The Access to Cash Review and its implications for the cash ‘infrastructure’ in the UK

An overview of the final report of the Access to Cash Review and its implications.
On 06 March 2019, the Access to Cash Review (ACR) published its final report, looking at the impact of the recent shift from cash to digital payments and considering whether Britain is ready to go cashless.

Cash and ATM use is declining and will continue to decline. The report focuses on the key trends in this decline. Over the last 10 years, cash payments have dropped from 63% of all payments to 34%. Debit cards are now the UK’s most frequent payment method. Some of these changes have been driven by innovation. Other factors have also been at play, for example the Interchange Fee Regulation and related payments/ acceptance rules and acceptance of lower value payments.

The report contends that Britain is not ready to go cashless, as there would be potentially severe consequences. It states that digital payments do not work for everyone yet (around eight million adults (17% of the population)) and cash is a necessity for many people in Britain. The report’s recommendation is to accept that there will be less cash in the future but that we should not go entirely cashless. It makes recommendations about how to maintain access to cash from a user perspective and how to maintain usability of the wholesale cash infrastructure when declining use dries up cash.

Key observations

The report considers social questions about access to cash and costs and mechanics relating to the wholesale cash infrastructure. It focuses particularly on the impact for more vulnerable consumer segments (including issues in rural areas where digital remains problematic) and issues relating to cash costs vs digital coverage for SMEs.

As cash usage decreases, the report comments that costs will increase. This is viewed as potentially problematic. The ACR considers policy, market and regulatory possibilities for addressing this. It also looks at lessons from jurisdictions where cash use has diminished even more notably than in the UK, particularly Sweden. For example it notes that in China and Sweden the issue of cash acceptance by merchants and retailers is more likely to drive the death of cash than issues around cash access.

The report also includes a discussion of the role of cash in black and grey economies and looks at solutions adopted by other countries to bring the grey economy into the formal economy (through tax breaks and peer-to-peer payment technology).

The report mentions that the UK financial services industry has begun looking into the impact of a decline in cash usage across the wholesale infrastructure supply chain, and exploring possible options to maintain sustainability. Industry body UK Finance has stated that work was being undertaken by members “to develop an industry view on how to ensure a secure, resilient and cost-effective supply chain, provided by a competitive market, remains in place” – looking at the wholesale supply chain. Initial market views in response to the report suggest that market participants are broadly supportive of considering the utility approach to the cash supply chain that the ACR suggests. This is explained in this article.

ACR’s recommendations

The ACR makes the following five recommendations for action to be taken now by government, regulators and the industry:

  • guarantee access to cash (wherever consumers may live or work)
  • ensure cash remains widely accepted (locally and nationally)
  • call for radical change to the wholesale cash infrastructure, moving to more of a "utility" approach, to keep cash sustainable for longer
  • make digital payments an option for everyone
  • have a clear government policy on cash, supported by a joined-up regulatory approach.

Industry responses have focussed on market-led approaches to wholesale cash infrastructure in particular (given, no doubt, its commercial complexity). The report stresses the roles that it anticipates that policy and regulation will play. It adds that rather than trying to prevent shifts in other sectors that are strongly connected to the decline of cash (e.g. online shopping), banks and regulators should think creatively and innovatively.

Responses to the report and the decline in access to cash

How have regulators and stakeholders responded?

The FCA, Bank of England and PSR all welcomed the review. The Bank of England announced that it will convene relevant stakeholders to develop a new system for wholesale cash distribution and they are committed to working with HM Treasury, the PSR and the FCA to address issues identified in the ACR report. The PSR also said they look forward to working with other regulators and government to address the issues over the longer term.

A related ACR press release includes a response from Nicky Morgan, House of Commons Treasury Select Committee Chair, who supports the ACR's call for government, regulators and industry to respond with a plan of action and considers it would be "highly negligent for those parties not to provide a considered response".

We have also seen reports of Jonathan Reynolds, shadow economic secretary to the Treasury saying the government should “open an urgent consultation into this report’s recommendations and develop a comprehensive policy for safeguarding cash as an option for those who need it.”

The CBI commented on the ACR encouraging banks to get involved and “share [their] knowledge and expertise; study the review and see how [they] can contribute to the debate.”

Positive Money issued a response to the ACR interim report stressing the urgent need for a regulator with a specific duty to protect cash access. This has been backed by a joint campaign led by the Federation of Small Businesses and Which? calling for a regulator to be put in place. The Association of Convenience Stores and the British Retail Consortium also support this campaign as well as local MPs, who have campaigned against cash machine charges in a drive to ensure free access to cash.

Impact of the review for the cash infrastructure and implications for market participants

So, practically what does this mean we may start seeing, and what steps will market participants need to consider?

We may see a move towards banks and regulators offering a “guarantee” of cash access, by offering innovative ways of accessing cash, rather than protecting increasingly unviable ATMs or charging consumers for access. As an example, Lloyds Banking Group, in partnership with Visa, have introduced a pilot scheme offering retailers a fee for processing cashback transactions. We expect engagement with the regulators on facilitating access to cashback transactions will be one of the many issues to be addressed.

Banks will need to find ways of reducing the costs of cash and offering cash deposit solutions that minimize incentives for retailers to stop taking cash. Examples include allowing small businesses to deposit their cash in lockers or smart ATMs.

There will be a likely move towards a “utility model” driven by the Bank of England to reduce costs, making cash commercially viable for the banks to fund on an ongoing basis. Key in keeping the UK’s cash system affordable will be reducing duplication and creating a more optimised model in order to reduce costs. For example, in the current model, ‘surplus players’ sell their extra cash to ‘deficit’ players on a weekly basis resulting in multiple handoffs between cash centres since the money needs to be counted and weighed all over again. The report adds that cash is currently handled 2.5 times more on average than it would be optimally.

The report views the banks as playing a key role in developing and working on new models, working jointly and with the government to maintain and innovate in cash supply, access and receipt.

Based on the report we expect there to be a significant impact on the wholesale banks operating in the UK, including a potential move towards commercial collaboration as seen in the Nordics and the Netherlands. For example, in Finland and Sweden, ATM networks have integrated into one single network or jointly owned ATMs and deposit facilities are shared more willingly.

Options to reforming the wholesale cash infrastructure would involve either a single bank or commercially owned entity providing cash process and cash in transit or a range of ownership structures closer to the current market. The report highlights that an evaluation of the best model will require engagement with regulators and stakeholders and there is an expectation that wholesale banks will be involved heavily in these discussions.

There is an expectation that the industry will respond with a plan of action as per Nicky Morgan’s statement. We are also seeing banks (e.g. Lloyds) expressing the need for regulators to work with the industry on incentives to innovate to reduce or share the fixed costs of cash provision.

Next steps

Industry bodies are convening. In considering next steps, it will be important for banks to view these considerations in the round, from a user and also market infrastructure perspective.

We are seeing certain banks already starting to address the issue of access to cash with for example schemes to encourage cashback transaction. There will be an expectation for banks, in particular wholesale banks, to be key players in the move towards creating innovative solutions.

This document (and any information accessed through links in this document) is provided for information purposes only and does not constitute legal advice. Professional legal advice should be obtained before taking or refraining from any action as a result of the contents of this document.