Cash is increasingly becoming a relic of the past. The rise of the cashless economy in the United Kingdom has been accelerating for decades, starting with the introduction of the first credit card by Barclays in 1966 and developing more recently with the introduction of open banking in 2018, which has encouraged cashless payments by allowing for easy access to transaction data.
The UK economy reached a turning point in 2017, when the volume of transactions made by debit cards overtook those made using cash.
Payments made by cash accounted for 58% of payments by volume in 2009. This proportion has more than halved, with cash only accounting for 23% of payments by volume in 2019 according to data from UK Finance.
Accelerated growth
The COVID-19 (coronavirus) pandemic has only served to further accelerate the decline of physical cash. According to Link, during the first UK lockdown that started in March 2020, ATM visits were down by 80% in some areas of the United Kingdom. Link operates in the Payment Systems industry and is responsible for the operation of the UK’s cash machine network.
The decline in ATM withdrawals came as households were encouraged to refrain from using physical cash in an effort to limit the spread of the coronavirus. To facilitate continued smooth payments HM Treasury increased the limit on contactless payments from £30 to £45 in April 2020. It was announced in the 2021 Budget that this limit would be raised further to £100 during 2020-21.
Rise of cashless payments
The increasing volume of cashless payments has been almost entirely driven by rising debit card transactions, which accounted for 42% of all payments made by volume during 2019. The rise in debit card payments has been driven by improvements in radio-frequency identification (RFID) chips in debit cards, near-field communication (NFC) technology in mobile phones and the rapid growth of e-commerce over the past decade.
On the consumer side, contactless chips and mobile payments have increased the ease of contactless payments. In terms of infrastructure, the commercialisation of point-of-sale hardware has enabled the successful integration of contactless payments in most businesses. Small and medium-size firms have also been able to integrate contactless payment methods into their operations thanks to point-of-sale software developers, which provide cheap payment solutions.
The continued development of broadband cellular network infrastructure has also played a key role in the uptake of contactless payments. This has been especially true for firms without fixed establishments, such as some food markets.
According to data from UK Finance, 80% of adults in the United Kingdom made contactless payments in 2019 and 21%, or 8.6 billion, of all payments were made via contactless cards.
Revenue in the E-Commerce and Online Auctions industry is projected to grow at a compound annual rate of 15.4% over the five years through 2020-21. Fast growth in online transactions has also increased debit card transactions. Online payments generally cannot be facilitated by physical cash.
According to the Office for National Statistics, online payments accounted for 21.6% of retail sales by value in November 2019, compared with 7.9% a decade earlier in November 2009. Over the past year, further growth in online payments has been stimulated by the coronavirus pandemic, with online sales having peaked at 36.3% of all retail sales by value in January 2021.
Resilience of cash
Cash will likely linger, although decline in importance, for many years to come, just as bartering used to be the common form of transaction thousands of years ago and still exists today. It is important to view cash payments in terms of both volume and value to see their resilience.
According to the Bank of England, the value of notes in circulation, which accounts for the majority of physical cash by value, has doubled over the past decade. During 2019-20, there was £74.4 billion of notes in circulation.
Combined with circulating coins, total physical money supply in the United Kingdom is approximately £85.8 billion. This represents only 3% of UK broad money supply, which stands at approximately £2.8 trillion.
This highlights that the majority of the economy functions without the use of cash, which is only required to make up a small share of broad money supply for the economy to function smoothly. UK Finance states that despite innovation in payment methods, it continues to work to ensure that cash can be accessed in a timely, effective and efficient manner by those who need to use it.
Barriers to cashless payments
There are some limitations to card uptake in the United Kingdom. For example, according to UK finance, 98% of eligible adults own a debit card while only 68% own a credit card. This is because a consumer must be considered credit worthy to be granted a credit card.
Additionally, credit cards fees tend to be higher than debit card fees for merchants. Many firms in the United Kingdom therefore choose not to accept payment by credit cards.
Following the end of the UK’s transition period with the European Union, major payments processor Mastercard has stated it will raise the fees it charges EU merchants when UK cardholders purchase from them by fivefold in October 2021. This is expected to lower the amount UK consumers can purchase using credit.
Emerging trends
Contactless payments are projected to continue growing in popularity, especially via mobile phones.
Only 18% of adults in the United Kingdom were registered for mobile payments in 2019.
This is because the adoption of mobile payments is slow in those over the age of 45. The introduction of open banking in 2018 is expected to stimulate growth, as it provides better transaction information for consumers on their mobile phones, which also act as payment devices. This particular trend has been driven by neobanks, such as Monzo and Revolut, and has increased competition in the Banks industry.
The growth of alternative finance methods is also anticipated to encourage more contactless payments in future. This is especially true with the rise of Buy Now Pay Later (BNPL) finance, where purchasing goods and services through credit completely sidesteps the need for cash. According to payment processing firm WorldPay, BNPL payments equated to £9.6 billion during 2020 and could more than double over the next five years to account for 10% of all e-commerce payments.
Likely future
The pound sterling will likely retain its physical form for many years to come. However, its importance in transaction volumes and value is anticipated to deteriorate quickly due to the ongoing growth of contactless and mobile payments. Other technologies, such as cryptocurrencies and contactless payments made with the aid of biometric technology, could also hasten the decline of physical cash.
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