How Covid has led to the demise of hard cash and growth of contactless payments

Craig Johnson and David Lee on the steady demise of notes and coins during the pandemic as consumers shunned filthy lucre and switched to contactless payments and online services.

Many shops have begun to only accept card payments due to the pandemic, spurred on by the new upper spending limit of £45 for contactless payments. Inset, there will be no more new two pence or two pound coins for at least a decade. Picture: Shutterstock
Many shops have begun to only accept card payments due to the pandemic, spurred on by the new upper spending limit of £45 for contactless payments. Inset, there will be no more new two pence or two pound coins for at least a decade. Picture: Shutterstock

Before the pandemic struck, many corner shops still had slightly dog-eared, hand-written signs taped to the side of the till that read: “Cash only”. Fast-forward to the second wave of the virus and it’s likely to have gone, with its hastily-scribbled replacement reading: “Card only”.

This article formed part of The Scotsman’s Talking Money magazine. You can view the 2020 emag here >>

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When the contactless limit was increased from £30 to £45 on 1 April, payment providers said it was to help cut checkout queues and reduce contact between customers and shopkeepers. Despite the World Health Organisation rejecting evidence the virus was spreading specifically on cash – but then reminding people to always wash their hands after handling money anyway – much of the reputational damage to “dirty cash” was already done.

“The Covid-19 pandemic has effectively led cash to be deemed unhygienic,” says Caroline Stevenson, legal director of the financial service team at law firm Womble Bond Dickinson. “Suddenly, we looked at it differently – it’s handled by so many people and there’s a real reluctance to use it now.”

Banks had already been considering an increase in the contactless limit, which started at £10 in 2007, rising to £15 in 2010, £20 in 2012 and £30 in 2015. Coronavirus simply accelerated those plans, so there’s little chance of the cap being lowered.

Nor do consumers’ appetites for paying with contactless appear to be waning. A survey from Mastercard found that three-quarters of shoppers intend to carry on tapping their card instead of handing over cash post-Covid.

For those unable to venture out to shop during the initial national lockdown, or who have felt uncomfortable returning to the high street even when allowed, the internet has provided a lifeline for household essentials – and the odd subscription to Netflix too. Research by Visa found 89 per cent of UK citizens used online shopping during the spring lockdown, with 31 per cent buying items over the internet for the first time.

Two-fifths said they were shopping online more frequently, with 74 per cent saying they will continue to do so.

Jeni Mundy, Visa’s managing director for the UK and Ireland, said: “Payment behaviours have clearly shifted during lockdown, with the restrictions acting as a catalyst for people to make the move online.”

In fact, 28 per cent told Visa they would choose to shop online “where possible”. So we could see internet shopping continuing to account for a larger chunk of overall retail sales than it did before the pandemic, having peaked at 31.8 per cent in June, before easing back over the summer to stand at 27.5 per cent in September.

Among those who are able or prepared to return to physical stores, 42 per cent already pay by contactless whenever possible and a further 9 per cent use their smartphones for mobile payments.

That switch from cash to card has been one of the most visible signs of deeper changes to our relationship with money, as more people switch from physical interactions to online transactions. That trend is becoming clearer through the growth of online banking.

Santander said coronavirus had “supercharged the speed of digital adoption”, with 59 per cent using online and mobile banking more than they did before the pandemic. In April alone, TSB reported a 137 per cent jump in the number of people registering for online banking, with Lloyds posting a

50 per cent rise.

Management consultancy firm McKinsey & Co. stated that the coronavirus outbreak had accelerated the digital shift by two years. Yet that move to online spending and banking threatens to leave some people without the access they need to cash. A survey by consumer group Which?, conducted immediately before the pandemic, revealed that 25 per cent of people still rely or depend on cash, while a further 49 per cent describing it as an “essential back-up”. (See pages 14-15 for more on financial inclusion.)

During the national restrictions, the Post Office used its foreign currency service to deliver cash to the homes of vulnerable customers for the UK’s Department for Work and Pensions. And a Which? poll found one in five people shopped for or helped manage the finances of someone from outside their household during the spring lockdown, with the majority being repaid in cash. Yet one in ten of those good Samaritans were refused service by stores when trying to pay with notes and coins.

