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The cost of a cashless society

Digital and debit card payments are overtaking cash in the UK, but what impact could this trend have?

By Rohan Banerjee

Earlier this year at the Edinburgh Festival Fringe, the comedian Ahir Shah ran a “free” show at the city’s Cabaret Voltaire venue. Although he didn’t charge an entrance fee to see his hour-long set, a donation bucket was passed around at the end – a long-running custom for free shows at the Fringe. But over the past couple of years, this custom has encountered a snag: fewer punters are carrying cash. It has led Shah, many other comics, and even buskers, to invest in a portable card machine. “It’s not to punish stingy people, rather it’s a sign of the times,” he explains.

And this is a trend which stretches beyond the performing arts. Last year, a report by UK Finance found that debit card payments had overtaken cash as the most popular form of payment. Consumers used their debit cards 13.2bn times in 2017, an increase of 14 per cent from the previous year. The number of cash transactions in the UK, meanwhile, dropped by 15 per cent. Almost half (5.6bn) of these transactions were contactless. UK Finance also reported that 3.4m people “almost never used cash”, instead relying on cards. The “rising popularity of online shopping and flux of mobile banking apps” were cited as other factors in cash’s demise.

The evolution of financial technology has been driven by a human craving for “convenience”, according to Dr Joe Gladstone, assistant professor of consumer behaviour at University College London’s School of Management. “Humans are evolutionarily hard-wired to seek the cognitively and physically easy option. Technology is enabling these desires.” 

Tom Blomfield, CEO of the mobile-only bank Monzo, says: “I think that the value of data to consumers is being appreciated more. Having electronic receipts and a record of where their money is going makes people feel more secure.”

Monzo, which provides real-time updates of purchases made on a card linked to a smartphone, has more than 500,000 current account customers, making it the biggest digital challenger bank in the UK. “Having the data returned to them in real time,” Blomfield says, “offers a consumer some reassurances. Getting that push notification straight away helps people to stay on track of what they’re spending and where they’re spending it. It is a lot easier to lose a wad of cash.”

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Ross Brown, whose south-east London coffee shop, Browns of Brockley, only accepts payments by card or mobile banking apps, says that convenience is as much a motivator for businesses, as it is for consumers. “It takes roughly the same amount of time to count a float at the end of the day whether you’ve made five or 100 per cent of your sales in cash. I would say for a business that is quite fast-paced and doing a lot of small transactions, cards are quicker. I prefer not faffing about counting out change, or trying to work out if someone’s paying with a fake note, or an out-of-date coin.”

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Blomfield adds that the “business case for not using cash” is clear in providing the opportunity to “remove some costs altogether”. He says security, for example, “is a lot more straightforward. Physically handling cash is an expensive part of any business. You might have to invest in a safe or actual guards to keep the money safe.” Blomfield echoes Brown’s sentiments on saving time. “Sending kilos and kilos of cash to a sorting centre can take ages.”

What effect do cashless technologies have on people’s spending habits? Is a cashless society likely to spend more or less carefully? According to Gladstone, the detachment from cash that contactless payments provide can anaesthetise the psychological pain that comes with handing over large sums of money. “There is evidence,” he says, “for a ‘credit card effect’, where people tend to spend more on hedonic, discretionary or fun purchases, when people use cards over cash. One reason for this is that cards reduce that wince of pain we feel when we spend more than we would like.”

Not everyone thinks that this is a good idea. A report by the Bank of England last summer suggested that the increased popularity of contactless cards was linked to a rapid growth in consumer debt; while a survey of 2,000 British consumers carried out by credit-checking service ClearScore found 72 per cent of respondents admit that contactless payment options made them feel more inclined to make impulsive purchases. Perhaps Monzo’s push notifications, then, are not much of a deterrent. 

In Sweden, where 59 per cent of all consumer transactions are completed through non-cash payments, the Swedish National Pensioners’ Organisation, has raised concerns that the cashless drive will lead to the social exclusion of the elderly, who may not have access to the internet at home or may feel nervous about using technology. The vast majority of the nation’s banks have long stopped allowing customers to withdraw or pay in cash over the counter. But spokesperson Ola Nilsson told the BBC World Service: “As long as there is the right to use cash in Sweden, we think people should have the option to use it and be able to put money in the bank.”

Fintech is on the rise globally, but cash remains the second-most popular payment method in the UK, accounting for just over a third of all payments. A 2017 report by consumer research group Which? found that around 2.2m people still mainly used cash for their day-to-day grocery shopping, even though nine out of ten of them had a debit card. This figure included a lot of people who lived in rural areas, where “many small and remote shops still operate exclusively in cash”.

While UCL’s Joe Gladstone acknowledges the inherent challenges of an increasingly cashless society, he thinks “it will have a net positive impact” by “reducing fraud, substantially increasing taxes paid and improving economic efficiency”. For Gladstone alienation, of the tech-shy elderly or those who live in rural areas, is “definitely not inevitable”. And he says effective government policy could help. “New technologies mean there is no reason that shops can’t immediately accept digital payments, for example. So if cash was actually prohibited, these shops and communities would quickly adapt.

“The reason consumers have free banking in the UK, which in many ways is an incredible situation which we take for granted, is because the government mandated banks to provide this. Similarly, the government can mandate or incentivise banks to proactively provide vulnerable people easy-to-use digital products.”

For all the benefits of technology, however, it also carries its own risks. Consider, for instance, a cautionary tale from Visa. Visa experienced a Europe-wide hardware failure this summer, which left millions of customers unable to make payments by card. Some cardholders found that their attempted transactions meant funds in their accounts were ring-fenced, leaving them unable to even withdraw cash for use in lieu. It may be argued, then, that this is symptomatic of a wider problem: an over-reliance on technology, which makes the case for cash as a valuable contingency. 

With an increase in digital and cashless transactions, the question of data security also comes into play. Who has access to this information? While cash provides anonymity, some consider contactless payments data to have enormous surveillance implications. Brett Scott, a former broker and the author of The Heretic’s Guide to Finance, has argued that there is a “dark side” to cashless technologies. 

He wrote for the Guardian: “There are certain institutions – banks, payments companies, and governments – that really do want the death of cash… engineering the general public’s consent for cashlessness is a subtle process. People may indeed enjoy a new payments app or contactless card, but financial institutions then use that to justify the gradual removal of the cash infrastructure – such as ATMs – in order to deliberately make cash harder to use. This feeds back, making digital seem relatively more convenient, ‘inspiring’ more people to choose it.” 

At best, according to Scott, digital payments can enhance market research. At worst, private companies may use data as a means to “invade privacy”, while alienating anyone without a bank account. “Coins and notes are a flexible and anonymous medium for quick small transactions that don’t involve an intermediary. In a world where all transactions are electronic, though, the only means of paying is via a bank account, meaning anyone without a bank account cannot buy anything. If you are a refugee with no permanent address and bank account, good luck.” 

Ultimately, while fintech has triumphed in providing consumers with a variety of payment options, opened up new markets, especially online, and created a sector large enough to potentially absorb many job replacements within itself, it’s apparent that cash needs to be spared obsolescence for the time being. Rolling out fintech more widely in rural areas and helping the elderly population to develop digital skills would come at a huge cost to any government, while the Visa fiasco highlights the risks of having a plan B, and the privacy which cash ensures must still be respected. If champions of cashless payments are enthused by a wider provision of choice, why, then, should they seek to remove cash?

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