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Planning for the end of cash is essential

February 15, 2021

Fifty years ago today the UK made the momentous jump to a decimal currency. It was not without its doubters and certainly not without its opponents, but it worked. Now, we are faced with the prospect of another fundamental change in how we use money: the end of the cash economy.

This has been creeping up on us for several years but has been turbo-charged by the pandemic. Unlike decimalisation, however, we do not seem to be planning for it and that is creating unnecessary anxiety. The government, the Bank of England and the Financial Conduct Authority need to address this urgently. The Bank has at least begun to acknowledge the challenge society now faces: “…the barriers to alternative payment adoption may have been permanently broken by Covid”, it said in its recent bulletin on Cash in the time of Covid.

Last year, cash transactions dropped significantly, following years of already step decline. According to data from UK Finance, in 2008 60% of payments were made in cash, dropping to 28% by the end of 2018. Before the pandemic it was projecting a further fall to 9% by 2028: we are probably close to that already, although there may be a modest reversal when the economy fully re-opens.

In the face of these trends it seems inevitable that cash will be almost completely redundant by the end of this decade. We need to accept that inevitability and start preparing accordingly. Too much of the discussion around this topic seems to be aimed at finding ways of preserving the use of cash, striking a Canute-like pose against the relentless march of the digital age.

Protecting the vulnerable
There are vulnerable groups who are going to need a lot of help and support to come to terms with the disappearance of cash. People who have no fixed address and have a very poor credit history need financial products tailored for them. Groups that we must not lose sight of too are people with controlling partners or who are caught in abusive situations, including modern slavery. We should see the end of cash as an opportunity to confront these problems, not say we need to preserve cash because we don’t have a better answer.

We should have considerably less sympathy for other groups wanting to preserve the use of cash, from the cash-in-hand tradesmen to organised crime, especially drug crime.

What we have to do is to help the estimated eight million UK citizens who are still outside the digital banking system to ease their way into it. In the short term, this means preserving their access to cash through bank branches and ATMs.

Bank branch closures are a more immediate concern than the decline of ATMs, as they still provide an essential service to many people using cash and cheques. The banks have an informal “last branch standing” agreement which needs to be enforced by the FCA and needs to embrace the Post Office counter network too. For at least the next five years we need to ensure that all but the most remote communities have relatively easy access to at least a part-time branch.

This seems a better option than asking shops to agree to hand out cash even when the customer is not making a purchase. This would be likely to quickly increase the number of shops that opt out of trading in cash completely.

Peak ATM has passed
ATMs proliferated in the last decade, peaking at just over 70,000 in 2015. Since then it has been a story of decline but the latest figures show there are still 54,300 cash machines in operation, the vast majority free-to-use. This is back to 2004 levels. How much further this availability can fall before becoming a serious problem is hard to know.

Peak ATM: Over 70,000 in 2015, now 54,300

We have all got very used to the luxury of most towns having dozens of ATMs but that comes at a price – and that raises one of the most difficult questions in this transition away from cash. Who pays to maintain a service for a dwindling number of people? If you accept that this number will include some of the most vulnerable then just slapping charges on the use of cash will hardly help them and would not be politically acceptable.

This has to be part of the transition planning, however, as the cost per ATM transaction – currently about 21p – will only rise as fewer transactions go through an under-used network.

Alongside these practical issues are a plethora of other concerns, largely around trust. Banks are still not liked and there are legitimate fears around cyber security and the control of personal data. These all have to be addressed, although I would rather one of my cards was hacked than I was mugged in the street for a wallet full of cash. Banks and businesses have to keep ahead of the criminals and be open and honest when they fail, otherwise this battle to win hearts as well as minds over to the idea of a cashless economy will be lost.

There will come a day when the cash economy is a topic studied in economic history alongside the barter economy. My guess is that day will come sooner than many are prepared for.

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