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The new one pound coin produced by the Royal Mint in Llantrisant.
The new one pound coin produced by the Royal Mint in Llantrisant. Photograph: Aled Llywelyn/Athena Pictures
The new one pound coin produced by the Royal Mint in Llantrisant. Photograph: Aled Llywelyn/Athena Pictures

In the contactless payment era, why is cash making a comeback?

This article is more than 6 years old
It’s never been easier to pay without using real money, and yet the value of banknotes and coins in the economy is rising at a rapid rate. Austerity, fear of a looming Brexit apocalypse, or growing criminality may all be behind it

As we enjoy an era of contactless payment, credit cards and bitcoin, Sunday appears set to signal another blow to the longevity of cash. From midnight, the round pound coin, a British institution dating back to 1983, will pass its use-by date. Is cold, hard money going the way of the chequebook and the high-street bank branch?

Certainly, the old pound coin as we knew it is for the scrap heap. It will lose its legal tender status and no longer be accepted in restaurants and shops except for a few including Tesco, Aldi and Poundland, which say they will take it for a little while longer. Approximately £500m worth of the coins are believed to still be in circulation.

That is a lot of loose change. But official figures show the value of hard cash in the economy is increasing at a rapid rate. Annual growth in the run-up to last Christmas was the fastest in a decade, and the total value of all banknotes and coins has now surged to almost £83bn.

That’s more than £1,200 in cash for every man, woman and child in the UK. Research shows the average person has about £77 in cash in their purse, pocket and at home. However, an increasing number have much more squirrelled away safely. And most of it is in £20 notes, which account for more than half of the total.

But this is not a peculiar quirk of the British character. There are mountains of cash around the world – although you would struggle to see them. There were $1.5tn (£1.1tn) of US dollars in circulation last year, an increase of 6% on 2015, with more than a trillion made up of $100 notes. There were €1.1tn (£1tn) of euro notes in circulation in August, up by 6% on a year ago. Millions of mattresses are being stuffed with notes around the globe.

Mass cash stashing might signal a widespread fear of a looming apocalypse – or, more prosaically, it could signal rampant illegality. The rapid growth in cash sloshing around the UK could be a warning sign for the economy, as banknotes can facilitate crime and tax evasion. In a nod to the doom-mongers, the Bank of England estimates some people could be hoarding money for a rainy day.

Brexit could be one such downpour, according to economists at the consultancy Pantheon Macroeconomics. Samuel Tombs, chief UK economist, suggests the growth in cash in the economy and the fall in the value of the pound since the referendum might not be coincidental. And even a decade after the financial crisis, Bank of England analysis shows some people prefer not to store money at high street banks.

David Fagleman, policy and research manager at Cash Services UK, which helps to coordinate the movement of money between banks, said: “We are certainly aware that in previous times of economic uncertainty, people have gone back to cash. So it could well be something that happens again over the coming years.”

Growing levels of financial instability for households squeezed by state benefit cuts, sluggish wage growth and the rising cost of living could be encouraging the usage of cash too. British banks are also planning the biggest squeeze on consumer credit since late 2008, potentially exacerbating the squeeze.

The statistics point to a significant section of the population for whom putting spare cash under the bed is unthinkable. Around 2.7 million people in Britain relied mainly on cash in 2016, an increase of 1.1 million in the past three years. More than 1.5 million people do not have a bank account, while the latest available figures from the Joseph Rowntree Foundation suggest 13.5 million people lived in low-income households in 2015. For these Britons, cash is not a hoardable unit of insurance but a day-to-day necessity that vanishes like water.

Victoria Cleland, the Bank of England’s chief cashier, whose signature adorns newly-printed banknotes, said: “It tends to be that people who are less well-off will use cash as a budgeting technique. If you were in a situation where you saw more people were struggling, you would expect to see a higher demand for cash.”

But back to the bigger picture. Cash usage in general is falling because of the rise in technology, such as contactless payment methods. The proportion of payments using physical currency has declined from 62% of all transactions in 2006, to about 40% last year, with a further fall to about 21% expected by 2026.

Carl Packman, research manager at the poverty charity Toynbee Hall, said: “In the rush towards better digital payments it would be an error to reduce access to cash. Cash is a great leveller: regardless of age and income demographics, keeping cash is a way of taking visual control of money and avoiding unwanted situations like problem debt.”

One of the new polymer tenners recently introduced into circulation. Photograph: Matt Dunham/AP

Part of Threadneedle Street’s reasoning for replacing the three decade-old pound coin was to counter fraud, with as many as one in 30 of the coins thought to be a fake. The new 12-sided coin, which resembles the old threepenny bit and first entered circulation in March, has high-tech features to thwart counterfeiters.

Suitcases full of banknotes conjure images of organised crime for good reason. The Bank found in 2015 that at least half of all UK banknotes were either held abroad or being used for illicit purposes – from drug dealing to prostitution and dodgy business deals. The study followed earlier research which showed at least 11% of UK banknotes in general circulation are contaminated with cocaine.

Peter Sands, the former boss of the Asia-focused UK bank, Standard Chartered, suggests scrapping the highest denomination notes because they are more likely to be used in crime. The European Central Bank is removing the €500 note, which is nicknamed the “Bin Laden” due to its association with money laundering and terror financing. Wads of shredded €500 notes were discovered stuffed down the sewer system of a branch of Swiss bank UBS.

