While so much focus over recent years has been on supporting SMEs to transition to digital payments, the reverse might now be needed to stop cash dying out altogether. As Covid-19 dramatically accelerates the transition towards digital payments, experts say SMEs are crucial in keeping cash in regular use, and government intervention is needed to support them.
How did Covid-19 affect the use of cash in the UK?
The 2020 UK Finance Payment Markets report released last week confirmed what many had expected: that the Covid-19 pandemic saw a huge acceleration of the country’s already rapidly declining cash usage. Cash use has been declining at a rate of around 15% a year since 2017, but 2020 saw this rate double, with the number of cash transactions falling by 35%. This follows almost a decade of decline: even before the Covid-19 pandemic, cash payments were only 43% of what they had been in 2009, while debit card usage has almost tripled.
Across all payment types, transactions were down 11% due to hospitality closure, but the share of card payments increased. Some 44% of all payments were made using a debit card, and over a quarter (27%) were contactless. On the other hand, cash accounted for 17% of all payments, down from 23% in 2019, and a drop of 39 percentage points since 2010.
Tracking month-to-month usage of LINK cashpoints in the UK gives a detailed picture of the way Covid-19 cut cash usage. In April 2020, ATM usage fell to half what it had been in February. May 2021 saw 100 million fewer ATM transaction than the same month in 2019.
Evidently, Covid-19 did not instigate the decline of cash, but rather accelerated what was already happening. Businesses that were previously resisting adopting digital payments – perhaps due to the charges or lack of digital literacy – were forced to transition, as people shunned coins and notes amid hygiene fears. And while it is now known that risk of surface transmission of the virus is low, many businesses are still refusing cash, or at least heavily encouraging contactless payment.
There are lots of pros to going cashless: cutting the inconvenience of carrying cash for the consumer; reducing the cost of producing it for the central bank; speeding up and easing transactions; and potentially lowering crime. But those fighting to retain access to cash say it’s not about holding back progress, but making sure that options are available, to protect those who need it.
The need for cash
Natalie Ceeney is chair of the Fintech industry body Innovate Finance and chaired the Access to Cash review, which estimated there are eight million people in the UK for whom cash is an economic necessity. “Before Covid, you could probably fit the UK population into three groups,” she says. “There’s those who are quite happy using digital, and there’s those at the other extreme, who are totally dependent on cash. And the middle group: those who were happy with cash but are also digitally able, who have been pushed over and they won’t go back. So now we’ve isolated the most vulnerable, those who depend on cash, and they’re stuck.”
Adrian Roberts, chief commercial officer of LINK (which sponsored the Access to Cash review), says that closures of ATMs and businesses becoming “cash-only” will leave the most vulnerable behind. “We have to maintain access to cash until digital becomes accessible to everybody, and it just isn’t at the moment," he says.
And businesses want to keep cash in use, too. Research conducted before the pandemic by the Federation of Small Businesses found that cash was still the most common payment method for a quarter of small businesses on the high street, and businesses wanted to keep that option open for their patrons. "They have that customer demand to access it and they don't want to inconvenience their customers, particularly in those kinds of consumer-facing settings,” says Matt Dickinson of the Federation of Small Businesses (FSB).
The FSB also found that small businesses benefit from financial infrastructure – including the provision of cash – in their area. “In towns and rural areas particularly, if you're the town that has lost its bank branch and its ATM, and there's another town up the road that does have a free cashpoint and a bank branch, that town is instantly more of a draw for a lot of people,” says Dickinson. “They'll go to the bank branch, but while they're there, they will also go to the cafe, browse some shops, and the like.”
But the challenges of keeping cash put a high burden on small businesses, whether it's the safety risk of holding and transporting it, or the logistics of making deposits. “You’ve got to take it to the bank, but banks are closing branches, so how far does the retailer have to travel now to pay their cash?” says Roberts. “And then they have to pay the bank to deposit that cash. So it’s probably not fair to say ‘every shop must accept cash’, more about making it easy and inexpensive for them to do it.”
The FSB and the Access to Cash review argue that it’s up to the government and the FCA to help SMEs keep both cash and digital payments open as options to consumers. They hope that the Financial Services Act, brought in this spring to define the UK's financial regime post-Brexit, will include measures specifically aimed at maintaining access to cash, such as allowing businesses to give cashback without a purchase.
The Access to Cash review spawned several community pilot projects: “banking hubs” in post offices, with a different branch each day; faster deposit options and coin recycling for businesses; and an app where residents can “order” cash and pick it up from participating retailers, which Ceeney says she hopes will produce strong findings for the FCA to use.
But, Dickinson says, we need to think beyond just how we protect those who depend on cash, to the broader social implications of having a digital financial system that is so overwhelmingly controlled by a few huge companies. “By not having physical currency, you then give the whole payment systems infrastructure over to the card providers, basically,” he says. “It just gives them licence to increase their fees as much as they want to because there's no competition from cash as a payment method.”
Dickinson says he wants to see the government and FCA prioritise support for businesses and vulnerable people in the interim, but ultimately think bigger about what’s next for digital payments. Options such as a central bank digital currency might be the next step in ensuring financial inclusion for everyone in the future.