the number of debit card payments in the UK overtook the number of cash payments for the first time [2] and the gap has widened since (Figure 1). This data includes online transactions, which are a major driver of the increase in the number of card payments. With the continued rise of online shopping, the widespread uptake of mobile banking and the growing use of contactless technology does this mean that cash could disappear for good?

If you follow the trends then it appears so – and the covid crisis hasn’t helped. The old minimum purchase limit for card payments seems to have gone out the window, more shopping is being done online and, in a swift reversal, some shops are now refusing cash altogether. Conversely, the maximum contactless payment in the UK increased to £100 in October 2021, up from an initial £10 in 2007 [3]. The latest statistics show that between 2017-2019 the number of people who were “cashless” doubled from 3.4 million up to 7.4 million, with 25% of 18-34 year olds now claiming to be “cashless” [4]. The FCA financial lives survey states that in 2020 some 84% of adults made a contactless payment, in 2017 it was only 63% [5].

Number of UK payments – cash versus debit card:

Figure 1: Number of UK payments in millions by payment method for cash and debit card payments. Note that this includes both in-person and online payments. Source: UK Payments Market Summary [4].

Don’t count cash out yet though – the Bank of England estimates that in 2017 there were £70 billion worth of notes in circulation and that demand for notes had doubled compared to 10 years previously. The Bank of England reckons that bank notes are distributed across a variety of places; some are being held in people’s houses as savings; a lot is in banks, shop tills and high street ATMs; some is overseas; and a large proportion is held for criminal activities [6].

Those that still use cash

There has long been a concern that the decreased use of cash, much like the closure of high street banks, will lead to a disenfranchised section of society. Those who are not technology savvy, or don’t have a bank account may be left behind as society becomes cashless.  To help preserve the use of cash the government announced, in the March 2020 budget, that it would legislate protections to access to cash using various measures such as preserving ATM machines in rural locations, protecting some high street bank branches, and encouraging stores to provide cash-back services.

Other sections of society are already adapting. Charities have adopted “tap-to-donate” collection methods using contactless card readers, since 2018 all registered buskers at the Edinburgh Festival have been issued with card readers for accepting payments, and since May 2021 the Big Issue has offered card readers to each of its sellers [7]. Whilst these methods work for registered traders there still remains a gap for groups such as the homeless, illegal buskers and others without the means of accessing a card reader.

Another section of society that uses a lot of cash is the “shadow economy” – a move to a cashless society raises problems for traders who typically conduct “cash in hand” business to avoid taxes, as well as criminals who deal in cash to avoid detection. If all payments are conducted digitally then it means there is at least some trace of the transaction having taken place and it may be harder for criminals to hide their activity. Although, increasingly, criminals are turning towards digital alternatives such as bitcoin which provide a refuge outside the regulated banking economy and may provide an equivalent space to cash for these types of transactions.

What are the risks and benefits of a cashless society?

Going cashless could save both consumers, businesses, and the treasury some money: throughout the UK up to 25% of ATMs charge a fee for withdrawing cash; businesses have to store cash securely on their premises and then pay for security services to help transport it safely to banks; the central bank and the treasury have to pay for the production and issuing of new notes and coins; and both public and private sectors have to adapt machines each time notes or coins are changed. For example, in 2019-2020 the estimated cost of producing and issuing notes and coins in the UK was £143m [8]. Overall, it’s estimated that running the cash system costs up to £5 billion a year [8]. Unfortunately, at the moment many of these are fixed costs, and so as cash usage decreases the costs of running the system remain the same.

One of the other benefits is reflected in the discussion of the shadow economy above. In the absence of a suitable alternative, then a lack of cash forces everyone into the banking system. This means that all payments are logged digitally and that illegal activities such as tax evasion become harder to hide. According to an IFoA report in 2017 the potential savings in tax evasion in the UK could be up to £6 billion a year [9].  Of course, the rise of digital payments has also been met with a rise in many types of fraud – any move to a completely cashless society would need to have improved safeguards against this.

The risks of a cashless society lie primarily within the vulnerable and/or older sections of society (highlighting why it is a politically sensitive topic): those who don’t have bank accounts from which to make digital payments, those who need every transaction not to be registered, and those who don’t have access to, or don’t know how to use, the alternative technologies available. Whilst an increasing fraction of UK society is cashless there are still 5.4 million adults who rely on cash for their day to day lives, with dependency highest in the over 85’s [5]. For these groups Sweden provides a cautionary tale. As one of the most cashless societies in the world, with public transport only accepting digital transactions and the eKrona backed by the Swedish central bank, Sweden has been heralded as a world leader in moving towards a fully cashless society. However, backlash in early 2020 led to the government legislating that banks must protect access to both ATMs and cash deposit facilities for those that need them. This will mean that several locations across the country will have to have ATMs re-introduced.

Looking forward

A totally cashless society could also pave the way for changes in the banking system; from negative interest rates, to benefits from greater transaction monitoring, to flat taxes on all money spent.

Overall, the experts seem to agree that whilst we might be heading towards a cashless society, we’re not ready to become completely digital just yet. Until we find a way to include everyone in the transition then the infrastructure surrounding the cash system will have to remain.

Still, as my eldest child tucks her first baby tooth under her pillow I can’t help but wonder: one day will I need to leave a card reader out for the tooth fairy instead?

Caroline Blackley

January 2022

References:

1. https://www.ft.com/content/4fa6f536-82ce-11e0-b97c-00144feabdc0
2. https://www.theguardian.com/business/2018/jun/18/uk-debit-cards-transactions-overtake-cash-for-the-first-time
3. https://home.barclaycard/insights/2021/10/a-brief-history-of-contactless-payments/
4. https://www.ukfinance.org.uk/system/files/UK-Payment-Markets-Report-2020-SUMMARY.pdf
5. https://www.fca.org.uk/publications/research/financial-lives-2020-survey-impact-coronavirus
6. https://www.bankofengland.co.uk/knowledgebank/will-cash-die-out
7. https://charitydigital.org.uk/topics/topics/the-latest-trends-in-contactless-donations-8994
8. https://www.nao.org.uk/wp-content/uploads/2020/09/The-production-and-distribution-of-cash-Summary.pdf
9. Achord, S & Chan, J & Collier, I & Nardani, S & Rochemont, Sabrina. (2018). A Cashless Society Benefits, Risks and Issues (Interim Paper).
10. Rochemont, Sabrina. (2020). A Cashless Society in 2019.
11. https://www.theguardian.com/world/2020/jun/03/uk-cashless-changing-payment-habits-britons-lockdown