This article was first published in Economics Observatory, a cross-institutional initiative that seeks to answer questions from policy-makers and the public about the economics of the coronavirus crisis and the recovery. It is republished with the permission of the authors.
It is still too early to tell whether Covid-19 and the public health interventions implemented in response will have permanent effects on retail payments in the UK.
Initially, the hoarding of cash was overshadowed by an acceleration in e-commerce and contactless payments, an increase in the use of mobile payment apps and – some speculated – the possibility of cryptocurrencies becoming mainstream. This happened while bank branches closed (some for good), as many as 9,000 ATMs (15% of the total) remained idle and the media falsely reported a high risk of transmission through banknotes.
But despite these apocalyptic messages and the initial negative shock leading to a severe contraction in the use of cash, transactions using banknotes and coins began to recover even before lockdown eased, as Figure 1 suggests, while cash usage increased by two-thirds after lockdown measures eased.
Before Covid-19 struck, digital retail transactions in the UK were on the rise, as Figure 2 indicates. Ten years ago, cash was used in six out of 10 payments. As late as 2016, cash accounted for 40% of all payments and 44% of all payments made by consumers in the UK.
The adoption of contactless payments in public transport networks, increasing e-commerce, widespread use of plastic cards and digital payment applications – for example, Apple Pay, Samsung Pay, PayPal and iZettle – as well as the increase in ‘tap and go’ payment limits, boosted digital payments.
Industry group UK Finance reported that the proportion of cash transactions was 28% in 2018 with an expectation of it dropping to 9% by 2028 (UK Finance, 2019). The long-term downward trend in the use of banknotes and personal cheques indicates that neither will dominate on-the-spot transactions ever again.
But it is too early to tell whether the trend of declining use of cash and personal cheques accelerated in the context of Covid-19. The acceleration implies a long-term structural change within retail payments rather than on other parts of the transaction economy (namely online versus bricks-and-mortar, financial inclusion, bank facilities – ATMs, branches, self-service, etc.).
Recent attempts to rush the UK economy to rely solely on contactless and digital payments have highlighted deep-rooted inequalities and the need for access to cash by some communities (including vulnerable consumers). Anecdotal and mass media reports suggested that joblessness associated with the Covid-19 pandemic might have increased the demand for cash by people in the lowest income strata and those living in rural areas.
These trends, in turn, point to the following major issues:
Although there were calls to replace notes and coins with paper cheques as early as in 19th century France (Baubeau, 2014 and 2016) and Edward Bellamy proposed a credit card in his 1888 utopian novel (Bellamy, 1888), the modern idea of a cashless economy emerged in the United States during the 1950s, as banks adopted computers and faced the rising cost of processing paper cheques (Batiz-Lazo et al, 2014).
Despite this long history, there are no systematic studies of changes in means of payment during pandemics or health crises. Nonetheless, the evidence cited above emerged predominantly from peer-reviewed journals and reports from national and supra-national institutions with responsibilities for oversight of financial markets and institutions accumulated over the past 30 years and during the early months of the current pandemic.
As countries begin to exit lockdown and with the threat of a second wave of infections, it will take a while until we can confidently assess the effects of the global pandemic on the public’s long-term use of cash.
UK Finance provides readily market information but it is only available to members. LINK, the single operator of ATMs, provides regular, freely accessible information on cash distribution volumes. Central banks have scheduled surveys of consumer demand and payment preferences for the autumn of 2020 and mid-2021.
Previous economic crises, including that of 2008/09, were associated with a strong ‘unexplained’ increase in the demand for cash, leading to suggestions that such a shift could be related to increased uncertainty (Jobst and Stix, 2017). Rising unemployment has the potential for individuals to lose access to credit facilities and even bank accounts. These individuals might turn to cash as the ultimate budget management tool.
What will be the impact of Covid-19 on the profitability of Independent ATM Deployers (IAD) and, in turn, the location of free-to-use ATMs? In this regard, a consultation was underway before lockdown (see Payment Systems Regulator, 2019). It is unclear how recent events will modify the recommendations of that consultation.
Policy concerns about the reduction in the number of bank branches and ATMs in the UK pre-dated lockdown (for example, Bank of England, 2020; Payment System Regulator, 2019). There is a potential to increase the number of ‘underbanked’ users and unbanked communities if Covid-19 further reduces transaction volume at physical bank branches and ATMs by accelerating a move towards cashless payments, e-commerce and online banking services. It remains to be seen how non-banking intermediaries, participants in ‘shadow banking’, and fintech start-ups respond to the challenge (see Lepecq, 2020b).
At a time of major economic contraction, investors’ appetite to continue funding fintech start-ups remains to be seen.
Consumers ultimately have no clarity as to the cost of using alternative means of payment. This involves both pecuniary costs (for example, commissions) and non-pecuniary costs (for example, traceability of transactions, loss of anonymity and fraud). Research is mostly mute on these topics.
Innovations in digital retail payments have been mostly incremental while bank-based systems (such as contactless mobile payments, digital wallets or card-based e-commerce) will continue to dominate the trend towards digital transactions. In other words, it is unlikely that a shock like Covid-19 and lockdown will by itself originate a payment innovation.
It is unclear whether there will be a political appetite for an accelerated move towards a cashless economy considering some of the socio-economic groups it would potentially put at a disadvantage in terms of accessibility, financial inclusion and financial literacy. All of these issues cross lines of age and gender, income and wealth levels, race and ethnicity, and the urban/regional divide (in particular the case of London and the south of England versus other parts of the UK).
Other than General Data Protection Regulation, there is no framework for determining access to and exploitation of digital transactions. National and local policy-makers have relied on aggregate card usage data as a high-frequency proxy for economic performance to understand the extreme shifts in consumer expenditures caused by the pandemic and lockdown, and to design targeted policies to support the most affected sectors.
Systematic studies based on credit and debit card transactions are beginning to emerge, such as one for France by Bouine et al (2020) and one for Mexico by Campos-Vázquez and Esquivel (2020). But questions remain about privacy, particularly in countries without a robust regulatory framework protecting users’ personal information.
As a large and complex infrastructure, it is unclear the extent to which the payments system complies with United Nations Sustainable Development Goals (other than those relating to financial inclusion and gender). It should also be subject to a climate-resilience stress test.