For the best part of the past decade the use of cash for day-to-day transactions has been declining as people became more confident using Chip & Pin, contactless and mobile options, as well as increasingly opting for online shopping in favour of the high street. 

According to UK Finance, cash accounted for 20.4bn transactions in 2010 (c.58% of payments), which by the end of decade had fallen to 9.3bn (23% of payments). A drastic 54% reduction in volume largely due to the rise in debit card payments, which rose a whopping 166% in volume over the same time period.

The story of payments for 2010-2020 is undoubtedly the displacement of cash as the most popular, and most prevalent, method of payment for consumers to make day-to-day transactions, by debit cards. 

It was therefore no surprise that the last few years of the 2010s saw a flurry of activity around the ‘the cash conundrum’; the growing cost of the infrastructure that verifies, sorts, transports and provides access for cash, in an environment where volumes are declining. After all, despite a decline in overall use, not everyone is cashless. UK Finance estimates 2.1 million people mainly use cash for their day-to-day spending. Overall, however, the majority remain a user of both cash and card payments. Enryo research from 2020 shows that 72% of people think the move to a cashless society is happening to fast.

In 2018 the government launched a call for evidence into ‘Cash and Digital Payments in the New Economy,’ in 2019 The Access to Cash Review published its final report and in 2020 the Bank of England launched an consultation on the future of the wholesale cash distribution model and the government launched a call for evidence on access to cash. 2020 also saw the National Audit Office and House of Commons Public Accounts Committee investigate the production and distribution of cash.

Considering that the use of cash has declined on average 12% a year since 2014, (according to UK Finance), one would be justified in saying that this is all a bit too late. The Reviews should have taken place mid-decade and failure to do so has made the solution harder to find as lower volumes present a less attractive proposition, and leaves less time to resolve it. The delay in acting is largely due to a lack of overall strategy from regulators and government, which is essential to guide a complex commercial market, providing a utility type product, with a multitude of players.

There is however, no time like the present and it’s fortunate that the issue is now being addressed, especially as the pandemic has highlighted the importance of access to cash. In many ways 2020 was a landmark year for cash in the UK. So, what will 2021 bring? Here are some thoughts. (While many countries are experiencing a similar journey with cash, this article is focused on the UK.)

Fewer cash transactions

The forecast from UK Finance points to a continued decline in cash use to account for around 3bn transactions by 2029. There is no doubt that Covid-19 will have had an impact on this. The UK government’s lockdown measures in response to the virus have had a colossal impact on the majority of businesses as they were forced to shut and people remained indoors. This suppressed normal behaviour and, as a result, suppressed normal spending patterns: people made less payments as there were significantly less opportunities to buy clothes, a coffee or sandwich, visit the cinema or pub, or socialise with friends and family. 

The impact has been a reduced volume in all payment methods for 2020. Data from Visa shows that while spending on food is up by an average of 25.7% year-on-year, since March, most other categories of spending (clothing, transport, communications, recreation, hotels) are all down. 

Analysis by Enryo shows that Covid-19 will result in significantly less cash transactions in 2020 than predicted, which will result in cash transactions accounting for closer to 1bn by 2029 (around 1 in 30 consumer transactions). This means that over the course of the next 8-9 years the use of cash will become more concentrated in certain groups; the elderly, digitally and financially excluded to name but a few. There may be fewer transactions but millions will still remain dependent on cash. Further, in the pandemic fuelled rescission we should expect people to return to cash as a budgeting tool. 

More free ATM closures

One of the main drivers behind the Access to Cash Review was the closure of ATMs and, combined with bank branch closures, has left some communities without convenient access to cash.  

According to LINK, between January 2018 and November 2020, the number of free-to-use ATMs reduced from 54,500 to 42,000, a 23% reduction in the size of the free network. (Note -a large number of these machines are temporarily closed as a result of COVID-19.) With cash use falling, the  number of ATMs will naturally continue to follow suit. The Post Office’s announcement that they are to cut a third of cash machines in the next 18 months, with 600 ATMs to be shut by March 2022, is a firm indication that this is the direction of travel. 

There has also been speculation that some banks may withdraw their support for post offices and the cash machine network LINK. This would radically change how people access cash. Plans for an ATM utility network may be revealed in 2021.

Innovation in access

Following on from the last point, this is not all doom and gloom. In a well functioning market when demand remains (which in this case, it does) then it should be provided. In the world of cash, new market entrants have been slow to enter the market and offer alternatives to the status quo. 2021 should see this change with the launch of new Post Office-led banking hubs, which will be piloted in three English towns. The lack of banking facilities is much more profound in Scotland, where more than a third of bank and building society branches have closed in just eight years, leaving 40% of Scottish towns with one or no bank branch. Harnessing the power of Open Banking, OneBanks, which will launch in Denny, Falkirk this year,  will allow people, SMEs and micro-enterprises to access all their banking services and accounts in one location. 

Shared banking facilities have been a long sought after dream for many, perhaps this will be the year that it comes to fruition. 

Legislation

The Access to Cash call for evidence provided more information on the government announcement in the March 2020 budget that they would introduce legislation to protect access to cash for those who need it and ensure that the UK’s cash infrastructure is sustainable in the long term. The call for evidence pointed towards a legislative change to remove barriers to the widespread adoption of cashback without a purchase, as well as empowering the Financial Conduct Authority with statutory responsibility for maintaining a well-functioning retail cash distribution network. The outcome was expected to be announced in the March 2021 budget, however given the rising cases of coronavirus the Chancellor may rightly prioritise Covid-19 support. It is unlikely that the government will take steps outside of the direction noted in the call for evidence, which is unfortunate news for those who called for intervention to ensure people can use cash to buy essential goods and services (food, medicine, travel). Policymakers should also be aware that legislation is not a silver bullet and unless a firm strategy for access to payments is outlined (for consumers and merchants) the issue will reappear a few years down the road. 

The £50 note

The final part of the Bank of England’s currency modernisation project enters circulation at a yet to be revealed date in 2021. Featuring Alan Turing, the new banknote will present a unique challenge for the central bank as it is the least common used for day-to-day transactions but represents 9% of the volume and 25% of the value of notes in circulation. It may add pressure on the Bank to account for the £70bn banknotes in circulation (£20bn increase since 2014) at a time when day-to-day use has been falling. The House of Commons Public Accounts Committee inquiry requested a better understanding of the factors that are driving the increase in demand for notes. This request is understandable and, if approached correctly, should significantly add to our understanding of who is using cash and for what purpose. 

Side note - although the 50 is the highest value Bank of England note, it’s not the highest sterling note as some Scottish and Northern Irish banks issue a £100 banknote. There are no plans for either of those to go polymer.