Welcome to issue 94 of Payments:Unpacked, get to grips with the UK’s retail payments landscape with Mike Chambers - exclusive payment insights, hot topic briefings and fundamentals unpacked.
In this issue we focus on the current use of cash in the UK as evidenced by our use of the UK’s ATM network operated by LINK. This issue provides a real time picture on the UK’s acquisition of cash which fuels the purchase of the every day goods and services we consume.
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LINK: Payment System Operator
Firstly, who are LINK?
In their own words….
LINK is the UK's cash machine (ATM) network and the busiest ATM transaction switch in the world.
Effectively every cash machine in the UK is connected to LINK, and LINK is the only way banks and building societies can offer their customers access to cash across the whole of the UK. All the UK's main debit and ATM card issuers are LINK Members.
Cash machine operators join LINK in order to offer cash to the 100 million plus LINK-enabled UK cards in circulation.
The LINK Network is a fundamental part of the UK's payments infrastructure and cash machines are by far the most popular channel for cash withdrawal in the UK, used by millions of consumers every week.
The total value of LINK cash withdrawals can exceed £10 billion per month and at its busiest, LINK processes over 22,000 transactions a minute.
LINK supports access to cash.
It sets the rules for ATM operators who want their cash machines to be part of the UK ATM Network or card issuers who want their cardholders to be able to use the UK ATM Network.
Almost every cash machine in the UK, both free-to-use and pay-to-use, is connected to LINK, giving cardholders nationwide access to cash that is not achievable without joining LINK.
Link Scheme Holdings Ltd. is the operator of the LINK Scheme as set out in the Financial Services (Banking Reform) Act 2013. LINK is recognised as an inter-bank payment system under section 184 of the Banking Act 2009, bringing LINK into the scope of the Bank of England's supervisory regime. This is because of the crucial role that LINK plays in the UK economy as the main facilitator of free-to-use cash withdrawals
More: LINK’s website.
A quick history lesson
The world's first true coins are widely believed to have been minted in Lydia in Asia Minor around 640BC. They were made of an alloy of gold and silver called electrum and were probably made in order to guarantee the purity of the constituent metal
The next phase in the evolution of currency was the invention of paper money. The first banknotes were issued in China during the reign of Emperor Hien Tsung (AD806-821), but not as a result of any great financial insight. The sole reason for their introduction was an acute copper shortage that precluded the striking of new coins. Eventually, China got carried away with the ease of producing this new form of cash. Too much of it was printed and this led to inflation. In 1455, the Chinese abandoned the use of paper money and did not return to it for several centuries.
The Chinese experience was repeated when Sweden became the first European nation to experiment with paper money. In 1661, a banker named Johan Palmstruch began to issue credit notes that could be exchanged at his Stockholm bank for stated numbers of silver coins. Unfortunately for Palmstruch, who had consulted the Swedish government before launching the scheme, he got carried away with his licence to print money. He issued more notes than his bank had silver deposits to redeem, and in 1668 was prosecuted for fraud. He was initially sentenced to death, but the penalty was later commuted to imprisonment.
As economic activity increased in Europe, it became apparent that the money supply needed to be expanded beyond the limits imposed by holdings of precious metals.
This recognition led to the establishment of the first national central banks. People were much more likely to trust notes backed by government reserves than those issued by private institutions. They even proved willing to accept temporary governmental bans on the redemption of banknotes for silver, as happened in Britain during the "Restriction Period" of 1797 to 1821.
The first mention of sterling is in 1078 as "sterilensis", and by the 13th century the term was in common usage. England had a uniform national currency 600 years before France, and 900 years before either Germany or Italy.
The pound was established in 1560 by Elizabeth I and its value was one Troy pound (373.2417216 grams) of sterling silver.
Until decimalisation in 1971, a pound was made up of 20 shillings – each shilling worth 12 pence. After decimalisation, the system was simplified, so that 100 "new pence" made up a pound.
