There was a time not so long ago when cash was indisputably king. As recently as 1999, 70% of all transactions in the UK involved the use of cash. Those days have gone destined never to return.
The evidence is not hard to find. In August, HSBC plans to close its branch in Henley-on-Thames, making it the fifth bank in the town to close its doors since 2019. Henley, where Courtiers opened its first office in 1982 is not alone. Across the country bank branches are closing at a rate of around 54 a month, playing a major part in the 12,000 fall in the number of free-to-use ATMs since 2018.
The closure of bank branches and the removal of ATMs are just two signs of the seemingly inexorable trend towards a cashless society. Long in the making there are signs that it could be with us, or at least in many parts of the developed world sooner rather than later.
In 2017, debit cards overtook cash as the most used payment method in the UK. UK Finance predicts that by 2031 just 6% of all payments will be made in cash.
In recent years, digital banks such as Monzo, Revolut and Starling have emerged, while contactless payments, digital wallets, and banking apps have become increasingly common. Fintech companies facilitating the move towards digital payments have mushroomed.
Almost all the money in the UK is held electronically, with just 4% held in the form of banknotes and coins in 2020, according to the Bank of England. Meanwhile, China and Sweden continue to work on developing their digital currencies.
Jacob Reynolds, Courtiers Head of Asset Management, says the UK has been moving towards a cashless society for some time, “We’re just not using ATMs like we used to and there’s more and more access to online banking, with the smartphone being an important factor.”
Partly as a result of the pandemic, he says, “a lot more people have become very tech savvy” and no longer need to rely on their bank having a local branch or be constrained by reduced opening hours or have the hassle of queueing.
It all begs the question – aside from the closure of bank branches and the removal of cash machines, what might be some other implications of the seemingly inevitable drift towards a cash-free future?
According to research by Link Group, around 23 million people in the UK say that using cash helps them feel more in control of their finances.
But the movement away from cash won’t be felt evenly across society. Some older people prefer the simplicity and immediacy of cash, with the poorest households more likely to rely on cash than average. People without bank accounts face financial exclusion.
People living in rural communities where the ATM network has been decimated will also be hit hard. Those in areas where Wi-Fi reception is weak will also find the transition towards a digital payments economy more difficult than those in areas with a strong connection.
No longer must panicky depositors queue outside a bank to withdraw their money, or stand in a long ATM queue, they can do so almost instantly on their mobile phone. In the case of Silicon Valley Bank (SVB) depositors and investors managed to withdraw an astounding $42bn in just one day.
A digital payments economy would create an enforced dependence on banks. Across the world, bank account ownerships increased from 50 per cent of the global adult population in 2011 to 76 per cent in 2021. But where does this leave people when banks fail? Does the £85,000 protection limit per UK regulated financial institution limit need reviewing?
A shadow of its former self?
If people get used to paying for goods and services digitally, it could spell the beginning of the end for the informal economy, where the widespread use of cash allows participants to remain under the radar of the tax authorities. The informal economy accounts for around 10 per cent of UK GDP.
While cash transactions are difficult to trace, digital payments leave a trail, making it easier for the tax authorities to monitor individuals’ transactions. A smaller informal or shadow economy could lead to the government collecting more tax.
More broadly, the fact that people will no longer be able to make anonymous payments is seen by some as a threat to privacy, with 57% of people saying they are concerned.
Cash is physical. It has to be carried, stored and moved around. Not only does this mean costs for businesses and banks – it makes cash a target for criminals.
While the risk of being physically robbed will diminish, assets held digitally are far from safe, with fraudsters constantly battling to stay one step ahead of those trying to nullify the threat.
Take credit card fraud, where the number of card frauds per thousand people in the UK (134) is eight times that of Germany (15), where although credit cards have grown in popularity since the pandemic cash still accounted for 40 per cent of all transactions in 2021.
In the first half of 2022, the losses from remote banking totalled £84.8m, with losses from payment cards totalling £272.3m, according to UK Finance. The Crime Survey for England and Wales recorded 2.3 million bank and card frauds, between April 2021 and March 2022, making up 51% of all frauds.
There are also concerns over the safety of individuals’ data held by banks, credit reporting agencies and card companies. In 2017, Equifax announced that it had suffered a massive data breach potentially affecting approximately 143 million individuals, including some in the UK.
As cash becomes increasingly obsolete, digital currencies could be part of the future. In the UK, the Bank of England and the Treasury are looking at the idea of so-called Britcoin. This would be an electronic version of cash issued by the Bank of England and accessible via digital wallets provided by companies. Importantly, people would still be able to pay for goods and services using money in their bank account.
Digital currencies could be used by the government to direct payments to individuals. It would also provide governments with a way to stimulate spending.
A digital currency could boost financial inclusion, not only in the UK, where 1.7 million people don’t have a bank account, but also in countries like India, where 230 million people are ‘unbanked’. A major issue with digital currencies is privacy, with fears that it could give the state (through central banks) unprecedented access to citizens’ identity details, their income and transactions. However, the Bank of England, says, “it wouldn’t collect any of your personal data and wouldn’t be able to see how you spend your money.”
“Part of the rationale for investing in Lloyds, which we hold in the UK and Multi-Asset Funds is that because they’ve been moving away from bricks and mortar sites, their operating costs have been going down,” says Jacob. Courtiers also recently invested in Western Union, which is a big player in international money transfers.
Cash is a sensitive issue and governments need to tread carefully. When the Indian government tried to withdraw 500 and 1,000 rupee notes in 2016, it resulted in chaos. Cash remains a legal tender, which is why in January 2020, New York City Council banned cashless stores, following the examples of San Francisco and New Jersey in 2019.
The economic and social effects of moving towards a cashless society shouldn’t be underestimated particularly on certain groups, with lack of trust, questions over privacy and access to cash being particular issues.
The government has pledged to protect access to cash. In May 2022, it said that its forthcoming Financial Services and Markets Bill would protect access to cash by guaranteeing customers reasonable access for withdrawal and deposit facilities, with the Financial Conduct Authority having oversight. While this should ensure that cash doesn’t completely disappear, whether this and some other measures will be enough to stop the continuing decline of cash must be open to doubt.