The RSMR Weekly Broadcast - The big cash decline & the £50 billion mystery

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The National Audit Office (NAO) have recently produced a report with some interesting data which gives us an idea of what’s going on with the use of cash in society. Since 2008 – 2009, there’s been a 59% decline in cash payments. In the UK, we’ve adopted the technology to accelerate electronic payments and promoted online services ahead of other countries where you need to be physically present to make a purchase. In major cities, this trend is even more pronounced, as you can pay for pretty much anything on your debit or credit card. The report forecasts that there will be a further 65% reduction in the use of cash between 2018 and 2028 with electronic payments gaining even greater momentum.

In terms of coins, the report shows that the Royal Mint has no plans to mint any 2p or £2 coins for the next decade. The stockpile of coins remains high and with cash usage low, you may never see the year 2020 or 2023 on a 2p coin.

According to the NAO, cash was the most frequently used form of payment until 2017. Ten years ago, cash was used in six out of ten transactions but by 2019 it was under three in ten. It’s not just about lack of demand, when the new 12-sided £1 coin was introduced in 2017, people had to swap their old £1 coins for new ones at the bank or pay them into their accounts. They searched through their change and found old coins of other denominations and paid them in as well, leaving the country with a huge stock of coins in reserve. The Royal Mint aims to have 11 week’s-worth of most coins at any one time but at the moment it has: six times more 1ps than it needs; eight times more 2ps than it needs and 26 times more £2s than it needs so we’re set for new £2s or 2ps for at least 10 years.

Does this turn the 2ps and £2s you have in your piggy bank into rare collectibles? Sadly, no, but it could have implications for coin collectors, and for those who rely on cash every day as a form of payment.

Between March & April this year there was a 71% decline in the market demand for notes and coins. Lockdown had a direct impact on the demand for cash and Covid-19, in the longer term, has resulted in a psychological shift in behaviour linked to cash usage. The coronavirus pandemic will no doubt exaggerate the demise of coin as we are encouraged not to handle cash to limit the spread of the virus. In the future, we might even go down the same road as China, where all transactions are processed through an app.

The use of cash in day-to-day transactions has fallen but the demand for notes has increased continuously over the last 20 years. In July 2020, the number of notes in circulation reached a record high of 4.4 billion, with a staggering monetary value of £76.5 billion, up from £24 billion in 2000. According to the Bank of England, only 20%-24% of these notes are being used for cash transactions with around 5% being kept by savers, so what’s happened to the other 70%? The Bank doesn’t know for sure what £50 billion of notes are doing out there. Maybe it’s down to holdings overseas for transactions or savings, holdings in the UK of unreported domestic savings or the shadow economy, undeclared work activity and business transactions that occur 'under the radar'. Dodgy dealings on the black market could also contribute to this immense pile of notes that aren’t currently in circulation.

A high level of unreported domestic savings could go a long way to explaining the mystery. With interest rates so low, people aren’t exactly clambering over each other to put cash in the bank. If the interest rate is lower than the rate of inflation, there seems little point in moving your money from under the mattress at all. We may never solve the riddle of the £50 billion of missing notes, but it certainly makes for interesting speculation!       

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