Today, pound sterling is used in the United Kingdom of Great Britain, Northern Ireland, the Isle of Man, the states of Jersey and the states of Guernsey.
It is the world's oldest currency still in use.
More: The pound in your pocket.
Access to Cash
Notwithstanding the illustrious history of cash (paper and coins), in March 2019 the Access to Cash Review’s final report stated that “…in ten years ago, six out of every ten transactions were cash. Now it’s three in ten. And in fifteen years’ time, it could be as low as one in ten.”
We’re hearing more and more talk of the ‘cashless society’. Almost every day there is another story in the media of bank branches and rural ATMs closing, or pubs, restaurants, charities and shops going cashless.
Access to Cash Review, March 2019
Since 2019 this transition to digital payments has been accelerated as we have increasingly developed sticky digital payment habits.
The Access to Cash Review’s final report stated that that as the transition to a digital payments society gathered pace action was necessary and suggested that there are solutions that could be adopted to ensure that no one is left behind which are practical and affordable. The report argued that the eco system players can be more innovative in the way people enable cash access. The report also argued that digital payments technology can be developed in a more inclusive way. And that the eco system re-engineer the cash infrastructure to make it lower cost and more sustainable, so that it can support cash for longer.
The convenience of digital payments has made them the first choice of payment for many. New technology is making digital payments even easier but there are some areas of society where cash payments still dominate. A straight-line trajectory of current trends would see an end of cash use by 2026. However, we believe that cash will still be here in 15 years’ time, but potentially accounting for as few as one in every ten transactions.
Access to Cash Review, March 2019
More: Access to Cash Review.
Will you visit an ATM this week?
As the use of cash declines and we increasingly adopt digital payment habits Northey Point publishes a weekly ATM Tracker. The tracker provides a real time picture on the UK’s acquisition of cash and, therefore, points to the extent to which cash is fuelling the purchase of the every day goods and services we consume.
Three key takeaways in the latest tracker are:
Last week ATM transactions increased by 1.9 million (when compared to the previous week).
Last week’s ATM transactions were 21.2 million less than the equivalent week in 2020.
With the impact from Lockdown 3.0 continuing, weekly ATM use has reduced by 46% (compared to the equivalent week at the beginning of 2020).
Weekly ATM value and volume figures 31 January 2021.
The latest figures from LINK show the impact from the UK’s continuing digital payment habits, together with more widespread Tier 4 restrictions which came into effect at the end of last year, followed by the third national lockdown at the start of 2021. At the current time, transaction levels still appear to have stabilised at the same level as that seen in Lockdown 1.0.
Last week saw a total of 24.5 million ATM transactionswhich represents an increase of 1.9 million ATM transactions over the previous week.
For 2021, this is a reduction of 21.2 million transactions when compared with the equivalent week in 2020.
Thus, the actual increase in ATM transactions over the last week was in line with 2020 but at a significantly lower level in total.
Last week ATM volumes reduced by 46% (compared to 2020).
Lockdown 1.0 vs Lockdown 2.0 vs Tier restrictions and now Lockdown 3.0.
The first graph below clearly shows the steady decline in cash usage in 2018 and 2019 with a similar rate of fall at the beginning of 2020 but then followed by the steep drop at the start of the first lockdown.
After Lockdown 1.0 the weekly volume of ATM transaction rose from a low point of 20 million to circa 30 million at the point we entered Lockdown 2.0.
It then shows a further dip during Lockdown 2.0 followed by cash usage increasing as restrictions were lifted in many places across the country. This increase was in line with seasonal trends albeit more muted than in previous years.
However, in the week before Christmas the volume of transactions was the closest to 2019 than had occurred since the first lockdown.
With Tier 4 restrictions in many more areas from Boxing Day, cash usage again fell sharply and we saw the gap widen further since that time.
