The report covers:
- How the cash system operates in the UK;
- Whether key public bodies have clear objectives and responsibilities for delivering the government’s aims for the cash system and adequate information on how well the system meets consumer needs;
- How well the Royal Mint and the Bank of England oversee and manage coin and note production respectively.
UK Cash Landscape and Recent Trends
10 years ago, cash accounted for 60% of transactions made, but in 2019 this was down to just 30%. Forecasts suggest this could drop to 10% by 2028.
Further, it seems likely that a severe drop in cash demand caused by the COVID outbreak may accelerate that trend. Cash demand from cash centres during March and April 2020 decreased 71% and, although demand has since been recovering, it remains to be seen if cash usage levels will return to pre-COVID levels.
The report notes that around £50 billion in cash is unaccounted for. Little is known about the whereabouts for this money – with the NAO believing that some may be hoarded or held overseas, but that some may also be held for use in the ‘shadow economy.
The UK’s cash system is large and complex and running the system costs both the taxpayer and businesses. Research estimates that the entire UK system costs around £5 billion a year. Many of the costs of production and distribution are fixed, meaning that as cash demand dwindles commercial operators’ business models come under pressure, forcing them to cut costs.
This could cause (and, many would argue, already is causing) access to cash problems for consumers. Although many have become less reliant on cash, particularly in response to the COVID-19 pandemic, most adults still use cash some of the time, and just over a million adults are dependent on cash due to lack of access to formal banking services.
A range of public bodies have responsibility for aspects of the cash system:
- Producing and maintaining the integrity of coins and notes – HM Treasury and the Royal Mint, and the Bank of England respectively.
- The wholesale distribution of notes in England is via the Note Circulation Scheme, comprising four companies governed by contractual arrangements with the Bank. The wholesale distribution of coins is carried out solely by the private sector.
- The Payments System Regulator (PSR) is an economic regulator responsible for promoting competition, innovation and the interests of consumers and other users of UK payment systems, including the LINK operated ATM network.
- The Financial Conduct Authority (FCA) is the conduct regulator for financial markets in the UK, and is charged with protecting consumers and promoting competition between financial services providers.
In May 2019, HM Treasury established a new coordinating group, the Joint Authorities Cash Strategy (JACS) Group, to ‘set up strategy, coordinate work to support nationwide access and help safeguard cash for those that need it’.
The report concludes that the declining use of cash is placing increasing pressure on the sustainability of the infrastructure for producing and distributing cash, and that the current approach to overseeing the cash system is fragmented.
The creation of the coordinating group has brought together the key public bodies and helped improve their understanding of the end-to-end cash system, but they have yet to establish information systems to track the impact of a rapidly changing cash system on consumers.
The Mint and the Bank have achieved their objective of maintaining public confidence in cash against the threat of counterfeiting, both have accumulated significant stocks of coins and notes in the face of very different patterns of demand – representing a cost. In the case of coins, this has been exacerbated by the return from circulation of coins of all denominations following the replacement of the £1 coin – to the extent that for the 2p and £2 coin in particular, the Mint will not need to produce more of either for at least ten years.
With cash demand rapidly declining, and the renewal of coins and note types now almost complete, the Mint and the Bank need to align their production operations much more closely to likely future needs if they are to demonstrate value for money
The report also set out a series of recommendations:
- 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 the costs of doing so.
- It should assign clear responsibility for bringing together and reporting information on how well the cash system overall is performing in meeting the government’s policy objectives. And, alongside the regulators, it should develop a system for monitoring and reporting progress across the whole cash system and have a plan in place to take action if some groups become left behind as the cash system changes.
- The Mint and the Bank should maximise opportunities to learn from each other’s experiences of cash production, including setting the appropriate levels of contingency stock.
- The Bank should improve its understanding of factors driving the increase in demand for notes, and also who is holding the approximately £50 billion worth of notes where there is currently a lack of information.