Financial Services and Markets Bill

Written Evidence Submitted by the UK Cash Supply Alliance (UKCSA) (FSMB06)

Financial Services and Markets Bill

Executive Summary

The UK Cash Supply Alliance (UKCSA) believes that cash is the payment method with the lowest economic friction, providing businesses and members of the public with a crucially important alternative. Card fees levied on businesses can be material, and disproportionate to the value of the transaction. These costs can only be passed on to consumers.

The Access to Cash narrative focuses disproportionately on the elderly and disadvantaged in our society. While it is critical that the interests of these members of the population are safeguarded, it is clear that there is a much broader picture. Millions of people prefer to pay in cash or use it for budgeting, and the principle of personal payment choice needs to be protected. This is particularly important in light of inflationary pressures which are driving up the cost of living. In a recent survey, 80% of respondents said that they would not deal with businesses that do not accept cash.

To ensure the continued availability of free to use cash withdrawals (explicitly stated as a crucial issue by a number of MPs at the Bill’s Second Reading) the system of remunerating ATM providers needs to be overhauled and put on a stable economic footing.

At the same time, measures must be taken to open up the huge untapped resource of intelligent deposit machines that exist in the remaining bank branches. These machines are currently only available to customers of the bank in which premises they reside. This could easily be opened up, providing widespread access to deposit facilities at a pace which the efforts to create "bank hubs" cannot match, providing that there are also measures to limit the pace and extent of bank branch closures. This could also provide an opportunity for cash recycling, reducing dependence on centralised infrastructure.

Taken together, the UKCSA believes that the Bill must direct the regulator to address these two key areas, and in doing so, make real and substantive provisions to protect cash availability and acceptance to the benefit of a wide section of the UK population that goes well beyond the protection of the elderly and disadvantaged in society.

Finally, we urge Government to introduce a Payment Choice Act that enshrines the right of the public to make modest in-person payments in cash if they wish.

The UK Cash Supply Alliance

The UK Cash Supply Alliance (UKCSA) is a not-for-profit organisation that aims to engage with and connect organisations across the cash supply chain with UK government, regulators, trade associations, the retail sector and the public. https://www.cashsupplyalliance.co.uk/

The UKCSA’s Steering Group comprises representatives from a number of high-profile organisations involved in the supply and provision of cash to the UK, including the Post Office, Loomis, service organisations and firms bringing technical innovations that address some of the challenges associated with the continued widespread circulation of cash.

Written Submission

1. The UKCSA’s evidence is limited to consideration of Part 2 of the Bill – Access to Cash.

2. We do not believe that the proposed measures are sufficient to ensure that cash has a sustainable, long term future in the UK, and we call for them to be strengthened.

3. Much of the narrative around Access to Cash is focused on protecting the elderly and disadvantaged. We acknowledge the need to protect the interests of these groups, but it is clear that millions of people choose to use cash as a way of managing their daily affairs and that it is much more than a case of need.

4. Figures published by LINK, UK Finance and the Post Office show that around £10bn is withdrawn each month (£120bn pa) from ATMs, over bank counters and at Post Offices. The volume of withdrawals in the LINK Scheme alone equates to about two withdrawals per month for each adult member of the UK population.

5. From this we infer that cash is required by a considerably larger constituency than the nation’s elderly and disadvantaged. Millions manage their daily finances using cash because they know where they are, and because they find it easy to budget by allocating cash. The convenience of contactless payment is undeniable, but for those on tight budgets it represents an easy way to lose control of spending.

6. The UKCSA believes that this is a particularly important consideration during times of economic stress, given the cost of living crisis and the current high rate of inflation.

7. For low value in person payments, cash is the medium with the lowest economic friction. An exchange of value can be achieved instantly and at no additional cost to either party. This can be contrasted with the costs of card payment, where the party receiving the payment is often subject to considerable unit costs arising both from fees levied by payment terminal providers and the recipient’s bank. Since these fees are likely to be passed on to the consumer in the price of goods, they may regarded as inflationary in their own right.

8. It will often be unclear to the recipient of a card payment exactly what it has cost them to receive an individual payment due to fees varying by card type. Fees for accepting credit and commercial debit cards may be considerably higher than for standard debit cards. The UKCSA was told by a seaside coffee stall vendor than on a busy day his fees amounted to about £20 (for that day alone) for accepting card payments. It is inevitable that these fees will be reflected in prices.

9. Since over 90% of cash withdrawals are made by the public through ATMs, it is critical that the operators of ATMs are adequately remunerated for providing this service. Otherwise widespread and convenient cash supply will dry up as operators exit the market. In the Bill’s Second Reading, numerous MPs stated that it was critical that widespread access to free cash withdrawals was maintained and protected.

10. We note that in the early 2000s, the interchange fee payable under the LINK Scheme by card issuers (the banks and other financial institutions) to ATM operators for serving their customers with cash stood at 50p per transaction. Today, the same fee is around 25p. In part this reduction represents the efficiencies driven by independent ATM operators over the years. However, in recent years this fee has been subject to arbitrary cuts and caps imposed by the LINK Scheme under pressure from leading banks.

11. From 2001 until 2018, the LINK interchange fee was determined by reference to an annual Cost Study conducted by KPMG on behalf of LINK. This study calculated the overall costs across the LINK network, and divided it by the number of transactions to arrive at a unit price. This mechanism was originally required by the OFT to avoid any suggestion of price fixing. It was generally accepted by all parties that the method employed to calculate the price was not perfect, but at least it was transparent and understandable.

