Sleepwalking towards a cashless society

In the UK, last year I estimate there were roughly 3 billion contactless transactions. This year, I predict this number will rise to 6 – 9 billion contactless transactions*. This is a huge increase and shift in consumer behaviour, with a large proportion of these transactions coming at the expense of cash. In 2017, expect a corresponding reduction of 3 – 6 billion cash transactions in the UK, a reduction of 15% – 30% in cash usage.

Contactless also displaces chip & PIN transactions at POS, but it is clear cash is in for a sharp decline in 2017. You can already see it in ATM withdrawals – in the UK, these peaked at 2.9bn withdrawals in 2012**. They have been in a shallow decline since, which I expect will accelerate, resulting in close to around 2bn UK ATM withdrawals, or perhaps lower, in 2017.

The situation is similar in Europe, where contactless transactions have hit critical mass and are growing rapidly.

I don’t see anyone else making these predictions and I suspect that few are prepared for this scale of change, this quickly, in the UK or Europe.

I could of course be wrong, but the signs are there is a dramatic change underway in the way we pay - but have banks planned for this, does the public realise it is happening, is it being managed?

The answer is no to all these questions – we are sleepwalking our way to a cashless society.

As an example, in the UK, the Payments Strategy Forum has published “A Payments Strategy for the 21st Century - Putting the needs of users first”. This is a flagship initiative designed to shape the next generation of UK payments. However, it makes only one reference to the reduction in cash usage and no reference to contactless. Planning and managing the transition to a cashless society is not an objective in the report.

This matters because displacement of cash with electronic transactions is an issue of privacy. Not only are once-unrecorded cash transactions now recorded as electronic transactions, but the PSD2 comes into force next year in the EU and makes these transactions public. They will be available to any authorised third party who requests them, albeit with your consent, but once given, the genie will be out of the bottle, and with it, your privacy.

Payment transactions need to be private because they tell your story – your daily, weekly, monthly, yearly life. Where you eat, where you shop, who and when you send money as gifts, where you holiday, donations to political parties and charities, contributions to school events, how much you pay for your mortgage and so on.

While the PSD2 and open access to account data will benefit innovation and consumer services, it is unclear to me who benefits from access to your detailed information on low value payments, apart perhaps from advertisers and government surveillance agencies.

On the face of it, it is great to get rid of cash, it is expensive, inefficient and unhygienic, but cash is also private, and privacy is priceless.

It is impractical to believe we can cling on to notes and coins, their decline is inevitable, but the payments industry needs to address this privacy issue. It should innovate and develop creative solutions to replace cash that preserve privacy and trust, and go far beyond the capabilities of contactless transactions in their current form.

An innovative electronic payment method designed to replace cash needs characteristics that retain the key features of cash, enhanced with digital capabilities. I suggest these include:

• A peer-to-peer payment mechanism without an intermediary
• Transactions go unrecorded, or if they are, they are anonymous
• Confined to low value transactions (say <$50) and low aggregated values
• Useable ubiquitously, available to all without registration or permissioned access
• The privacy of a transaction can be turned on/off, under the control of the consumer
• Operable offline and online
• Impractical to scale/aggregate for use in money laundering, other financial crime and tax evasion
• Digital cash stored under the consumer’s absolute control
• Support for micropayments (down to a cent or lower)
• Guaranteed preservation of value of digital cash – no ability to impose negative interest rates or haircuts on deposits (e.g. in a crisis)
• Low, or no cost to transact
• Seamless integration and interoperability with other bank account payment instruments
• Real-time transfer of funds, available 24 x7.

So far there is little evidence of innovation going down this route. There are examples, such as Tibado, Tibit and of course cryptocurrencies (e.g. Zcash), but adoption is low at the moment, with none I am aware of being developed or adopted for mainstream use by the banking industry or the FinTechs serving it.

It is telling that despite heavy investments in FinTechs and innovation labs in banks, it is contactless technology from ten years ago using card networks created in the 1960s that is driving cash displacement.

It is time for proper payments innovation to displace cash, because without it, one day in the near future we will wake up to find we are in a cashless society that nobody expects or wants, where many elements of our privacy have gone.

* Contactless payments have roughly tripled each year in the UK (and Europe) for at least five years, a consequence of a positive network effect. Last year there were ~3bn contactless UK transactions. The market is unsaturated, so it is reasonable to assume volumes will triple again this year to ~9bn transactions (or perhaps 6bn transactions if they only double). As a check, there are ~100m UK contactless cards, so 9bn contactless transactions equates to less than 2 transactions per week per card. This feels like there is plenty of room for contactless transaction volumes to continue growing, especially since the main UK supermarkets (who account for a major share of retail commerce) have only recently installed contactless POS equipment.

** see the Link website link.co.uk/about-link/statistics/ for statistics on total cash withdrawals (own-bank and interbank withdrawals).