COVID-19: accelerating towards a cashless society?

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The decline in the use of physical notes and coin in the UK is not a new phenomenon. In July 2018 the Scottish Parliament’s Economy, Energy and Fair Work Committee considered the impact of bank branch and ATM closures on Scottish consumers. In 2019 UK Finance, the industry body for the UK banking sector, published a report which showed that for the first time card usage accounted for more than half of all payments in the UK, and the number of people not using cash at all more than doubled between 2017 and 2019.

The COVID-19 pandemic has had a significant impact of the UK economy through lockdown, but social distancing has also changed consumer habits. Businesses made adaptations to reduce close contact with and among consumers, and one result of this has been a shift toward contactless forms of payment.

LINK, the UK’s cash machine network, publish data showing the usage of cash machines. Over the last few years demand for cash has been falling, but the start of the pandemic marks a significant shift. As much of the UK economy closed during the lockdown, cash withdrawals from ATMs in April 2020 plummeted almost 55% compared to April 2019. However, even as the economy has begun to reopen, demand for cash withdrawals has remained considerably below the level of recent years. From May to September cash withdrawals were down almost 35% compared to the same period in 2019. By comparison, cash withdrawals in May to September 2019 were down just 8% compared to 2018. In May John Howells, LINK chief executive, thought that ATM volumes would end down around 30 to 40% for 2020.

Cash withdrawals from ATMs in 2019 fell by 7% compared to 2018, but over January to September 2020 are down 30% compared to the same period in 2019. Prior to the COVID-19 pandemic, cash withdrawals in 2020 were down only around 8%

Why does cash matter?

While card and digital payments have become significantly more popular, they are not an option for everyone. In 2018 the Access to Cash Review was established to consider consumer requirements for cash over a five to fifteen-year period. Their final report found that 17% of the UK population would struggle to cope in a cashless society. Of those who would struggle, only just over a third said it was due to local shops not accepting cashless alternatives – the report also identified many harder barriers which need to be overcome such as physical or mental health issues, fear of overspending using digital payments or debt, or relying on others to make purchases.

In September 2020 the National Audit Office published ‘The production and distribution of cash’ which looked at the role public bodies have in operating and overseeing the cash system in the UK. The costs of operating the cash system are estimated at around £5 billion per year, however public bodies only incur a small part of this cost related to the printing of notes and the production of coins. Over half the costs relate to bulk cash distribution and the operation of ATMs.

Public costs are £100m for note printing and £50m for coin production, while private sector costs total £4.85bn or 97% of the total. £1.6bn relates to bulk and local cash distribution, and £1.6bn for high street retail. £1bn is the annual cost of the ATM network, with the remainder comprised of circulation schemes, high street bank branches and consumer holdings.

These costs are also largely fixed, and so the decline in the usage of cash puts private sector business models under strain. Over the last few years in the UK this has been evident through two main channels – the significant reduction in the branch networks of high street banks and more recently in the reduction in the number of ATMs (and a shift from free to use machines towards paid machines).

Access to cash

LINK data shows that the number of ATMs in the UK peaked in 2015 at a little over 70,000, and by 2019 this had fallen to 60,662, a decrease of 14%. In 2018, 82% of ATMs were free to use, but by 2019 this had fallen to 75%.

Another key method of accessing cash is through bank branches, but there has also been a marked decline in the numbers in Scotland since the 2007-08 financial crisis. In 2010, there were over 1,500 bank branches in Scotland but by 2020 this had fallen to just 695 (a fall of over 50%). This significant reduction in the branch network is partly due to banks facing pressure to reduce costs, and partly due to changes in customer behaviour as some transactions are carried out online, using mobile payments or using banking apps.

Bank Branches in Scotland have declined steadily since 2010, when data was first available.

As the Access to Cash final report noted, this shift to digital transactions is not uniform – certain transactions are much more difficult to do distantly, while not everyone can take advantage of these new payment methods. During the lockdown Age UK noted that some older people were reporting they have almost exhausted their cash supplies and were worried about how they were going to pay for goods and services. Despite this fall in demand and reduction in the means for consumers to access their cash, the volume of notes and coin in the UK has not fallen. Between 1990 and 2020, the value of notes and coin in circulation rose steadily as a percentage of GDP from around 1.5% to just under 4% before the onset of COVID-19. The dramatic increase in 2020 is because of the fall in GDP.

Since 1990 the value of notes and coin in circulation in the UK has increased steadily as a percentage of GDP. Periods of financial crisis resulted in a more rapid increase as GDP reduced – this is particularly evident in 2020 when lockdown resulted in a significant fall in GDP.

The closures of bank branches and the reduction in free to use ATMs has led to some areas becoming ‘cash deserts’, and the Herald noted that these tend to be in less affluent and more rural areas. In September 2020, TSB announced that it would close a further 73 branches in Scotland, more than 10% of the remaining branches in the country. TSB stated that 94% of Scottish customers would still be within 20 minutes travel time by car or public transport of a branch that will remain open, but it also means more Scottish towns will be losing their last bank branch.

Recent developments

Internationally, Sweden has been at the forefront of the move towards a cashless society. The Swedish Riksbank noted that this led to some businesses struggling to receive payments or process their takings, while some individuals are facing increasing difficulties in accessing their cash. Sweden has passed legislation which requires banks to provide an adequate level of cash services, with the largest banks being required to provide cash services across the country.

There have been calls in the UK for similar legislation to protect consumers and businesses who rely on cash. In July 2018 the Scottish Parliament’s Economy, Energy and Fair Work Committee heard evidence of the impact branch and ATM closures is having, and called for HM Treasury to strengthen the Access to Banking Standard in order to protect consumers access to cash. In August 2019 the Scottish Affairs Committee at Westminster also carried out an enquiry into access to cash in Scotland, and endorsed the recommendations of the Access to Cash final report, calling for the UK Government to publish a strategy to protect Scottish consumers access to cash.

As regulation of financial services is a reserved matter, this is not an area that the Scottish Parliament could legislate on. In the pre-COVID-19 March 2020 Budget, the UK Government committed to bring forward legislation to protect access to cash for those who need it. While the UK Government has not yet set out the details of what this legislation will do, like many other areas the need for action may be greater since the COVID-19 pandemic. The significant reduction in the use of note and coin will put greater pressure on the UK’s cash infrastructure and could well accelerate the closure of bank branches and ATMs, which will in turn make it more difficult for consumers who rely on physical currency to access their cash.

Andrew Feeney-Seale, Senior Researcher, Financial Scrutiny Unit

“Fishpool gold coins” by Lawrence OP is licensed under CC BY 2.0