12. From around 2016, the two largest card issuing members of LINK pressed for reductions in the interchange rates, citing that they could issue transactions more cheaply through the international card schemes (who did not base interchange on a similar rigorous study as that conducted by KPMG on LINK’s behalf). The LINK Scheme Ltd Board acceded to this pressure in the interests of keeping the Scheme together, with the result that interchange rates have been kept artificially low and set arbitrarily, to the detriment of the service providers.

13. The UKCSA believes that it is essential that the Bill directs the designated regulator to look into LINK Scheme interchange as a matter of urgency, and see that a calculation method is put in place that remunerates ATM operators fairly and adequately for providing this essential service. If this is not done, widespread access to free-of-charge cash withdrawals will not be sustainable, accelerating the demise of cash. Such an outcome will only be to the benefit of the banks, other card issuers and their shareholders.

14. As an illustration of the iniquity of the current interchange arrangements, one of the banks that pressed for fee reductions charges small businesses 35p per transaction, including debit card payments, credit transfers received into the account and even inter-account transfers, which presumably cost nothing to execute. Contrast this with the 25p that they pay to an ATM operator for serving one of their customers in a capital intensive business with significant marginal costs. This cannot be right or fair, and the legislation must make provision to address this before it is too late.

15. To ensure that cash can continue to circulate freely it is critical that individuals, and in particular, small businesses, have easy access to cash deposit facilities.

16. Almost 100% of UK ATMs are connected to the LINK network. This enables consumers to withdraw cash at any ATM they choose, not just at machines operated by their own bank. Around 97% of these cash withdrawals do not involve a fee to the consumer.

17. Closures of bank branches have severely restricted the ability of individuals, and crucially, small businesses to pay in cash, although the Post Office provides a widely used service. Even so, branch closures are a major factor in the decisions taken by some businesses to refuse or restrict in-person cash payments, which adversely affects consumer payment choice and has a clear effect on cash circulation.

18. There has been much talk of creating "bank hubs" with the aim of providing services on behalf of a number of banks from a shared location. To date there has been very little action and therefore this has had extremely limited effect.

19. Provided that restrictions are rapidly placed on future branch closures ie before the horse has bolted, a technical solution is available that would enable small businesses and consumers to pay in cash at remaining branches without needing to be a customer of the bank operating the branch.

20. It is estimated that there are around 10,000 "intelligent deposit" ATMs deployed in UK bank branches. These machines use advanced technology to count and sort bundles of banknotes at high speed while checking for forgeries. When the count is complete, the consumer is asked to confirm the amount of the deposit, at which point the transaction is completed. If the consumer disagrees with the count, then the whole bundle is returned to them, less any forgeries detected.

21. The LINK Scheme historically supported only cash withdrawals and balance enquiries. However, the Membership agreed a few years ago that deposit transactions would also be supported. Therefore, the technical infrastructure already exists to enable a customer of Bank A to make a cash deposit at a terminal operated by Bank B.

22. Absurdly, at the time the rule changes were made, LINK also passed a rule which enabled card issuers to decide whether or not they would accept an incoming deposit transaction. As a result, if a customer of Bank A attempts a deposit at Bank B’s terminal, the first thing that takes place is that Bank B sends a message to Bank A to see if they accept deposits. For reasons which can only be regarded as protectionist (ie not wanting to encourage customers to enter a competitor’s branch) all the banks set up their systems to decline deposits made at another bank (or independent operator)’s machine.

23. Therefore, a great deal of sophisticated deposit taking hardware is available, which is connected to the national network, allowing transactions to be captured, settled and reported on using exactly the same mechanisms that have been in place for years to support cash withdrawals. But it is unavailable due to what appear to be restrictive practices.

24. This untapped resource could be opened up rapidly if the regulator instructed card issuers to accept deposits presented over the LINK Scheme. Some flimsy arguments were advanced at the time by the banks, such as citing difficulty in creating statement narrative. It is very hard to believe that this could not be overcome – for example the transaction could be regarded as a negative cash withdrawal, and reversals of withdrawals are processed routinely.

25. The other strand which needs to be addressed is commercial. The operator of the deposit terminal (whether bank or independent operator) must be paid a realistic interchange fee which is based on the actual costs of providing the service, not an arbitrary fee decided by the LINK Board.

26. In summary, the means are at hand to make a rapid and significant step change to the availability of cash deposit facilities to consumers and small businesses in the UK, which in turn would help to halt declining cash acceptance, thus promoting payment choice for all, and ensuring the continued circulation of cash.

27. The Financial Services and Markets Bill presents an excellent opportunity to bring about changes to sustain free-to-use cash withdrawals and extend the availability of widespread deposit facilities. The UKCSA believes that the Bill must direct the regulator to make these changes before it is too late.

28. To further ensure that cash remains in widespread circulation, the UKCSA believes that the UK needs a Payment Choice Act. This would mandate acceptance of in-person cash payments up to the prevailing contactless payment limit (currently £100). This seems to us to be fair and reasonable. It would ensure that those who are lucky enough to have a choice in how they wish to pay can use cash if they wish. But crucially, it would prevent the exclusion of those who have little or no choice in how they pay. Other jurisdictions, including the USA and Spain have moved to pass legislation. Why not the UK?

September 2022