20 December 2014

Chris Dunne

Chris Dunne - VocaLink Limited

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Innovation in Financial Services

A discussion of trends in innovation management within financial institutions, and the key processes, technology and cultural shifts driving innovation.

Where is all the cash going?

12 February 2013  |  3368 views  |  2

According to the latest Bank of England statistical release, the amount of notes and coin in circulation is growing at about 4% a year.  This has been pretty much the average growth rate over the past few years, although there was a large spike in late 2009 to over 8%.

At around that time, Andrew Bailey, who was then the Bank of England Chief Cashier, made a speech about the paradox that whilst cash usage as a proportion of overall transactions continues to fall there is still a growing demand for notes.  His view was that concerns about the stability of banks, coupled with low interest rates (which means that the opportunity cost of holding banknotes is low), was driving people to use banknotes as a store of value – ie stuffing it under the mattress.

So what has happened over the three years since Mr Bailey’s speech?  The growth rates of notes and coins has fallen back to the average 4%, but this is still substantial growth given that cash usage isn’t rising.  According to Payments Council data, there are about 15 billion spontaneous cash payments over £1 every year, and about 600 million regular cash payments (for rent etc), and that these rates have been pretty static over the past few years.

Over the same period, ATM usage has continued to rise – there are now over 66,000 cash machines in the UK, and there were over three billion transactions through the LINK network that connects these ATMs.  Traffic through the network was up about 1.5% in 2012, with average withdrawal amounts remaining steady; on average we withdraw about £65 a time at the start of the year, rising to about £68 in the run up to Christmas.

So – the Bank of England continues to print ever more banknotes, and as a nation we are taking more money out of cash machines, but we aren’t using that cash to make more payments, even allowing for inflation.  There are two obvious routes for this additional cash – as a store of value (the Bank of Mattress), or to the shadow economy, which according to a study last year accounted for about £64 billion in lost revenue to the taxman in the UK.  As I mentioned in a previous blog, the UK tax authorities are cracking down on this, but looking at the way that cash is disappearing it looks like they have an uphill struggle.

TagsPaymentsTransaction banking

Comments: (2)

Neil Burton - Self - London | 12 February, 2013, 16:22

Certainly as a store of value http://news.bbc.co.uk/1/hi/magazine/8678979.stm

‘Euro cash-in-circulation has sustained average growth of about 11% per year, almost doubling since the euro was introduced in 2002, even when excluding the €500 and €200 notes that are the most hoarded (in the Eurozone and in neighbouring Eastern European countries). In 2008, the year-on-year expansion in cash-in-circulation was much higher than the increase in non-cash transactions per inhabitant (11% vs. 4%).

According to estimates from the European Payments Council, cash payments cost the EU economies between €50 billion and €75 billion per year—expenses that should motivate all stakeholders to take more determined action to discourage cash payments.’ – World Payments Report 2010

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Ketharaman Swaminathan - GTM360 Marketing Solutions - Pune | 15 February, 2013, 12:37

With the repealing of the "no surcharge" rule post Frank-Dodd-Durbin Amendment, US retailers are permitted to levy surcharge for accepting credit card payments. According to recent news reports, some of them are actually planning to do so. This will likely result in increased use of cash for retail payments even in an economy like the USA that has traditionally seen widespread use of credit cards.

In India, banks and / or retailers are also partially to blame for potentially boosting the use of cash by steadily lowering the redemption value of credit card rewards. Just to cite my personal experience, five years ago, 1000 reward points from a leading bank used to get me a gift voucher of close to INR 700 from a leading retailer. Today, the same 1000 points from the same bank gets me only INR 100 from the same retailer. In the past, just for the sake of convenience, I used to pay by credit card even when the merchant levied a 1.5-2% surcharge. Today, with a near 7X drop in redemption value, I strictly pay by cash whenever a merchant levies surcharge for credit card payments.

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job title Payment Services Director
location London
member since 2012
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Responsible for the Bacs and Faster Payments scheme businesses and the relationships with the Bank of England, HM Treasury, Payments Council, FCA, BBA and SWIFT. Also responsible for Government busin...

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