The death of cash?

Contactless and mobile payments are growing fast. Does this spell the death of cash?

The cash machine turned fifty last year. First unveiled in Enfield in 1967, it went on to completely transform our payment habits by making cash always available, everywhere. It’s hard to imagine, but before the Automated Teller Machine (to give it its proper name), you had to get cash by lunchtime on Saturday or wait till the banks opened again on Monday morning. It’s a far cry from the life we’re used to where almost anything is on-demand.

Use of cash is in sharp decline

But as a nation, our love affair with cash is cooling fast and visiting the cashpoint is now a pastime in decline: in 2017, the number of people using the UK’s 70,000 cash machines fell for the first time following a decade of year-on-year growth, and 40% of all payments in the UK were in cash – that’s compared to 62% in 2006¹. UK Finance² now expects cash will account for just 21% of all payments by 2026³. I know I can quite easily get through a week in London without needing cash; things change slightly when you leave the city but it’s still very doable.

Contactless payments are growing strongly

So what’s changed? Cards, and in particular contactless cards, are replacing cash for many small transactions. In food shops and coffee queues across the country, you’ll find customers using their contactless bank card to pay, making for much faster transactions and no fumbling with coins. It’s a rapidly growing payment habit – in 2016, we spent £25 billion in the UK using contactless, a figure almost matched in just the first six months of 2017. The average value of a contactless payment at food and drink retailers (the most popular sector for the cards) was £9.70⁴, showing its direct equivalence to the loose change in your pocket.

This strong trend has, in fact, been some years in the making. The first contactless cards were introduced in the UK in 2007. And back in 1995, the first stored-value payment card or “electronic purse” was introduced. You could load the Mondex card from your bank account via an ATM or over the phone and use it for cash-type transactions – for example, at the newsagents or to pay for parking. These early schemes stored the value on the card itself (so-called “closed loop”) and ultimately failed to build compatibility and scale – but the technology continued to develop leading to, for example, pre-paid cards such as Transport for London’s (TfL) hugely successful Oyster scheme. Contactless bank cards were first accepted for travel on London’s buses in 2012 and then introduced across the TfL network in 2014 – the year that use of contactless started to accelerate. Contactless can increasingly be used to pay for transport elsewhere across the UK.

Now we’re starting to leave our wallets, as well as our cash at home

So contactless is here to stay; UK Finance forecasts there will be around 9 billion contactless payments in 2026, compared to 2.5 billion in 2016. And now we’re starting to leave our wallets at home as we begin to pay, as well as work, browse and play, through our mobile devices and wearables. Mobile phone providers and others have developed apps allowing you to put your contactless cards in a mobile wallet on your device – and use them to pay for goods and services in the same way you would your physical cards⁵ – although there are some small differences between the different offerings. It’s difficult to get statistics for the growth of these mobile contactless payments in the UK as they’re a subset of all contactless payments, but here at Starling, we’ve seen 58% of our customers setup Android Pay (now Google Pay), Apple Pay or Fitbit Pay on their Starling account within a few months.

Not all mobile payments use contactless technology though. For person-to-person payments, (for example, to pay your yoga teacher or split a restaurant bill with a friend) your mobile phone number can be used as a proxy for your bank account details – so the payment message you send is linked to your account as a debit. This service, called Paym, was developed by the Payments Council on behalf of UK banks in 2014.

Of course, if you use a mobile banking app such as Starling, you can also initiate Faster Payments (same-day payments) from your phone, just as you would with online banking from a PC.

As a mobile-only bank account, we’ve always made it easy for our customers to manage their money direct from their phone and we’re committed to investing in payment methods to increase flexibility and choice. Watch this space for further mobile-enabled payment options from us soon!

What next? Open Banking will also change the way we pay

New banking infrastructure and rules are being introduced in this year which will allow consumers to authorise third parties to source data (with appropriate safeguards) direct from their banking provider via open application programming interfaces (APIs). The UK’s Open Banking programme and the changes to be introduced in the EU under The Second Payment Services Directive (PSD2) will lead to the development of more innovative services. Initially, these are likely to focus around information and analysis services (such as overdraft, mortgage or service fee comparisons across providers), but will also allow the development of new payment services from a range of providers⁶. At Starling, we’re already making our open API available to selected partners with the aim of enhancing our Marketplace offer for our customers. Yoyo Wallet is just one example: it allows customers to opt to pay for goods and services directly from their Starling account and receive points and rewards automatically.

It will take time for the possibilities of Open Banking to be fully exploited, but ultimately it’s likely to mean another big step-change in how we make payments.

Is this really the death of cash?

No question, a revolution in the way we pay for goods and services has been underway for some time and the pace of that revolution is accelerating.

But are we witnessing the imminent death of cash? Will the grand-children of millennials still know the joy of having a coin or note slipped to them by a doting grandparent, or will they have to settle for a digital transfer?

Cash, in the form of notes and coins in circulation, is issued by central banks, is exchangeable and guaranteed by governments, so in a very real sense, it underpins our economies. That is not to say it couldn’t be replaced. In Sweden, where two-thirds of consumers say they can manage without cash, the central bank is consulting on whether a digital cash-equivalent might be introduced⁷. If introduced, the e-Krona would be guaranteed by the state, as an equivalent and complement to central-bank issued notes and coins. But there are currently no plans to completely replace the currency.

Cash transactions are also anonymous, a feature libertarians value and which Bitcoin and other cryptocurrencies have sought to emulate in the digital environment. And sometimes cash is just best – when you want to make sure the waiter gets the tip or pay for a copy of the Big Issue, for example. For those on a tight budget, limiting the cash in your pocket is also a time-honoured way of managing spending. (Though for Starling users, our Pulse and Spending Insights features help you stay in control of all your outgoings on your phone screen). Then there are those in society who don’t have access, or have limited access to technology, and financial inclusion recognises the right of the unbanked and unconnected to pay and be paid. (Few of us today use cheques and back in 2009, it was announced they would be phased out by 2018. But following questions in parliament, the Payments Council relented, saying that cheques will continue as long as customers need them.)

So we think cash won’t disappear completely anytime soon – not least because we’ll be happy to keep the flexibility offered by a plurality of technological developments and payments options to meet our different needs and situations After all, just because we get something new, it doesn’t mean we automatically give up the old. It’s likely that, as more and more of what we do moves to that compelling mobile device, it will be the plastic cards in our pocket that will disappear into mobile wallets first, before we give up cash itself. But will cash follow? Only when technology is able to support those moments where you need to pay for your window cleaner or to give a charity donation on the street will we realistically see the end of cash. But technology is solving these problems, so it could only be a matter of time. Watch this space.

¹UK Cash and Cash Machines 2017 Summary, UK Finance
²The trade association for the UK banking and financial services sector, formed on 1 July 2017
³2017 UK Payment Markets Summary, UK Finance
⁴Contactless 10 Year Report, September 2017, UK Finance
⁵(Actually phones and cards use different standards, but they are normally interoperable, which really matters when you’re designing reader terminals and travel gates.)
⁶Account Servicing Payment Service Providers (ASPSPs), Account Information Service Providers (AISPs), and Payment Initiation Service Providers (PISPs).
⁷First Interim Report of the e-Krona Project, Sveriges Riksbank, September 2017