Hard Cash… and the Lack of It

22nd March 2019

In the light of recent reports about the decline in the use of paper money, and Which?’s suggestion that our cash infrastructure ‘is on the brink of collapse’ – something that will disproportionately affect older people – Jennifer Lipman investigates the changing face of payment practices.

They say money makes the world go round. But is that money tangible – coins and notes – or is it digital transactions; card payments, bank transfers, smartphone taps? Increasingly, it’s the latter.

Last year the Government opened a review of cash payments, noting that physical spending had fallen from being 62% of all payments in 2006, to 40% in 2016. This led to headlines about pennies getting the chop, with ministers quickly forced to reassure the public that there were no plans to abolish copper money.

That may be so, but Britain is undoubtedly moving towards becoming cashless. Local bank branches are fast disappearing – in January Santander announced the closure of 140 branches, driven by the rise in use of online services. Meanwhile, a growing number of retail outlets (largely independent pubs and cafes) are stopping taking physical payments. And while this might be desirable for many, this shift will have significant repercussions.

We’re not cashless yet, of course. “While cash usage is declining, it will still be the second most common payment method in ten years’ time,” points out UK Finance. According to their 2018 UK Payment Markets report, a whopping 13.2 billion debit card payments went through in 2017 – but 13.1 billion cash payments were made. And, actually, not all by pensioners; according to Which? 98% of us still use physical money and almost three-quarters do so frequently. The Association of Convenience Stores says that 76% of customers still use cash.

“The UK has been quicker to adopt digital payments than most countries, but that doesn’t mean the death of cash is imminent,” stresses David Clarke, from financial charity Positive Money. “The majority of us will continue to use cash for a long time to come.” He cites figures showing that 77% of us see access to a free cash machine as essential; having an alternative doesn’t mean we don’t value the original.

Nevertheless, it’s no stretch to say things are changing; nearly two thirds of us now regularly use contactless or card. For some, it’s a positive trend. As the owner of a Monzo account – one of several challenger banks making waves – I adore the ease of my neon orange contactless card, which texts me spending updates, allows instant money transfers, and levies no fee when I splash cash abroad.

I still use coins and notes sporadically, but my transactions are predominantly virtual; I shop online, pay for tickets digitally, and use apps for day-to-day habits. I recently found myself – red-faced – paying 40p on credit card in Sainsbury’s; the inevitable consequence of having no spare change.

It’s good news for card companies, points out Clarke, as they escape the cost of paying for cash services. In a cashless world, “Visa and Mastercard will enjoy an even greater market share” and enjoy the fruits of the transaction fees they levy. Banks will also see an upside, with lower staff costs as branches close, and the decline in cash withdrawals reducing the fees paid to ATM operators. “As they have more data on people’s spending [this will allow] them to build increasingly accurate profiles, and thus increase the degree of individualised pricing” says Lucie Russell, Director of Fair by Design, which campaigns for improved services.

Digital payments leave less room for fraud, and can be more efficient for small businesses that need to keep a handle on finances. But it’s not flawless; as Russell says, “there is also increased vulnerability of customers to digital fraud, through phishing emails”. And a digital-first approach brings the threat of cybercrime, whether small scale or with accounts wiped out in seconds. Indeed, in recent years more than a few IT glitches have locked consumers out of their accounts, including TSB’s April 2018 meltdown. Inconvenient at best; hugely problematic when customers have no fallback. “All consumers miss out when banks and payments platforms suffer technical troubles,” says Russell.

Even if systems work well, some of us simply prefer physical money. “People choose to use cash for a variety of reasons,” points out Clarke. “Some people enjoy a greater sense of control than with the ‘frictionless’ experience of paying with a card or mobile app.”

More worryingly, as society moves away from cash, those who still rely on it – typically the poor and the elderly – may find it harder to access key services or pay for basic needs. According to Which?, 78% of consumers in the two lowest households income brackets use cash at least two or three times a week, and a quarter never use card. Four fifths of over-65s are similarly dependent. The decline of cash machines, particularly bad in rural regions, might not matter to a city dweller with Apple Pay, but does to an octogenarian who needs cash for his or her weekly shop.

For those struggling with money, the big fear is they will be forced to pay a ‘poverty premium’, where things like energy suppliers or insurance cost more because they can’t shop online for cheaper alternatives. The risk is that as services become ever-more focused on digital transactions, it creates a two-tier system. “A decrease in the use of cash could result in certain groups of people becoming financially excluded,” echoes Jane Tully, external affairs director at the Money Advice Trust.

“Companies often charge more for the privilege of paying in cash, in the form of administrative or handling fees,” says Russell. If you live in a cash machine ‘desert’, she adds, you can’t always access a free ATM, or may have to fork out for petrol or bus fares to reach one – an additional poverty premium.

And even if some could switch to digital options, it’s not always a desirable choice. One in three National Debtline callers uses cash daily. “For people in debt and on a tight income, using cash can help with budgeting and provide some degree of control as to where they are with their money week-to-week,” says Tully. “People with mental health concerns, in particular, often express that the disassociation from paying via card, worsens their financial situation,” says Russell.

Another major concern is the impact on charities, since donations are often literally loose change. According to the Institute of Fundraising, three-quarters have seen a fall in cash donations by 16 to 24-year-olds. As Angela Style, Interim CEO of the Small Charities Coalition points out, “97% of charities in the UK are small, and for these charities delivering vital work up and down the country, small change can make a huge difference.”

For charities, the race is on to invest in digital collection methods. “More charities are now using contactless technology in their campaigns and using innovative methods,” says Felicity Spencer-Smith of the Institute of Fundraising, citing technology like donations via Alexa or Facebook. “These tools make it really easy to give to an important cause.”

Meanwhile, there’s a fight underway for cash options to be retained. “Maintaining access to cash is vital to ensure no customer is left behind,” say UK Finance, highlighting the prevalence of banking services through post offices, as well as investment in mobile bank branches.

But Clarke is concerned too little attention is being paid to this issue. He wants to see regulators act to protect people’s right to use cash. “The government should insist that banks pay the proper amount required to fund a comprehensive ATM network and task a financial regulator with ensuring that cash is widely accessible.”

Whether such calls will be heeded is uncertain; in January, Treasury Minister Robert Jenrick acknowledged the need “to consider the impact of the increasingly digital world on society and our economy”, yet offered little by way of concrete promises.

What’s clear is that, in our enthusiasm for the dream of a cashless society, we can’t lose sight of those for whom it could be a nightmare. As Clarke says, “the evolution of payments should happen in a way that expands, not restricts people’s choices”.

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