Just as self-driving cars, personalized medicine, and vacations to Mars are quickly becoming a reality, the premise of a cashless world is transforming from a distant vision into a very real prospect. Canada and Sweden seem to lead in this regard for a number of reasons, including consumer preferences and willingness to adopt new technologies, solid broadband and network infrastructure, high levels of banking penetration, as well as low historical levels of corruption. The lack of these factors could make it difficult for other countries to catch up, but the United Kingdom is quickly encroaching on the two leaders, with many Brits—and younger generations in particular—eschewing cash in favor of more convenient, less cumbersome alternatives.
Cash on its way out
Back in 2016, cards accounted for more than half of all retail purchases in the UK for the first time. Just over 10 years ago, 62 percent of payments in the UK were made with cash, according to UK Finance. This fell to 40 percent in 2016, and projections estimate that to reach 21 percent by 2026.
ATM withdrawals are another indicator of cash utilization, and these numbers have also fallen significantly in recent years. Data from 2016 estimates that there were 2.7 billion cash withdrawals, down from more than 2.9 billion in 2012. In just one year between 2015 and 2016, the total amount of cash withdrawn in the UK fell by £6 billion.
And gone are the days of teenagers requesting cash for a night at the movies, as cashlessness is even reaching this demographic. Halifax, a British bank, recently reported that more than half of teenagers with Halifax accounts request money from their parents online via bank transfer. Businesses and services alike are witnessing the transformation, with everything from pubs to public transportation seeing decreased use of cash—and a steady rise in card payments.
As with other economies, many Britons have adopted cashless payments due to the ease and simplicity of not having to carry around physical cash. Even businesses are happily embracing card and contactless payments, with some indicating that the associated cost of accepting cash—including the security concerns with holding large amounts of cash in the building—more than outweigh transaction fees. An additional factor driving cashlessness could be the closure of bank branches in the UK: Between 2010 and 2017, more than 5,000 bank branches closed, bringing the total number from nearly 15,000 to less than 10,000.
Convenience is king
In addition to a general move away from coins and notes, the rapid rise of contactless payments—which make paying for coffee as easy as tap-and-go—has helped to fuel the popularity of card payments.
Introduced to the UK in 2007, contactless payments have seen a slow start, but have gained serious traction in the past couple of years. In 2016, the total amount spent using contactless cards more than doubled—compared to the combined eight years prior. While cards have dominated retail spend by value for a number of years, low-value transactions have—until recently—held card payments below cash in terms of payment volume. However, between increasing numbers of merchants with contactless payment terminals and higher penetration of contactless cards (driven by the inclusion of contactless capabilities in most debit cards from UK banks as well as mobile wallets), UK consumers are evidently finding tapping a card or phone more convenient than cash for lower-value purchases. Indeed, the average transaction value for contactless payments was found to be less than £10, compared to nearly £40 per in-store card transaction and more than £90 for online card transactions.
According to the UK Cards Association, 27 percent of card purchases were made using contactless by the end of 2017, and there’s no sign of slowing. The rise of challenger banks in the UK is likely only fueling the fire, with Monzo, Revolut, and multiple others capturing millennials’ pounds and their loyalty—and all offering contactless capabilities.
What cashlessness would take
While the UK is far from cashless, it’s not hard to imagine a world without coins or notes—but there are a number of practical considerations that will first need to be taken into account.
At the most basic level, a cashless Britain would require every retailer to have some sort of card acceptance capability, and every consumer to have a card with which to pay. This might seem like an easy task when your world exists within cities, but more rural areas will likely have some catching up to do as access to financial services is particularly challenging there. For example, 20 percent of adults in urban areas have a credit card, compared to 14 percent in rural England (credit card penetration overall is much lower in the UK compared with the US). Additionally, nearly half of the rural UK cannot access broadband speeds of even 10MB/second, which can make completing card transactions painful. And in areas with low card penetration and lacking network infrastructure, it’s a chicken-or-the-egg question: Why would retailers go to the trouble of implementing card readers which may or may not work if consumers only use cash—and vice versa.
According to the UK’s Financial Inclusion Commission, 1.5 million adults in Britain are unbanked, making cashlessness both a matter of convenience for those with access to financial services, and a concern when it comes to financial inclusion. Still further, about half of those with basic bank accounts tend to choose cash to manage their money, representing a significant population that would need to adopt card usage in order for cashlessness to take off. On the other side of the equation, a 2016 Worldpay survey found that almost 10 percent of small retailers in the UK did not accept cards despite 25 percent of consumers indicating that they avoid stores that don’t, meaning card acceptance also has room to improve.
Banks can also play a role in the move toward cashlessness by offering contactless cards and/or mobile wallet functionality (by partnering with Apple Pay, for example). While lower-value transactions have traditionally been made in cash for the sake of convenience, contactless turns this premise on its head by decreasing the time and effort needed to pay. Indeed, banks are incentivized to push for a cashless world, which holds the potential of increasing fee income (which can bring in more revenue than interest on deposits) as well as decreasing costs due to the need for fewer branches and staff.
The same holds for merchants, as the more merchants offer contactless payment terminals, the easier it will be for consumers to tap-and-go, rather than fumbling with coins—and the more consumers will spend, as research shows that both debit and credit cards increase purchase volume compared to cash.
Security is another key anxiety associated with a cashless future. With cash, security concerns mostly surround physical security, like theft. But cards bring a slew of digital security into the picture. While card payments are traceable and therefore less subject to concerns such as money laundering, banks and consumer alike worry about payment fraud, security breaches, and other risks associated with sharing large amounts of personal data. While some regulatory actions (such as GDPR and PSD2) have already been taken to increase data security in the UK, there will be many gaps to fill as cards and other alternative payments increasingly replace cash.
Similarly, confidence in the banking system and overall economy can play a role in consumer acceptance of a cashless country. As mentioned above, Canada and Sweden have traditionally low rates of corruption (only 18 percent of Swedes, for example, believe government corruption is widespread, as opposed an average of 56 percent in all OECD countries) and high trust in institutions, whereas just 40 percent of UK adults are confident in their financial services industry.
Keep your coins for now
While your British friends might refuse your £20 notes and quip that they’re “going cashless”, the UK won’t be banning cash soon (which could increase tax revenues for the government by billions)—or at least not for the next couple of years. In 2015, one aide to the Prime Minister (David Cameron at the time) suggested including a “cashless UK by 2020” proposal in Cameron’s Conservative conference speech—but Cameron ultimately decided the public wasn’t ready for it. There’s no doubt that the UK has seen tremendous growth in digital payments, particularly fueled by contactless payments in recent years—but the combined concerns of financial inclusion, security, and practical matters likely mean that it’ll be some time before Brits are nostalgic for £2 coins and portraits of the queen on their bank notes.