The links between notes and crime are forcing central banks to raise their game. The Bank of England is fighting financial crime with polymer notes, which it expects will be harder to counterfeit. The new £10, featuring a portrait of Jane Austen, was launched last month, following the introduction of the £5 featuring Winston Churchill earlier this year. The Bank plans to launch a £20 featuring the artist JMW Turner in 2020, while it has yet to decide whether to introduce a new £50 polymer note.

And if British cash is not being hidden away in houses, it is being kept away from the taxman. Paying a gardener, window cleaner or childminder in cash could be depriving the British tax system of as much as £6.2bn, according to official figures on the country’s “hidden economy” – which encompasses people carrying on business without telling HM Revenue and Customs. It’s the biggest behavioural aspect behind unpaid taxes, which total as much as £36bn, or 6.5% of theoretical total tax liabilities.

Attempts to tackle the problem elsewhere have not impressed. India scrapped some higher denomination bills overnight last year, to try to catch criminals and tax evaders off guard. The move is thought to have damaged GDP growth, while underlining how some financial practices are so hard-wired into an economy that trying to remove them immediately can cause harm.

It is possible that signs of overheating in the UK economy – record low unemployment and rising inflation – could deliver the answer instead by triggering an increase in Britain’s anaemic borrowing costs. The record low interest rate of 0.25% means savers are offered lousy rewards by high street banks for depositing money in accounts. The average monthly interest paid on an instant access account including bonuses was 0.14% in September. Having sounded warnings in recent months that the economy might be due a rate increase, Threadneedle Street may increase the cost of borrowing for the first time in a decade from as early as November.

Cleland estimates a 1% increase in rates would reduce cash demand by 2%, with the clearest effects seen by the £20 and £50 notes. “If you saw a significant change, that might alter behaviour and you think about the benefits of having money under the bed rather than in the bank,” she said.

Mobile wallets such as Apple Pay have become increasingly popular. Photograph: Reuters

Alternatives to cash

While cash represented 40% of all payments made in Britain last year, its usage is expected to decline to 21% of all transactions by 2026. Beyond increasing use of debit cards and contactless payments, there are plenty of other ways to pay:

BITCOIN Rising from obscurity but increasingly mainstream, bitcoin is the first and the biggest “cryptocurrency” – a tradable asset that allows people to bypass banks and traditional payment processes to pay for goods and services.

Unlike currencies controlled by governments and central banks, bitcoins are created by its network of users by “mining” new bitcoins. Miners use vast computing power to solve maths problems, and are given new bitcoins as a reward.

Regulators and banks are growing concerned about this new money: the City watchdog has warned investors in new cryptocurrencies should be prepared to lose all their money; the boss of JP Morgan, the biggest bank in the US, say he would fire any trader working for the bank who invests in bitcoin; Vladimir Putin has also warned they need regulating.

They pose huge problems for tracing transactions and collecting taxes and are regularly associated with money laundering and online crime because transactions take place anonymously.

The currency is also volatile, having recently soared to more than $5,800 before dipping back to $5,600 on the same day. But it is growing in popularity. A London property company says it will take residential rents paid in bitcoin by the end of this year – and another property developer says they will accept them in payment for apartments in Dubai.

ETHEREUM The second-largest cryptocurrency behind bitcoin, ethereum is also a peer-to-peer software platform used for the development of computer applications and transfer of contracts.

Both bitcoin and ethereum are built using blockchain technology. This is a type of decentralised digital ledger of encoded information, which exists on a network and cannot be controlled by one of the machines plugged into it alone.

DIGITAL WALLET The rise of online shopping has led to the development of digital wallets, which are online places to park money outside the traditional banking system. Paypal was an early version of this type of tool, most popularly used in conjunction with shopping on eBay. However, digital wallets can be used for spending elsewhere – online and offline.

APPLE PAY AND ANDROID PAY Apple and Google both operate contactless payment systems via their smartphones. They are in effect digital wallets, allowing consumers to connect their traditional bank accounts to the payment system. While both allow consumers to make contactless payments using their mobile phones, they also enable payments online.

TOTNES POUND A far more basic idea: the Devonshire town of Totnes, together with several other places in Britain such as Bristol and Brixton, has introduced local currencies. Part of the Transition Town movement, the currency is designed to keep money within the local economy for the benefit of the local community, small businesses and customers.

The theory is that sterling and other major currencies can be easily withdrawn from one place and used or hoarded elsewhere, which can be potentially damaging to a local economy. Community currencies aim to foster greater links between producers and users, encouraging local development and cutting down on pollution caused by the transportation of goods from elsewhere.

M-PESA Launched by Vodafone’s Kenyan associate, Safaricom, in March 2007, M-Pesa is a mobile phone-based money transfer system. It is hugely successful in Kenya and growing fast in other countries – including Afghanistan, Egypt, Albania and Tanzania -where access to traditional banking services can be limited. The service, now live in 10 countries, enables users to deposit money into an account stored on a mobile phone, as well as to send money to others and make payments and withdrawals. It also cuts street crime and corruption.

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