Thus the impact on cash usage can still be seen from the sticky digital payment habits developed over the course of this year reinforced during each national and local lockdown.
This second graph has now been updated for the first month of 2021 and with non-essential shops and hospitality venues closed and government restrictions on travel being reinforced, the volume of ATM transactions was initially exactly in line with that seen at the beginning of Lockdown 1.0.
However, it can be seen that the volume has increased during January and although initially more gradual, in the last week this has followed the same trajectory as that seen in 2020. Therefore at present although the volume remains significantly below the same period in 2020, ATM transactions are now slightly ahead of the lowest point seen during Lockdown 1.0.
Therefore, given we are one month into Lockdown 3.0, it looks as though the floor in the number of transactions seen in 2020 is likely to be maintained during 2021.
Daily LINK ATM transaction volumes
The graph below shows daily LINK volumes at the start of 2021 when compared to 2020 and 2019.
Despite all the various restrictions in the previous week, 21 December had seen £238 million dispensed from Link ATMs, which was the highest for a Monday since the beginning of March.
This was also being reflected up until the end of the year in the volume of transactions, with the number each day closely following the trend seen on the equivalent day in 2020.
However since then, although the trend itself is very consistent, the impact of the wider Tier 4 restrictions and then Lockdown 3.0 commencing can clearly be seen in the reduced activity compared to the beginning of 2020.
This trend is likely to continue with the impact of Lockdown 3.0 in 2021. As this may remain in place until March it will then be interesting to see the direct comparison between activity in Lockdown 3.0 and under similar conditions as Lockdown 1.0 began last year.
Monthly LINK ATM transaction volumes
Monthly LINK ATM transaction volumes for January fell back to 98.5 millionfrom the seasonal increase in December, with the impact seen from Lockdown 3.0. Therefore although there was some recovery at the end of 2020, it is likely that the current lockdown will reinforce the digital payment habits as happened throughout each period of restriction in 2020.
Lockdown 2.0 did not appear to have been long enough to cause a further shift in behaviour but it does seem to have reinforced the habits developed during the year. After the lockdown, cash usage increased back to pre-second lockdown levels but no higher despite seasonal spikes seen in previous years.
At the end of the year with Tier 4 restrictions resulting in the closure of non-essential stores and thus impacting traditional sales activity, we saw that these digital habits were reinforced again in the last week of 2020.
There is likely to be a further impact from Lockdown 3.0 although at present usage appears to have settled in line with Lockdown 1.0. However, if digital payment habits are further reinforced, we could see ATM transaction volumes fall again during 2021, although on experience to date it seems that this may be a gradual fall during this year, rather than a further significant change as witnessed in 2020.
Rolling volume change (compared to 2019 & 2020):
w/e 29 November: -44%
w/e 6 December: -38%
w/e 13 December: -36%
w/e 20 December: -38%
w/e 27 December: -29%
w/e 3 January: -46%
w/e 10 January: – 46%
w/e 17 January: -47%
w/e 24 January: -48%
w/e 31 January: -46%
Rolling value change (compared to 2019 & 2020):
w/e 29 November: -39%
w/e 6 December: -29%
w/e 13 December: -28%
w/e 20 December: -33%
w/e 27 December: -18%
w/e 3 January: -41%
w/e 10 January: -37%
w/e 17 January: -39%
w/e 24 January: -40%
w/e 31 January: -38%
A selection of ‘cashless’ / ‘digital payment’ blog posts from Northey Point:
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The Payments:Unpacked newsletter from Mike Chambers at Northey Point explores a wide range of the UK’s payment news including: Open Banking, Request to Pay, Direct Debit, Confirmation of Payee, Bacs, CHAPS, Faster Payments, LINK, cash, cards and cheques and unpacks the eco-system that supports the operation of these systemically important payment systems.
The newsletter is an independent and informed insight into the UK’s payments landscape – exclusive payment insights, hot topic briefings and fundamentals unpacked.