Our new study argues that the decline of cash is good for small businesses. Government should avoid preserving it at the expense of digital payments
Cash use is falling: a decade ago six out of ten payments were made by cash, today it is two in ten, and it is predicted to drop to fewer than one in ten over the next decade;
Cash is cumbersome and expensive for small businesses – handling cash costs British businesses roughly £3,000 per year on average;
Some UK businesses – in particular independent shops – have decided to forego cash entirely, and no longer deal with its associated costs, inefficiencies and risks;
However, this trend has been criticised by politicians and regulators around the world. The British government has committed to preserving cash in the economy for the foreseeable future. Some US cities have gone further and banned businesses from going cashless entirely;
This is the wrong approach: banning card-only stores will burden independent shops, inadvertently advantaging cashless online retailers like Amazon;
Financial inclusion is a primary reason behind attempts to ban cashless shops. But bans will do next to nothing to materially improve the fortunes of the unbanked. The report argues that fintech innovation can expand inclusion, not limit it;
For example, some challenger banks now enable new customers to open accounts without a fixed address, allowing new customers to use a friend’s house or a shelter instead. Rather than abolishing card-only businesses, politicians should allow SMEs to innovate, and instead focus on bringing the benefits of the cashless economy to all.
Cashing Out, a new report from think tank The Entrepreneurs Network, finds that ditching cash is helping independent shops survive in challenging retail conditions.
Cash is in terminal decline: a decade ago it was used in six out of 10 payments. Forecasters predict that this will drop to fewer than one in 10 over the next decade. Over half of Britons carry less than £10 on them at any one time, less than a quarter of retail payments are made in cash, and a wave of smaller companies are turning against handling cash altogether.
This is a welcome development for small businesses. The day-to-day costs of handling cash sit more heavily on independent high street shops, who face stiff competition from online retailers such as Amazon. Cash is a physical product which needs handling, insuring, and transporting physically, and it will always be a target for thieves. Handling cash costs each UK small business over £3,000 per year, on average, while the rise of low-cost card payments offer them a significant opportunity to reduce their overheads.
Some SMEs have decided to forego cash entirely, in part due to rising insurance costs in the wake of multiple break-ins. However, this trend has been criticised widely.
Major US cities have banned cashless businesses and senior British politicians have called for their abolishment in the UK – in the interests of financial inclusion. Philadelphia last year announced a ban on card-only retail businesses. Lawmakers in New Jersey have passed a similar bill, and attempts to do the same are underway in New York City, Washington DC and Chicago.
And in response to the Access to Cash Review, published in March 2019 and supported by Link (the largest operator of ATMs in the UK), then-Chair of the Treasury Select Committee Baroness Nicky Morgan said: “free-to-use cash machines are disappearing at an alarming rate. On top of this, some firms’ insistence on the use of non-cash forms of payment may act as a social barrier. Any significant reduction in access to cash is unacceptable.”
Yet Cashing Out finds that this would be a retrograde step serving to harm entrepreneurship without helping the unbanked.
There has been a significant decline in the number of unbanked since the government began reporting on financial inclusion in 2003, from around 4.5 million to 1.23 million. Nonetheless, many of the unbanked exist on the precarious margins of society and in this context politicians’ criticisms of card-only businesses are understandable.
To some, the rise of fintech has only benefited the already well-off, and card-only retail serves to further alienate the poorest in society, who have limited access to credit. However, Cashing Out finds that abolishing card only businesses increases costs and risks borne by small businesses, while doing little to materially help the poor. The unbanked receive worse, and more expensive services and utilities paying by cash. Further, a 2019 paper analysed rates of discrimination in lending and loan approval in new fintechs compared to traditional providers, and found that fintech algorithms discriminate 40% less.
The Access to Cash Review painted a grave picture of the future of cash. Cashing Out finds its argument forceful but inconsistent: a financial future where we are unable to help pensioners use a debit card, yet where commuters can buy train tickets with implants, seems highly unlikely.
But the Review was right to acknowledge that new electronic payment systems like iZettle or Square have made accepting card payments cheaper than ever before.
Recent polling of the unbanked has revealed striking results. Most of them had had a bank account in the past and had lost it, and many of them claimed that they did not want a bank account. Many of these people live on the margins of society and distrust mainstream financial institutions. Among the newly banked, meanwhile, satisfaction with banks is poor, these people regularly incur penalties, and around 15% of newly-opened accounts are abandoned.
Six in ten of the unbanked are unaware that banks have to offer everyone a basic bank account, irrespective of their credit rating. A new wave of fintech offerings and Open Banking could transform the way we approach financial inclusion and lead to the poorest in society getting the banking services they need. For example, Monzo lets new customers open accounts without a fixed address, allowing them to use a friend’s house or a shelter instead.
Cashing Out calls on regulators to embrace the productivity benefits for SMEs of electronic payments, and take advantage of the opportunities offered by Open Banking and fintech to our economy.
Fred de Fossard, author of Cashing Out, says:
“The recent growth in electronic payments and financial innovation in the UK should be celebrated. In trying to support the unbanked and those at the fringes of society, the UK government should embrace the opportunities of Open Banking instead of introducing retrograde measures which will harm businesses and consumers, and do little to support those in need.“