Cost of cash nears tipping point in the U.K.

Cash is not dead, but the burdens of ensuring access threaten to break long-standing ecosystems that sustain traditional payments.

Barclays’ decision to pull out of a deal with the U.K. Post Office to support over-the-counter cash withdrawals is the latest in a series of dramatic moves from financial institutions, technology companies and governments to ease the cost of managing cash as digital payments accelerate and open banking regulations such as PSD2 squeeze bank margins.

In the U.K., contactless payments are growing. Cash is declining, though not enough to dump it entirely, making it harder for the Post Office to stand in for ATMs and branches in underserved areas. Two-thirds of U.K. bank branches have closed in the past 30 years, while thousands of ATMs have disappeared.

Waldo Swiegers/Bloomberg

The Post Office reportedly is raising fees at the same time Barclays seeks less expensive ways to maintain cash payments while embracing forward-looking payment technology, which carries its own expense. Barclays did not return a request for comment, though the bank has said it plans its own programs to ensure cash access and promises to not close branches in underserved areas. Barclays is also a vigorous investor in new payment technology as it tries to ward off threats from Apple and Amazon.

Cash is a difficulty for payment companies, since it's a necessary part of financial inclusion while expensive to maintain. At the recent P20 conference in London, John Glen, economic secretary to HM Treasury and U.K. city minister, noted contactless payments in the U.K. have increased 1,500% between 2014 and 2018, while cash usage has falling to 28% of payments in 2018 from 60% in 2008.

“For banks to maintain [cash] service for fewer and fewer customers has to be a very difficult business model,” said Sarah Grotta, director of debit and alternative products advisory service at Mercator.

There are alternative means to maintain cash access, such as encouraging retailers to provide cash back at the point of sale, but there are limits, Grotta said. “This used to be a great way for retailers to reduce their costs to carry cash, but if U.K. retailers have primarily non-cash transactions, I am not sure if there will be any cash in the till to provide to the cash back customer.”

The problem for both the Post Office and Barclays is cash is less popular, yet not extinct. The U.K. Post Office reports there were 130 million cash withdrawals, deposits and balance queries at about 11,500 Post Office branches in the past year.

The Post Office did not disclose the fees it charges banks, but it’s widely reported those fees are higher than other options. ThisIsMoney, a local site, reports the Post Office interchange fee is about $1.16 for a withdrawal, while the average bank ATM interchange fee is about 25 cents. The Postal fee is absorbed by banks, since the service is free to consumers.

The Post Office has "increased the remuneration that its postmasters receive," said Karim Aziz, the Newsdesk manager for the U.K. Post Office, in an email, adding the new deal is for three years and 27 other banks have signed on. Barclays is the only bank reported to be bailing on the Post Office cash service, though the economic pressures apply to all banks.

“Banking is a business and moving cash is costly, as is keeping an ATM or Post Office shop stocked with cash,” said Gareth Lodge, a senior analyst at Celent. “The question ultimately is what is fair access to cash, what is the best way to deliver it, and who should pay for it?”

That answer is political, and Barclays' decision has drawn criticism from regulators and consumer groups.

“This step by Barclays reduces the number of places their customers can go to get cash," said Louis Myers, a spokesman for the Payment Systems Regulator in the U.K., in an email. "We are concerned about the impact this will have, and we will be closely monitoring the steps Barclays plan to take to make sure there are suitable alternatives for its customers to access their cash, especially those who rely on cash or who live in rural areas.”

PSR is considering whether LINK’s current policies on the Post Office are still appropriate and also whether it needs to use its regulatory powers to further ensure public commitments are met regarding the ongoing availability of access to free-to-use ATMs for U.K. consumers, Myers said.

“There is an ongoing debate about how best to protect access to cash and we will continue to work closely with government and our fellow regulators to consider whether further steps are needed,” Myers added.

Easing the expense of cash payments is a global phenomenon, as governments such as India have removed large amounts of cash from circulation, and the technology industry has invested billions of dollars to remove cash payments from stores.

There has also been political pushback against cash removal in other countries, as local laws in the U.S. have mandated stores permit cash as a payments options, and Amazon has decided to keep cash as an option in its checkout-free Amazon Go stores. Most of the other checkout-free deployments in the U.S. also keep cash.

“This highlights the issue of access to cash,” said Lodge, who notes the current level of cash withdrawals in the U.K. is similar to 15 years ago, but in a decline from its peak volume seven years ago. “It will keep declining, so this is about the future as much as about today.”

There are other regulatory costs, as the PSD2 regulation and open banking have impacted financial performance.

“Open banking increases competition in financial services and erodes profitability in other banking areas, which drives the profits that fund the unprofitable areas of the bank,” said Tim Sloane, vice president of payments innovation at Mercator.