Can Brexit save cash in the U.K.?

With the U.K. careening toward a no-deal Brexit in the midst of a health crisis and economic downturn, the government is suggesting a breakup with the EU could defray the costs of cash usage and access.

The Treasury is proposing consumers can get cash back at shops without making a purchase, a system that EU guidance says would require heavier regulations in line with banks or payment companies.

The U.K. Treasury says “current EU law makes it difficult for businesses to offer cash back when people are not paying for goods and this has been a barrier to widespread adoption.”

The government is considering scrapping the rules once the Brexit transition ends on Dec. 31, and it’s also considering giving the FCA overall responsibility for maintaining cash access. Presently, a handful of regulators have different roles in governing cash, and the U.K. government says a single authority would be more efficient.

The proposal comes as Prime Minister Boris Johnson this week told the U.K. to prepare for a no-deal Brexit as negotiations with the EU stagnate, a move a CNN analysis reports could cost the U.K. $25 billion, on top of an expected 9.4% GDP contraction that would be the U.K.’s worse economic performance in 99 years. It’s unclear, though presumably a “hard Brexit” would create less pressure for the U.K. to hold onto EU regulations.

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Adding to the pile is the coronavirus pandemic, which has accelerated an expansion in digital payments that has raised the cost of handling paper bills, an already contentious issue in the U.K. The Treasury says that by offering cash back at local stores, the total amount of cash in the country is actually reduced due to recycling, with the cost of managing cash also going down.

But the legal path isn’t that easy. Under the second Payment Services Directive (PSD2), only banks and licensed payment companies can offer cash access without requiring a purchase. Decoupling the U.K. from the EU doesn’t automatically change those rules.

“While PSD2 is a European directive, it has been transposed into the U.K. law, and I think most people assumed that the U.K. would continue to comply fully, irrespective of what happens with Brexit,” said Zil Bareisis, head of retail banking for Celent, who is based in London. “The law would have to be changed to enable such a service.”

The U.K. Treasury reports consumers received about $5 billion in cash back when making payments at stores in 2019, making it the second largest method for accessing cash in the U.K. after ATMs.

ATMs are endangered in the U.K., declining as banks reduce support for ATMS. This has created cash and ATM desserts, mostly in rural areas and underserved communities. That was a political landmine even before the pandemic and recession. The postal service is used to compensate for the declining cash access points, though there was a dispute between Barclays and the postal service over the fees tied to the cash access service.

There are also logistical problems beyond the legal and political hurdles.

“Handling cash is costly, although those costs are often less understood than the costs of card payments, which are transparent,” Bareisis said. “Also, while the idea of recycling cash already available to retailers makes sense, will they have enough of it as contactless and other electronic payments continue to grow and cash usage in shops declines?"

There’s additional questions as to how the merchants will benefit from giving cash to consumers who haven’t bought anything. Merchants pay a fee for a cash back and there are other soft costs such as ensuring they have enough bills on hand.

“The argument that they will get increased footfall could mean that they get just that. Footfall and the additional cost and no extra spend,” said Gareth Lodge, a senior analyst at Celent, also based in London, adding merchants in rural areas tend to be smaller and get worse interchange rates.

The Treasury’s proposal suggests a broader antipathy toward PSD2, the EU guidance that tightens rules for security and authentication and guides open banking, or the sharing of consumer data between banks and third parties such as e-commerce or payment apps.

PSD2 compliance has long been a challenge for banks, but its influence has been substantial, as open banking has taken hold in markets well outside the EU.

PSD2 isn’t a law, but something more resembling a standard or directive. So the U.K. could carve out a limited exception while still mandating broader compliance through its own laws. “The national lawmakers have been given a set of aims and guidelines rather than very specific requirements,” Lodge said. “The U.K. could comply with the majority of PSD2, which is already in place, and create its own derogation, which could be crafted to limit the scope to the U.K.”