The consequences of a cashless society

For most of us, the way we pay for things has changed considerably over the past few years. As recently as 2006, more than 60% of all transactions in the UK were made in cash. Yet by last year, that had fallen to a little over a third.

What’s accelerated the change is the use of contactless payments, which now account for around a third of all card payments.

While there was once an awkward moment when you pulled a card out of your wallet in a convenience store or a bar, there are now an increasing number of places where card is the preferred method of payment. Some outlets won’t accept cash at all.

Cheques – remember them? – are quickly becoming as easy to use as cassette tapes. Most major retailers stopped accepting them a few years ago, and volumes are falling by around 15% a year.

And inevitably, the amount of money being withdrawn from cash machines has peaked and is now starting to fall.

Cash is still king for many

Don’t be alarmed if this is not a world that you recognise. There are still millions of people in the UK who prefer to use cash (and even cheques) – and a small minority who only ever use cash. In some cases, it may be a personal preference. In others, it may be their only option.

But if the way that we pay for things continues to change at the rate it has been, we are about to be faced with some difficult questions about whether we can afford to keep cash at all.

It’s easy to feel as though cash is the cheapest form of payment. For consumers, it’s free to withdraw from most cash machines – or from your bank – and free to deposit. Back in the day, being a cash buyer might even have been enough to persuade a retailer to offer you a discount on a big ticket item.

The cost of cash

But in reality, cash is an incredibly expensive business. It has to be printed, stored in secure buildings, transported by security guards in specialist vehicles, counted by shop staff, bank staff – and of course there is also a cost to maintaining the vast network of cash machines that we have in the UK (the majority of which remain free to use).

These costs are manageable as long as cash remains widely used. But as less of us withdraw money from cash machines, the economics start to break down. This year, the number of cash machines has started to fall – and we can expect more and more independent operators to take away their machines if they’re not profitable.

Part of the problem in Britain is that while there has always been a cost to withdrawing cash, we’ve become used to not paying explicitly for access to our cash. The cost of free cash withdrawals is all mashed up with the broader costs of the wide array of services that we get from our banks – from arranging our standing orders to keeping branches open.

Banking isn't, and never was, free

Banks, of course, are not charities – and recoup these costs and their profits by not paying us interest on our current accounts and charging us over the odds for overdrafts and international transactions.

Nevertheless, it’s left people with a feeling that banking in the UK is free. Which means that as the cost of those “free” services starts to rise to unacceptable levels for business – the most logical decision for them to take is to remove them.

We’ve already seen hundreds of branches close around the country, for exactly this reason. And if we sit by and watch the cost of cash continue to rise – we can expect that before long, the number of free cash machines will diminish dramatically, and growing number of shops and restaurants will stop accepting it.

There are two reasons why sitting back and letting this happen will be bad news. Firstly, and most importantly to my mind, reducing access to cash financially excludes groups of society. There are still well over a million people in the UK that don’t have a bank account, and many more who do, but rely on cash to budget and manage their daily affairs.

For some, having to pay for access to their cash would only push them deeper into financial difficulties. There are also many millions of elderly customers – and other vulnerable groups – who are unable to use new banking technologies, either because they don’t have access, or because they would be unable to use them if they did.

Danger of digital

But protecting access to cash is not just a social issue. We also need to consider what risks lie ahead for our economy if we let cash use dwindle to the point where we are completely reliant on digital payment methods. The recent problems at TSB and Visa illustrate that banking systems are fallible. In Sweden, where cash use is now below 15% of all transactions, they are wondering whether they have let cash usage fall too far and too fast. If banking systems went down for weeks, how would our economy function without cash?

Thankfully a new independent panel has been set up to consider how we can protect access to cash – to think through some of these questions before undesirable outcomes are thrust upon us by market forces. It’s chaired by former head of the Financial Ombudsman Service Natalie Ceeney, and is staffed by consumer advocates (including me), sitting alongside a range of the other key stakeholders in this debate.

I’m not sure what the answers will be yet. But when it comes to who pays, there will need to be some shared responsibility between banks, their customers and the government – to build an infrastructure that protects our wider economy as well as vulnerable consumers who rely on cash. If you want to take part in the debate you can – goto the review’s website www.accesstocash.org.uk.

This article first appeared in the Telegraph over the weekend of 11/12 August