Why the death of cash is not imminent

Anthony Duffy
By , - InnovationFinancial Services

Mark Twain famously corrected The New York Journal of 2 June 1897, when he stated that “the report of my death was an exaggeration”. 120 years later, I suggest that this quotation is equally applicable to cash, given that commentators regularly speculate on the long-term health of this means of payment.

Contrary to some others, I think that notes and coins do still have a future ahead of them. Sure, cash usage is in decline, which means that its future will be different to its present, but physical money has certain properties and features that other forms of payment will never have. And we shouldn’t forget that there are around two million people out there who don’t have bank accounts or plastic cards and who, thus, must make all of their payments in cash.

So why do others think that cash is in terminal decline? I believe that this is because much of the growth in traffic volumes lie in other forms of payment. According to the British Retail Consortium, half of all retail transactions are now made using plastic cards. Furthermore, UK Finance research has found that a record 1.4 billion plastic card transactions occurred in June 2017 alone, reflecting a 12% growth over the year.

The rise of contactless

Much of this growth in card transaction volumes has been driven by contactless payments. UK Finance has also found that such transactions made up around 34% of all card transactions, compared to around 18% twelve months earlier.

Such phenomenal growth is expected to continue – Payments UK estimates that the average UK adult made two contactless payments per month in 2015, but will make 14 per month by 2025. And, with around one third of UK adults use mobile banking, the numbers of transactions being processed by the Faster Payments Service – the payments enabler for online and mobile banking – is expected to double by 2025.

And what does international experience teach us? Sweden is often cited as the country leading the way to a cashless society. Indeed, a recent survey undertaken by Stockholm’s Royal Institute of Technology found that two thirds of traders expect to have stopped accepting cash by 2030.

Cash is universally accepted

So, why my positive view of cash? Yes, as a proportion of total payments, it is in decline. UK Payments expects that, by 2015, it will make up just 27% of all transactions. But this still represents around 17 transactions per month for the average UK adult. And it does have particular attributes that no other payment mechanism offers.

Firstly, cash is universally accepted. Indeed, it is illegal for a vendor not to accept it in payment of a debt, such as a restaurant meal or a taxi ride. Secondly, it confers anonymity on its users – important, as privacy, or maintaining it, is set to be one of the biggest issues of the 21st century. And, thirdly, it cannot be over-spent. No one can spend £21 with a £20 note.

And the ease of using cash maintains an appeal. Even in Sweden, more than 40% of people still prefer to pay cash for transactions of Kr 100 or less. And, for some, old habits die hard – the Swedish National Pensioner’s Organisation found that many of its 400,000 members never use bank cards.

It’s a numbers game

But what about the costs of processing notes and coins, given that these expenses are often put forward as a key reason that change is needed? Well, I recall arguments similar arguments, about the outdated nature of cheques, being out forward just a few years ago. This led to plans being announced for cheques to be abolished by 2018, until a public outcry, supported by parliamentarians, forced a rethink.

And cheques did not benefit the State financially in the way that cash does – it costs around 2p to manufacture a £20 note, which the Bank of England sells to retail banks at face value. The difference of £19.98 is known as seniorage, and passes to the Exchequer. The £400 million or so raised in this way each year passes into the nation’s coffers and helps fund expenditure.

So, whilst it’s clear that cash usage faces stiff competition from other forms of payment, I suggest that the attributes of cash, the confidence that it enjoys and the financial contribution it makes to wider society, means that any plans to abolish cash completely would be met by a public outcry.

Of course, cash isn’t a perfect payment vehicle, but it’s one that I think will be around for a while. After all, didn’t Twain also comment that he hadn’t “… a particle of confidence in a man who has no redeeming petty vices whatsoever”? [1]

 

[1] Answers to Correspondents”, The Californian, 17 June 1865.

Anthony Duffy

Anthony Duffy

Director of Retail Banking at Fujitsu
Anthony Duffy is a highly experienced company director, senior manager and management consultant who has worked in the financial services industry and as an advisor to government for over thirty years.

In addition to advising numerous UK and continental European financial services organizations, Anthony has also held senior line management positions, including  as Director of Strategy for a FTSE-100 bank; Deputy Managing Director of a UK commercial bank; and Managing Director of a UK asset finance company.  He has also worked in central government, advising Cabinet ministers of the development and passage of company legislation.  

Anthony joined Fujitsu in February 2012.
Anthony Duffy

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