Since 2017, when cards overtook cash as the UK’s most frequently used form of payment, obituary writers have been sharpening their quills to pen the epitaph for coins and notes. But have rumours of cash’s death been exaggerated?

“We are one of the countries least reliant on cash,” says Stevenson. “Some Nordic countries are more advanced. Only a quarter of transactions were cash pre-Covid and that’s obviously going to drop.

“But I don’t think we can get to a completely cashless society without a really good alternative. Whether that’s a digital currency mandated by the Bank of England [see panel, top right], or infrastructure to make payments entirely digital, I don’t know. I

think we are still 20 years or more away.”

A September report by the National Audit Office (NAO) revealed cash was used in fewer than three in ten transactions last year, down from six in ten a decade ago. By 2028, that figure could drop to one in ten.

When the 12-sided £1 coin arrived in 2017, the public not only swapped their “old” £1 coins for new ones, but also returned other denominations to banks as well. That led to a glut of currency, with the Royal Mint halting plans to produce any further £2 or 2p coins for at least a decade.

While fewer people are using cash overall, demand for notes is rising –

the number in circulation hit a record high of 4.4 billion this year, worth a combined £76.5 billion. The Bank of England estimates only 20 per cent to 24 per cent of the value of notes in circulation are being used for transactions, with households holding a further

5 per cent as savings.

“Little is known about the remainder, worth approximately £50bn,” the NAO said.

“Possible explanations include holdings overseas for transactions or savings and possibly holdings in the UK of unreported domestic savings, or for use in the shadow economy.”

Seeking stability in cryptocurrencies

Since credit cards were introduced in the 1950s, almost all payments have been made through cash, cheque, card, or bank-to-bank transfers – even contactless cards or smartphones are linked to cards or bank transfers. Now, financial technology firms want to offer alternatives and use “stablecoins” for transactions processed by retail or wholesale payments systems.

So far, cryptocurrencies, such as Bitcoin, have been too volatile for widespread use in payments, but “stablecoins” are pegged to a “fiat” currency – a national currency issued by a central bank or government – or collection of fiat currencies. These private currencies could also face competition from public versions, such as central bank digital currencies (CBDCs).

Either version will require changes to regulations and international agreements on such rules. CBDCs would allow central banks to retain more control over the stability of financial systems by controlling money flow – but they raise questions over privacy and public trust in centralised authorities.

Such moves took a step forward last month when the Bank of England joined with six other central banks and the Bank for International Settlements to publish a report identifying the foundational principles necessary for any publicly-available CBDCs to help institutions meet their public policy objectives.

“Cryptocurrency is all about mindset,” says Caroline Stevenson of Womble Bond Dickinson. “I think a lot of people thought it would be crypto’s time to shine but its popularity hasn’t really soared.

“It has potential, but I think a digital currency backed by the Bank of England would be deemed safer by the public.”

Contactless solution for the Big Issue

When the spring lockdown began, The Big Issue temporarily ceased production for the first time since its launch in 1992. Instead, staff swung into action to support its vendors, spending £600,000 to provide a range of services, from supermarket vouchers for food to TVs for those who were shielding.

The Big Issue sellers began returning to the streets on 6 July, with vendors provided with free personal protective equipment and hand gel. Credit and debit card readers were also introduced so that no coins and notes were needed.

“Cash was declining before Covid, but that’s now accelerated,” says Chris Falchi-Stead, The Big Issue’s sales and operations director.

“That’s given a lot of vendors the chance to become financially included, because it’s meant they’ve opened bank accounts, got basic forms of identification, and smartphones [for app-based banking].

“We’re trying to ensure vendors are not just prepared to be as successful as they can be immediately after Covid, it’s also about going into 2021, 2022 and beyond.

“We realise we have to adapt and change, and the vendors with card readers are reporting they’re selling more now than they did before.

“It’s difficult though – there’s still stigma around vendors accepting card payments, so we’re trying to break down that with the public. But on the whole, it’s been a huge success.”

This article is taken from the November 2020 special report Talking Money which first appeared in The Scotsman newspaper. To receive your free delivered copy please email [email protected]. UK addresses only. Subject to availability.

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