The decline of cash – a good or bad thing?

09th October 2018
Wayne Ashall
Wayne Ashall

The much-publicised decline of cash is set to have a significant impact on both the cash and the card industries. This creates an issue for merchants as card costs are transactional, while cash costs are largely fixed – a combination that will organically push up the cost of payment acceptance over time.

Looking at the extent to which cash has declined and how that is likely to progress in the next few years. We analyse the costs of cash and how these will increase as a proportion of cash spending as cash expenditure declines, as well as looking at how merchants can mitigate these cost increases.

What is the current state of cash?

While many people across both the cash and card industries have long predicted the decline of cash (and indeed its use has fallen), in reality, the rate of its demise has been nowhere near as rapid as many foresaw. In almost every country in the EU, cash still dominates at low-value transactions, with its speed and convenience matched only by the relative newcomer, contactless cards. However, while contactless transactions have been widely taken up in countries such as Australia, the UK, and Canada, the system has yet to take off in the U.S. and many EU countries, including the EU’s largest economy, Germany. Even where contactless has been successfully implemented, such as in the UK, transaction volumes are still nowhere near those of cash (Figure 1).

Although cash usage is in decline in both absolute and relative terms, purchasing by cash still makes up over 20% of all consumer spending in most EU countries (Figure 2). This means merchants in the EU cannot feasibly refuse to accept cash for some time to come, and the importance of getting your cash arrangements right remains high.

FIGURE 1. UK Cash vs Contactless Spending (£bn) (Source: UK Finance and Euromonitor)

As mentioned, contactless still has a lot of room to grow, and we expect this to accelerate. Visa’s contactless mandate means that all card-accepting merchants must offer contactless payments by 31st December 2019.

Wayne Ashall | Head of Consultancy

Meanwhile, a generational shift means that merchants cannot continue to rely on cash. Cash is mostly favoured by older generations who can be more tech-averse, but the younger generations readily use contactless. There is evidence of some EU member-state interventions that are pushing cash aside, including Spain and France who have both banned cash payments of more than €1,000. Sweden and Finland have made tangible steps towards a cashless society, while the UK government has released a consultation on the future of cash, and has considered eliminating copper coins from circulation.

In the UK, the announcement that the LINK ATM network scheme will reduce its interchange fee (the fee paid by card issuers to ATM deployers or acquirers) for ATM transactions, following competition from Visa and Mastercard, could lead to a decline in the number of UK ATMs and cash spending.

FIGURE 2. Cash Market Share by Country (Source: UK Finance and Euromonitor).

What is the cost of cash?

The cost to merchants of accepting cash is hard to quantify because there are so many component parts, and different studies include – and place greater weight on – different variables. A 2018 study in the U.S. found the cost of cash to be, on average, 9.1% – far higher than the cost of cards. However, this study included many costs such as labour and shrinkage, and it is contentious which of these costs are variable, and which are fixed costs which would exist even in the absence of taking cash. For example, employees may be reallocated, and salaried staff would not be paid any less.

A contrasting study by the European Commission of the cost of cash as part of Interchange Fee Regulation included only direct contract charges, e.g. charges for cash collection, processing, and banking costs. This study concluded these costs amounted to just 0.2% of the transaction value on average. It is important to note, however, this study was based on cost studies from just three EU countries between 2000 and 2002, and will be subject to the regulation’s upcoming review.

Despite these challenges and complexities we know that a merchant’s cost of cash is largely fixed. Cash office technology has fixed monthly charges, and there is often a minimum number of times that cash can be collected. There are some variable elements, for example shrinkage and cash processing costs, which are related to volume, but overall, most costs are fixed.

How will the decline of cash affect the cost of cash?

Declining volumes of cash transactions combined with fixed costs means that the relative cost of cash is organically increasing over time for merchants. There are other factors pushing up the cost of cash acceptance. There has been a decline in the level of competition in the cash in transit (CIT) and cash processing industries across Europe. In Germany, Prosegur is the only national CIT player, while in Spain, a court ruled in 2016 that Loomis and Prosegur were operating as a cartel. Post Office and Sunwin have both left the UK CIT market, and Brink’s has left Ireland, Belgium, the Netherlands, and Germany in recent years. This leaves a maximum of two national CIT players in most major markets in Europe which naturally places upwards pressure on pricing.

In the cash processing market, the strict membership requirements associated with central bank cash circulation policies such as the UK’s Note Circulation Scheme (NCS), means that there will always be a dearth of available players. As a result of this, there is upwards pressure on pricing, despite productivity improvements and declining demand. Such rising costs are increasingly problematic for the merchant community. How they respond depends on several factors – not least the cost of accepting alternative payment methods, such as cards.

How do merchants manage this decline?

There are a number of areas where merchants can minimise the effects of the rising cost of cash. For a start, merchants should regularly review their internal cash handling processes as internal costs can often be reduced without compromising security.

There is also the compelling method of optimising CIT scheduling to ensure reduced volumes result in reduced costs. Although many merchants have reduced schedules significantly in recent years, we still see opportunities for most merchants. There are also new initiatives in the CIT industry such as one-man, lower cost vehicles, and these can reduce costs for merchants.

The cash industry has seen further developments in cash office technology including smart safes and cash recyclers, but it can be very expensive and one way or another, the fixed monthly fee structure conflicts with declining transaction volumes.

Another key area to consider is supplier pricing. The CIT and cash processing industries are both seeing productivity improvements and excess capacity, but in spite of those factors, due to a lack of competition, merchants are still seeing upwards pressure on pricing.

There is also then the route of steering customers away from cash usage, but this is highly dependent on the comparative cost of cards.

FIGURE 3. Cash Processor Productivity Index (Source: CMSPI estimates, company filings).

In Summary…

Cash spending is declining in most developed countries, and we expect this trend to accelerate. This acceleration is partially driven by contactless, but the take-up of contactless is still in its relatively early stages so it remains to be seen what impact it will have as the contactless market matures. Nonetheless, the cost of cash acceptance for merchants is largely fixed, so any rising costs actually increases the relative cost of cash – a situation will only be compounded by ever-declining cash transactions. This is a problem for merchants, but they can mitigate it through measures such as CIT scheduling, price negotiation, optimising on-site cash handling, and in future, potentially steering customers towards cards.

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