20 October 2014

Brendan Doyle

Brendan Doyle - CMS

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Why we need to question the BoE's whimsical polymer decision

27 February 2014  |  3464 views  |  0

The Governor of the Bank of England, Mark Carney, announced on 18th December 2013 that all £5 and £10 banknotes in circulation will begin to be printed on polymer rather than cotton paper from 2016.

This decision followed a three month public consultation process around the UK and an internal review. I am very disappointed in this decision and have a number of primary concerns.

Credible Research?

I am concerned that the Bank used the public consultation as an opportunity to promote the merits of polymer rather than a constructive discussion of its pros and cons, which in my view means that its public approval ratings of 87% is simply not credible. I do not think that the stakeholders in the process – the public, retailers and cash industry operators – have been made adequately aware of the key issues and there has been no major debate even though the decision making process has been fundamentally flawed.

Priorities

I would question the necessity of spending valuable public resources on an expensive review into the material comprising our banknotes when there are still fundamental issues with the UK economy that the Bank is obliged to solve. There has been little compunction in other major economies to make the conversion and globally, very few countries have done so – I believe only around 2-3% of the world’s economy.

A Weak Business Case

I have serious reservations about many of the virtues of polymer put forward by the Bank. The case made by the Bank seems to be that the public sector will save money and they seem unconcerned that this means that small retailers suffer far higher costs in the changeover process.

The first and primary benefit is that the UK will save £100mn in printing costs over a 10 year period. This is because, although polymer is more expensive to produce and an active withdrawal will lead to initial costs, the hope is that polymer notes will last at least 2.5x as long as paper notes and will, therefore, bring a long-term benefit. It may well prove that this benefit materialises but experience from Nigeria, who recently ended an unsuccessful 6 year trial with polymer because the poor quality of banknotes led to low longevity, is highly concerning.

The second main benefit listed is that the UK’s rate of counterfeit banknotes is higher than its peer group and poses a risk to the public’s faith in the currency. However, while that may be true in relative terms, in absolute terms it is a minor issue. In 2011, the value of counterfeit notes fell to c.£13million out of £265 billion of UK cash spending - a non-issue compared to card fraud of more than £330mn. In any case, contrary to perceived wisdom, successful counterfeiting is still possible under polymer notes and we have seen a rise in note counterfeiting in Australia. Moreover, most counterfeiting takes place on higher value notes which the Bank has not committed to convert to polymer, so there is no guarantee that this £13million figure will fall at all.

The Bank’s third claimed benefit is that polymer notes are cleaner. I do not have the scientific expertise to ascertain whether or not this is true– and I hear contrasting reports - but are they really telling us to progress through a major, costly changeover process when the high street is still reeling from the worst recession in memory, just to make notes cleaner?

Impact on Retail & Small Businesses

My fourth, and biggest, major concern is that the Bank seems to have put little or no consideration into the costs to the UK economy of the conversion to polymer. The wider economy, especially the retail sector, will have the bear huge costs of change as equipment needs replacing, software adjusted, staff trained and other changeover costs borne. Small retailers with ATMs will be particularly badly hit and may suffer the double whammy of increased costs and reduced income as ATMs suffer downtime during the changeover. Neither the Bank nor HMT have made any commitment to compensate the losers in this process or make them aware of their exposure in this regard.

The Bank has not even completed a cost-benefit analysis to determine whether these costs outweigh the benefits or not. When asked what the net costs will be of the changeover they have stated that they simply don't know and in fact have indicated that it is the cash industry’s obligation to determine these costs, despite having no exemplar notes with which to make these calculations. We are at the stage where a decision has been made to make the switch and yet it has not been determined whether expensive machinery will need adjusting or replacing altogether. When one considers the magnitude of this exercise, it is very conceivable that this process could cost much more than the £100mn potentially saved on note printing and the small counterfeit reduction.

Why Do We Need An Independent Review?

Considering all of the above, I believe that if this issue had come before The House of Commons, it would surely not have survived with such a weak business case. My experience in the cash industry tells me that the conversion will cause fundamental disruption to the retail sector and big profits for many large cash industry businesses - all paid for by hundreds of thousands of small retailers up and down the country. Therefore, I firmly believe that at the very least the decision needs an independent review. It may well be determined after a thorough cost-benefit analysis that polymer is in fact a good idea - but, I think we'd all like to know that it has been thoroughly and fairly reviewed before any decision was announced.

Please don't hesitate to contact me if you would like to discuss the issues mentioned above.

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