The restrictions necessitated by the pandemic precipitated a rise in the use of cards and mobile wallets while the accompanying decline in the use of cash for transactions has led to questions about its future.
Adoption of credit cards initially slow
By repeating the same payment method for most transactions, customers derive confidence from their familiar method being safe and they also benefit from the speed inherent in repetitious tasks. These tried and tested routines can be difficult to change, so when the first credit card with its magnetic strip was launched in the UK in 1966 there was a slow take-up as customers continued with the familiar. Indeed people viewed the credit card as an alien American import believing it would encourage them to spend money they didn’t have and so largely they continued with cash. However extensive marketing campaigns and the appearance of further card providers slowly swayed opinions. Even so, in 2000 over half of all transactions were still being made using cash although by 2019 only 15% of transactions used cash. Then as the pandemic took hold, many high street shops stopped accepting cash as research indicated the Covid virus lives on banknotes for up to six hours and encouraged contactless methods instead. With the concurrent rise in internet shopping, cash usage fell dramatically.
Demand for banknotes higher than ever
Despite this pandemic-driven switch to cards, the demand for banknotes is at one of its highest levels ever. The Bank of England noted a sharp growth in demand in 2021 with 4.6bn notes in circulation at the end of February, compared to 4.3bn in 2020. This banknote paradox, when the demand for banknotes is increasing despite being used less and less in transactions, is not unique to the UK. It’s also evident in both the US and EU.
An explanation of the banknote paradox may lie with the pandemic as there have been less opportunities to deposit cash during lockdowns. Bank notes have been entering the cash cycle to pay people and small businesses, as well as for transactions in the dark and black markets. These notes have not exited the cycle as cash heavy merchants such as pubs and restaurants were closed and banks reduced their hours. The uncertainty of the pandemic led to the public demanding extra cash as a contingency while banks, post offices, and ATM’s frontloaded cash to service unexpected spikes in demand.
There are other causes of the banknote paradox not associated with the pandemic. People choose to hold banknotes for their national and sentimental value, others choose to hoard cash as a store of their wealth, and there is demand for currency from abroad.
Some consumer groups rely on cash for transactions
While many customers can move to credit or debit cards and digital payments, this ability is not universal. Customers without the necessary credentials or the documents needed to digitalise their money, are limited to using cash for transactions. Consumer groups without digital capability, those in ill health, the homeless and young adults not yet deemed to possess financial maturity have no alternative to cash. Research by the Financial Conduct Authority in 2020 indicates that 5.4m UK customers rely on cash to a very great or great extent in their day-to-day lives. So it’s no surprise that a move to a cashless society could create problems for some groups and indeed may be viewed as discriminatory.
Cash to remain relevant and accessible going forward
A cashless society in the near to mid future is unlikely given the number of banknotes in circulation and the needs of different consumer groups. Furthermore some commentators predict cash will make a comeback post pandemic as trust in online transactions and the internet generally is declining. In addition privacy worries concerning electronic payments are growing as the balance of information provision tilts further towards large companies.
A Cashback Without Purchase initiative has recently been launched by cash machine network LINK and PayPoint which enables people to withdraw cash from around 2,000 stores without making a purchase. This service is particularly timely as bank branches are continuing to close or reduce their hours while there is still a significant demand for cash.
Payment innovation is growing
Although it is likely that cash will remain, the general payments landscape will continue to change and fragment, a view which resonates with our report for Worldpay, Optimising your OmniPayments report written a decade ago. Ten years on and investment in payment technology has never been higher or more varied:
- Fintechs are using both card and bank payments to fill niches and improve customer experience (eg child friendly debit cards which don’t require home addresses)
- Cryptocurrency, including stablecoins, is not just being used for speculation but also for transactions (eg PayPal)
- Central Bank Digital Currencies (CBDCs) are being developed and discussed
- Buy Now Pay Later (BNPL) products like Klarna are being integrated into more shopping experiences
- Integrated online offerings are facilitating the set up of new ecommerce ventures by allowing them to accept online payments
- Biometric security is being improved to ease payments.
An omnipayments future won’t suit all customers, particularly those who like the simplicity and anonymity of cash, but it will be become easier for customers to pay digitally and customer experience will improve. So while cash is expected to remain, the shift away from using cash for transactions is expected to continue for some time. The new payment methods should help facilitate economic growth, but could also encourage the accumulation of personal debt.