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27 June 2021updated 05 Oct 2023 8:32am

How the myth of clean card payments created a cash crisis

Card providers and retailers are profiting from a boom in digital payments during the pandemic, but for millions of people physical money is a lifeline.

By Will Dunn

Some services are so essential to daily life that the companies providing them are asked to make them available them to everyone. Energy and water companies have a “duty to supply”; the Royal Mail and broadband companies are required to provide “universal service”; transport companies are sold franchises for short, busy services bundled up with longer, quieter routes. But there is no universal service obligation for access to money.

A report published on Saturday (26 June) by the charity Age UK makes the case for access to currency: more than 6 million people aged 65 and over use cash at least once a week in the UK, and around 2.4 million people in the same age group depend on cash for almost all of their payments.

During the national lockdowns of the past year, many of these people – especially those who were asked to self-isolate for long periods, to avoid placing greater strain on hospitals – found they had almost no access to their money, which they would normally take out from a bank branch, ATM or post office. Worse still, when they were allowed to go to the shops again, they found that many no longer accepted physical money. Research by the consumer group, Which? found that one in three shoppers were refused service at some point last year because they tried to use cash.

The idea that Covid-19 could be transmitted by cash was supported by the widely held view that notes and coins are dirty, because they pass through so many hands. It’s true that a bank note can be handled by more than 200 people per year, but it’s not true that cash carries more germs. In fact, one study found that coins were the cleanest method of payment, followed by notes; payment cards harboured around twice as many germs.

The most contaminated surface of all – ten times dirtier than a toilet seat – is of course your phone, a petri dish of swarming microbes that you inoculate with new species from everything else you touch. But far from banning phones during the pandemic, big retailers including Ikea, pub chains such as Young’s and thousands of smaller retailers instead removed the facility for cash payment in all or many of their stores.

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This was misguided, but it was also convenient: banks and retailers both gain when people use cards or phones to pay rather than physical money.

Banks are particularly opposed to cash because it’s a costly service. Withdraw £10 from an ATM, and your bank has to pay an interchange fee of 20p to Link, the network that provides almost all of the UK’s free cash machines. Those 20ps soon add up, in a system in which people are still withdrawing more than £157,000 a minute.

[see also: Why Klarna’s millennial customers are losing faith]

However, banks have been successful at arguing for cuts to interchange fees. Simon Youel, head of policy at the financial advocacy group Positive Money, told me the fee was previously calculated independently by KPMG, “but in January 2018, Link ignored that independent cost study, and reduced the fee anyway, from 25p to 20p – and this is essentially below what is viable for these cash machines to operate”.

“The ATM industry warned that this could lead to closure of 10,000 free-to-use cash machines, and already that number has been surpassed.”

Youel says the fees Link can charge are also under pressure from Mastercard and Visa, which are now operating ATMs “at a loss […] they’re competing with the Link scheme in a way which undermines the viability of the Link scheme”.

Walk straight into the shop and pay on card, and the merchant pays an interchange fee to your card provider (almost certainly Mastercard or Visa) for providing the card machine and making it work. But shops, too, have an interest in encouraging card use. Card payments involve less admin and more income: a body of research shows that paying by card drastically reduces the “pain of paying” and leads to higher spending. One of the more authoritative studies, from MIT, found that spending increases on cards were as much as 100 per cent higher.

It’s in the debt created by card use that banks and card providers make the real money, though, with overdraft rates now averaging 27 per cent APR and credit-card purchase rates averaging 25.5 per cent. The best defence against this is to use cash. “It’s much easier, if you’re trying to budget – giving yourself the physical money in cash that you can spend, rather than going into your overdraft and paying big fees,” says Youel.

[see also: How “millennial money management” sells young people the illusion of financial control]

Card providers also benefit from being able to track your purchases and sell that information in an anonymised form. McKinsey estimates the data analytics side of the payments business to be worth over $5bn a year.

Most people are still prepared to trade some privacy and spend a bit more for the convenience of digital payment. But there are also millions of people who need to make simple, private, informal payments – people who are less able to go to the shops themselves, or who rely on donations from others, or who are managing very small budgets. What the pandemic has shown is not that these people can be made to use other means of payment, but that they rely on cash, and that it’s very important that it is not taken away.

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