A Battleground In Payments: Cash v Plastic

31 July 2013

In the wake of a recent British Retail Consortium (BRC) study that showed a 10% decline in UK goods purchased with notes and coins last year, Chris Davies, managing director of the Global Payments processing firm, examines the future of cash versus card payments, and how consumer behaviour and payment technology might develop in the future.

The British Retail Consortium (BRC) study of consumer behaviour also argues that by 2020, only eight per cent of UK consumers believe that cash will be their preferred method of payment. Of course, this finding depends upon where a consumer is with a high ticket monthly supermarket shop or department store purchase much more likely to elicit a card payment than a newspaper bought in a shop, but the study does show that while cash won’t disappear it will diminish in importance. Technology such as card payment infrastructures, contactless cards and mobile point-of-sale (PoS) solutions, allied to near field communication (NFC) terminal systems, could all contribute towards increased card usage and less cash in the future.

One of the main drivers behind this shift towards the diminishment of cash is the way that technology has permeated every aspect of our everyday lives. For example, the ubiquity of smartphones, which place a previously unimagined amount of computing power at a consumer’s fingertips, has given rise to new and innovative ways to pay for things.

Is Cash Still King?
When you stop to consider the impact that technology has had on our lives in recent years, it is perhaps surprising that the use of cash to pay for goods and services is even still with us. But a system which has barely changed since it was first introduced around 3,000BC, and has sometimes relied on shells or other monetary tokens, is still popular with consumers and won’t just disappear.

The BRC study found that although its usage is decreasing, cash is still the most popular form of payment in the UK, accounting for approximately 55% of all transactions. While spending on cards is increasing, there has not been a corresponding decrease in the number of automated teller machines (ATMs), which is indicative of consumer sentiment in favour of cash. The number of ATMs in Europe actually increased by 0.9% in 2011 to 0.44 million units, according to statistics published by the European Central Bank (ECB) in September 2012.

The wholesale shift to electronic communication has been a defining feature of the past decade - an individual could live their life virtually paper free if they chose to. While the same could be said for living without cash, as the BRC study has shown, it has not really diminished its broader use.

Despite our passion for innovation and the opportunities this presents in the way we pay for goods and services, it seems consumers cannot shift their attachment to cash. What many people fail to appreciate, however, is the ‘hidden’ cost of cash for banks, processors and others. Using cash is expensive and cutting back on its use, where possible and with consumer permission, saves money.

The reality is that the cost of cash in the UK alone runs into many billions of pounds every year, and this can be multiplied country-by-country around the globe. These costs add up through the whole cash lifecycle and cover things such as costs for production, transportation/security, insurance, cash handling and loss of interest. The banking and retail sectors pick up the majority of these costs, but in part pass them onto consumers in the form of higher prices.

McKinsey, the consultancy firm, has estimated that society spends about €200 (£180) a year per person in order to cover the cost of cash and that the real cost of cash to a retailer is 1.3% of the purchase price. Card interchange fees have their own cost of course, although not to the consumer and the security and transportation costs are non-existent in comparison.

Technology Supports New Ways to Pay
A cashless society is not on the horizon anytime soon, despite what some marketers might tell you, but there are signs that new payment methods could be starting to dislodge cash in some everyday transactions.

The sustained presence of cash in a society populated with technologically savvy consumers is arguably an issue of both habit and trust - individuals like to use methods of payment that they are accustomed to and which make them feel secure. But those routines are gradually being changed as alternative payments become part of the retail landscape.

The explosive growth of electronic e-commerce, for example, has led many consumers to habitually use e-payments. In 2011, according to a report from the UK Ofcom regulator published last year, the per-head spending on e-commerce in the UK was £1,083. This is significantly higher than anywhere else in Europe and shows the popularity of online shopping in the country, which in turn necessitates different non-cash forms of payment.

Interestingly, one of the major constraints on any further falls in cash usage at the moment is the recession in the UK and in much of the rest of Europe because consumers typically like to use cash rather than plastic to maintain a tight control of their budget. Simultaneously, recourse to credit cards drops as individuals pay down their debts. The arrival of an economic recovery mooted next year is likely to correlate with an increase once again in the use of plastic cards.

Broadly speaking, for larger value transactions, spending on plastic cards has developed a clear lead, especially in retail. According to statistics from the UK Cards Association (UKCA), in December 2012, the share of plastic card spend in the retail sector was 74.7%, which is a 3% year-on-year increase.

Where cash is still dominant though, and likely to remain so unless low-value contactless cards finally take off, is in paying for low value, everyday items such as a coffee or newspaper in the morning on the way into work. However, the introduction of new payment methods such as NFC contactless terminals in shops and on bank issued credit and debit cards might challenge this in future. Figures from the UK Payments Council released in February 2013 in their report entitled ‘The Way We Pay’, showed that cash still made up three out of five daily one-off transactions in 2011. But significantly, it also found that the use of debit cards is increasing as are contactless payments; admittedly from a low base.

As I touched upon earlier, the real game changer in this area is likely to be the use of smartphones to make mobile m-payments. Consumers could become accustomed to tapping their phone to pay for everyday items in shops or to make peer-to-peer (P2P) mobile payments to friends or family. NFC-enabled smartphones aimed at the retail environment have already been piloted in the UK and some rollouts have progressed which may have an impact many years in the future.

From a demographic perspective a generation of ‘digital natives’ is now growing up with smartphones and digital technology as an integral part of their lives. They will be very comfortable with making payments using these devices and could be the biggest factor in eventually driving contactless in-store NFC payments up and cash usage down.

While I stress cash will never be fully replaced, there are obvious incentives for retailers and consumers alike to reduce their reliance on it for the payment of goods and services. The availability of new technology to support innovation in areas such as contactless and mobile payments is likely to drive a major change in behaviour across the retail chain, as is the shift towards online commerce. Payment processors, banks, retailers and others in the chain should get ready now.

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