The National Audit Office (NAO) recently reported that HM Treasury and the public bodies responsible for overseeing the cash system need to work together more effectively to achieve the government’s goal of safeguarding access to cash. A coordinated effort is needed to prevent vulnerable people who rely on cash for transactions from being excluded.
Ten years ago, cash was used in six out of 10 transactions but by 2019 it was used in less than three in 10 transactions. The outbreak of COVID-19 may have accelerated this trend, as data suggests that market demand for notes and coins declined by 71% between early March and mid-April during the lockdown, although demand has since been recovering.
The decline in the use of cash in transactions is putting pressure on the cash system. Commercial operators who distribute cash rely on high demand to maintain the attractiveness of their business models, and cover large fixed costs, such as bank branches and ATMs. In March 2020 the government announced that it would be bringing forward legislation to protect access to cash and address the sustainability of the cash infrastructure.
According to the NAO, the pressures on the cash system could mean that people who rely on cash find it more difficult to use cash in transactions. Published research shows that older people and those on a low income are more likely to make cash transactions.
In the two years to December 2019, there was a 17% reduction in free-to-use ATMs. LINK3, with support from the Payment Systems Regulator, have protected ATMs in specified areas where provision is limited.
However, while there remains a higher number of free-to-use ATMs in more deprived areas, in the two years to January 2020 the proportion of free-to-use ATMs has declined faster in those areas than in less deprived areas.
The NAO cannot currently see a clear link between the government’s aim to safeguard the consumer’s ability to use cash, and the responsibilities of the five public bodies in the cash system.
No single body has responsibility for reporting on the performance of the system in meeting the government’s aim. In May 2019, HM Treasury established the Joint Authorities Cash Strategy Group (JACS) to coordinate work to support nationwide access to cash. Although the group has improved joint working towards government’s aims, JACS does not oversee the cash system and has no decision-making power.
Changes in cash use are having an impact on the production of coins. Coin production shrank by 65% in the last decade to 383 million UK coins a year in 2019-20, from around 1.1 billion in 2010-11.
When the Royal Mint (the Mint) replaced the old £1 coin in 2017, the public returned large volumes of all coin denominations. As a result, the Royal Mint’s stocks exceeded targets in all denominations.
At the time of the NAO’s fieldwork, the Mint had no plans to produce new 2p or £2 coins for at least ten years. To drive efficiencies, the Mint has reduced headcount by 22% on coin-making work within its currency division and scrapped two of its six plating lines.
Despite fewer people using cash for transactions, the demand for notes has continued to increase.
In 2020, the number of notes in circulation reached a record high of 4.4 billion, with a value of £76.5 billion. In 2018, the Bank of England (the Bank) estimated that only 20%–24% of the value of notes in circulation were being used or held for cash transactions, with UK households holding a further 5% as savings.
Little is known about the remainder, worth approximately £50 billion, but 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. The Bank and other government bodies have little reliable information to quantify how much is likely to be held where.
At March 2020 the Bank’s contingency holding of notes significantly exceeded its minimum guidance levels, which was partly affected by the launch of the new £20 note. Its contingency stock levels were above minimum levels for all denominations, with a total value of £39 billion, against its minimum contingency guidance level of £20.5 billion.
The Bank considered these stock levels to be appropriate in light of the transition of the £20 note to polymer. However, it is not clear from the documentation shown to the NAO what process the Bank operated to determine adequate stock levels, and how the cost implications of building stock levels were taken into account.
Recent anti-counterfeiting work by both the Bank and the Mint is delivering improvements. Indications so far are that £5 and £10 polymer notes, with new security technology, have reduced the incidence of counterfeiting compared to equivalent paper notes. In addition, since the Mint introduced new advanced security technology, surveys have found very low counterfeiting rates for the new £1 coin and other denominations.
The NAO recommends that HM Treasury should set out more clearly the specific outcomes it wants the cash system to deliver for consumers and small businesses, and how this should be balanced against costs.
To drive efficiency, the Mint and the Bank should maximise opportunities to learn from each other’s experiences of cash production and align production capacity closely to future needs.
Gareth Davies, head of the NAO, said: “As society progresses towards the wide use of digital payments, the use of cash in transactions is dwindling. It may become harder for people to access cash when they need it and those without the means to pay digitally will struggle if cash is not accepted.
“HM Treasury now works more closely with the public bodies in the cash system to achieve the government’s goal of safeguarding access to cash. However, the approach is fragmented, and it is not clear that the action being taken will keep up with the pace of change.”
Lothian MSP, Miles Briggs, said: “Edinburgh and the Lothians have been moving away from cash over the last decade, but there are many people who still rely on using cash.
“The Covid-19 pandemic has accelerated the use of contactless payments which is not convenient for everyone.
“The UK and Scottish Government must work together to ensure that people who prefer using cash to manage their money have easy access to it.”
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