By Professor Andy Mullineux
Emeritus Professor of Financial Economics
The cost of living crisis has encouraged an increase in the usage of cash for household payments, following a period in which card and digital payments increased substantially.
Contactless payments, in particular, proliferated during the Covid pandemic, whilst cash payments were shunned. This encouraged banks to push ahead with digital banking and branch closures, making handling of cash more difficult for retailers and shrinking the UK’s network of ATMs.
The uptick in cash usage reflects a desire by households to manage their budgets more carefully than would be possible when relying on contactless payments, credit cards, and ‘buy now pay later’ schemes. ‘Jam jar’ budgeting based on cash allocations for dedicated expenditures (utility bills, rent, groceries, Christmas and birthdays etc) has a long tradition. Indeed, many digital payments and savings providers simulate this approach.
Belying the recent voluntary increase in cash usage are people that have always been dependent on access to cash. Some are unable to open basic bank accounts, though the banks have responded to pressure to reduce financial exclusion. Some choose not to open bank or building society accounts. Others fall on the wrong side of the ‘digital divide’ because they are unable to use or do not have access to digital devices and the internet. The excluded are most likely to be aged, poor, or physically or mentally impaired. Providers could improve provision to such groups through education and training and improving access to suitable devices.
It is notable that many senior citizens, particularly the more healthy and wealthy, overcame reticence to engage with digital banking during the pandemic and have become enthusiastic adopters. Others could be brought into the fold if concerns about widely reported fraud can be allayed.
When the cost of living crisis abates and the march of digitalised banking and payments resumes, there will remain for some time a significant number of vulnerable people dependent on cash payments. The Financial Services and Markets Bill, currently in the Committee Stage in the House of Lords, aims to maintain ‘access to cash’.
To assure access, cash must be both easily obtainable and useable. The ATM network, managed by LINK, is committed, along with UK Finance (the trade group representing the financial sector), to maintaining a good geographic network of free-to-use ATMs – despite its shrinkage. Assuring usability is more problematic in that it requires retailers to accept cash payments, and perhaps also to provide cash-dispensing services.
Their willingness to do so in turn depends on the ease with which they can ‘bank’ cash takings and manage the cash in their tills. However, the closure of the last bank in town is now commonly reported. Basic banking services can often be accessed via Post Offices instead, though its branch network has also been shrinking. Whilst the high street banks are currently experimenting with shared ‘banking hubs’; which can be seen as attempts to fulfil their ‘universal (payments) service obligation’.
Along with the FCA, the Payments Regulator should oversee fulfilment of a universal (access to cash) obligation. But how should the costs be covered and to what extent should payments services providers and retailers be compensated?
The Bank of England is the key provider and distributer to the banking system of bank notes. The big banks have traditionally taken cash deposits into current accounts and used the deposits for lending. In so doing, they create ‘bank money’ and generate profits. Cash (and cheques) were then used for payments and transfers between accounts. Whilst Standing orders, Direct Debits, and the Bank Giro system were developed for regular (including utility bill) payments. The ability to pay bills using cash (or cheques) is also under threat, with Direct Debits in the ascendency, which is problematic for those without a bank account. Like other central banks, the Bank of England is exploring the possibility of replacing notes and coins with digital currency, which would substantially reduce its (and the banks’) currency distribution costs.
Following Midland Bank in 1984, the big UK banks have offered ‘free banking’; which waives payments charges, and some other fees, but recoups the cost by paying lower interest on credit balances. This is wasteful, distortionary and unfair, since there is no incentive to economise on usage of the payments systems. Futhermore, low balance, high volume users (such as young professionals) are cross-subsidised by high balance, low volume users (such as retirees). This seems to be inconsistent with the new obligation of ‘Consumer Duty’ to be imposed by the FCA from June 2023 on licensed financial services providers.
What is required is a charge for payments services that discourages excessive usage and yet assures access to cash and its usability, such as a cross-subsidy from cheaper digital payments to enable the provision of more expensive cash payments services. This in turn would incentivise providers of digital payments services to reach out and enable access to them by those that have hitherto preferred to use cash, or use it out of necessity. Additionally, a market-related interest rate should be paid on credit balances.
A fund is required to help defray the costs of providing (free) access to cash and to compensate retailers. Using tax revenue, HM Treasury should establish it and payments providers should be required to make regular contributions to maintaining it. These contributions could take the form of a special levy on payments services providers, which may be passed on in whole or in part to users in the form of payments charges. Initially, this would be controversial. But ideally payments services used should be paid for, and this is done in many other countries. A good alternative might be to introduce a positive VAT (currently set at zero) for financial services, but this raises broader issues.
The views and opinions expressed in this article are those of the author and do not necessarily reflect the official policy or position of the University of Birmingham.