October 2, 2019

The Viability of Cash: How to keep Cash Relevant in an Increasingly Cashless Society

The conflict: rising costs but cash is still required

Following the publication of the Access to Cash Review (AtCR) in March this year, and the ESTA conference in Vienna in May ("A Bright Future for Cash!"), various problems concerning the viability of cash were highlighted, with two key conflicting issues at their heart:

  1. the UK is not ready to go cashless - people still need access to cash and will do for the foreseeable future; and
  2. the unit costs associated with cash management and maintaining the cash infrastructure are increasing, making it progressively more difficult for merchants and retailers to maintain cash as a payment method.

With issue number 1 above in mind, the AtCR's first recommendation was to guarantee consumer access to cash.

Cash payments have halved in the past 10 years. In the UK there is no legal requirement for retailers to accept cash.

Rising Costs

The underlying economics of cash handling and distribution have deteriorated.  The fixed costs of cash management are high due to the significant costs of the cash centres, the machinery and, but to a lesser extent, high levels of manual labour in distribution, processing and maintenance.  None of which are quick to flex as demand decreases.  As the market changes, ATMs are being used less but at the same time the interchange fee is decreasing, putting pressure on that end of the distribution chain too.  ATMs are consequently becoming unprofitable.

It was estimated by the AtCR that the UK's cash infrastructure costs around £5 billion a year, with much of the costs being fixed. Consequently, the future of cash depends on how the key stakeholders in the cash cycle choose to combat these issues – collaboration is required to ensure cash is a convenient, efficient and safe means of payment.

But costs are not the key issue for retailers

Following a recent European Central Bank (ECB) review on cash and payments, Henk Esselink (Head of the Issue and Circulation Section, Directorate Banknotes at the ECB) reported that merchants and retailers ranked reliability as the most important aspect of a payment instrument, with costs coming 4th and cash ranked highest on reliability. So it is clear then that cash is favoured and merchants and retailers want to keep accepting it… So how then do we combat the rising costs of cash infrastructure?

Is cash recycling the answer?

One increasingly popular solution, and one that was advocated at the ESTA conference, is that of cash recycling and the use of "Smart Safes".

Cash recycling involves merchants and retailers making deposits of cash on site every day, Smart Safes store cash which comes in and then recycle the same money – this reduces the need to transport and order more cash when required. Daily deposits are then (provisionally) credited the same day to the merchants' / retailers' banks, with the CIT carrier collecting the cash periodically. Popularity in Smart Safes is increasing as they are also able to authenticate and store banknotes safely, ensuring compliance with legislation, reducing cash management costs and increasing efficiency. Counterfeits are still verified on collection / processing and the cash cannot be put into recirculation until this happens. But they still cost the retailers significant sums and are therefore not always viable.

The AtCR found that the most common justification used by merchants and retailers for refusing to accept cash is the rising costs of handling and banking cash.

The future?

Cash recycling, at least in theory, has the potential to make a significant impact on the fixed costs of cash infrastructure by reducing transportation and processing costs.

However, recycling will not do away with the need for consolidation in the wholesale side and a significant reduction in the cash centre and CIT infrastructure.