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Digital currency - living in a cash-free world
by Edward de Mas Latrie

Digital currency, regular readers of our sector insights will know, is very much on our mind. When was the last time you paid in cash? If you’re even remotely tech savvy and living in a city, you may really struggle to remember. While cash comes with anonymity, digital payments have many more benefits. Contactless is so easy, there are a plethora of payment apps that help you keep track of your money, and app-only banks like Monzo come with so many benefits.

Our white paper Death of the Retail Bank? considers the likelihood of Central Bank Digital Currencies. But there are factors beyond CBDCs that are pushing down on the frequency of cash transactions.

But in the UK at least, we’re not as digital as we’d like to think. Although the cash usage has fallen steadily from 62% of payments in 2006 to 40% in 2016, with predictions pointing to 21% by 2026, we fall woefully behind countries such as Sweden, where cash payments make up just one in 10 transactions.

This comparison to Sweden is important because physical cash has fallen to such a level there that the powers that be are piloting their central bank issuing digital currency rather than physical cash. This would enable members of the public to open accounts direct with them and therefore drastically upturning the business model of commercial banks as the necessary intermediary.

That’s a worry for the likes of Nordea and Skandinaviska Enskilda Banken but looking at the data it looks like the we in the UK are a long way off that – at least 10 years. But cash is in danger of vanishing from many communities by external forces faster than most official predictions say.

To illustrate this best, we must look at an industry that in many ways is among the most cash-centric; Independent convenience and grocery shops. Cash is key for these businesses for many reasons; 62% of stores offer an ATM, 58% offer cash back and – crucially – 76% of transactions in these stores are made with cash.

But even this is radically changing. Last year, Link, the UK’s largest ATM network, announced a phased 20% reduction in interchange rates over four years. This move was widely criticised as it puts the sustainability of free-to-use cash machines and machines in remote areas at risk. The criticisms were not unfounded: ATM transactions fell by 6% year on year, and 3,600 cash machines closed. Link’s response was to cancel its third planned reduction, due January 2020, and put a hold on its fourth pending a review next year.

ATMs are not the only source of cash at risk. Post offices – which many independent shops run – are also closing down, with as many as 22% of postmasters (or 2,500 branches) planning to close or downsize in the coming year, due to concerns about income and business costs.

On top of the 1,080 bank branches that closed down in 2018 or will close down this year, access to cash is becoming harder and harder for the majority of UK consumers. The response is clearest in independent convenience stores – in 2016 just 41% offered contactless payment, now 71% do. Investment is happening fast as cash becomes less sustainable.

Living in an urban bubble, it’s easy to forget the challenges rural communities face when trying to access cash, but it is important to consider, especially when you look at how quickly the number of payments is falling.

The viability of physical cash is being challenged from all sides, with unprecedented challenges strong-arming the public away from it altogether. It would be unsurprising if that 21% of cash payments by 2026 was actually much lower, especially if access continues to get restricted.

Read more in our white paper Death of the Retail Bank?

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