Is cash king? The fundamental shift in retail banking, the FCA’s concerns and approach

Mountford Chambers | Fatima Jama

Introduction

The last decade has seen significant change in the way consumers pay and the way businesses accept payments. The volume of payments in the UK that do not involve cash rose from 46% to 86% from 2002 to 2022. This rise has been driven by innovation in payments systems and changes in customer behaviour and it accelerated during the pandemic. Consumer demand, new technologies and the cost of accepting cash payments are driving the shift to digital banking. Digital payments can decrease cost and increase convenience and efficiency for both businesses and consumers.

Despite its decline over recent years, cash remains a hugely important payment mechanism. In 2022, there were 6.4 billion transactions involving cash, an increase on the 6.0 billion in 2021, representing 14% of all payments made across the country. Even though usage is on a long-term downward trend, it is still the second most common method of payment.

Through the Financial Services and Markets Act 2023 (“FSMA 2023”), Parliament tasked the Financial Conduct Authority (the “FCA”) with “seeking to ensure reasonable provision” of cash deposit and withdrawal services for personal and business current accounts across the UK. This includes access to both notes and coins, and access that is free of charge for consumers with personal current accounts. In determining “reasonable provision” the FCA is also required to have particular regard to local deficiencies in the provision of cash access services which have significant impact.

The FCA published Consultation Paper CP23/29: Access to Cash (CP23/29) (the “Consultation”) in December 2023, setting out its proposals for how it supports access to cash in an increasingly digital world. The FCA also requested views in response to the Consultation on the proportionality of its approach to ensuring the reasonable provision of cash deposit and withdrawal services.

Why is cash king?

While digital payments can make life easier, cash is still vital for many. The FCA’s latest Financial Lives Survey found 3.1 million adults (6%) used cash to pay for everything or most things in the 12 months up to May 2022. Cash remains particularly important for consumers with vulnerable characteristics and small businesses. The proportion of UK adults that use cash to pay for everything or most things increases to 26% for those that are digitally excluded, 15% for those that have poor health and 14% for those with a household income less than £15,000.

Losing access to cash services would disproportionately impact vulnerable consumers who are more likely to rely on cash, and the costs burden may be exacerbated for these groups of individuals relative to those without vulnerable characteristics. For example, some vulnerable consumers may struggle to switch banking providers to continue to access nearby assisted cash services at a different bank (where they need assistance because they are not able to use machines), so will need to incur unreasonable travel costs.

Cash payments are widely accepted by small and medium sized enterprises (“SMEs”). The FCA’s research commissioned by London Economics found that 18% of cash-accepting SMEs say most or all of the payments their business accepts are in cash. It also found most cash-accepting SMEs (over 90%) would continue to access cash services at a different location following the closure of cash services at their usual location and at a similar frequency. This suggests some SMEs view cash services as a necessity, as they would continue to access them at the same frequency even if it became less convenient. It is therefore vital the FCA manages the pace and impact of any change, and ensure consumers and SMEs are given appropriate support.

FSMA 2023

The proposed new regime would require designated firms to assess and fill gaps, or potential gaps, in cash access provisions that significantly impact consumers and businesses. These assessments would need to consider local factors such as demographics and transport. Where firms identify gaps, they will need to act to address these needs. Firms would be required to:

• Undertake cash access assessments to determine whether additional cash access services are required to address local deficiencies where there is a planned or unplanned closure of a cash access facility, or material reduction or change in the services it provides.
• Respond to cash access requests from local residents, community organisations and representatives to consider, assess and plug gaps in local deficiencies.
• Deliver additional cash services to fill gaps in cash service provision where cash access assessments show that there is or will be a local deficiency in cash access with significant impacts and provision of the additional services is reasonable.
• Ensure they do not close cash facilities until any additional cash services identified as needed in the relevant assessment are available.
• Provide customers with clear information about where they can access cash services and how to raise concerns about a deficiency in cash access in their local area.

The FCA’s new powers do not prevent bank branches from closing. However, the rules will have an impact where branches are a key local source of cash. The FCA will ensure these rules work in harmony with its existing guidance on bank branch closures. Existing law allows retailers to decide whether to accept cash or not – so the FCA cannot require them to do so.

Responses to the Consultation

In total, the FCA received 151 responses from a variety of stakeholders including firms, industry groups, consumer organisations, charities, and individual consumers. The vast majority of responses supported the need for a new regulatory regime to protect access to cash. Many respondents highlighted the importance of cash access for consumers in vulnerable circumstances, those who rely on cash for budgeting, and the small businesses, community groups and charities who regularly use local deposit services.

The Federation of Small Businesses’ (“FSB”), the UK’s largest business support group, notes that whilst it agrees with the proposals, they do not go far enough. The FSB explains that maintaining small firms’ freedom to choose cash as a form of payment is inseparable from the broader cash services ecosystem. It argues that the consultation does not adequately address the ongoing decline in cash access infrastructure. The consultation also overlooks essential services such as local cash deposit facilities for small business owners, and assisted cash services that offer personal interactions.

Age UK, a charity dedicated to providing information and advice on money, health and care options, for the elderly, comments on the vagueness of the definition of “assisted cash”. It argues that further clarification would avoid confusion and compel banks to provide a minimum standard and help meet the needs of digitally excluded consumers. It also highlights the reliance on the banks themselves to conduct the assessment processes. This in turn could create conflict, as the requirement to deliver cash services would inevitably clash with commercial considerations.

The FCA itself has highlighted the risks and uncertainties of the intervention. The unintended consequences may be that firms increase the rate of cash access services closures in anticipation of the rules coming into effect, to avoid being subject to a cash access assessment and potentially be required to put a cash services solution in place. Or firms could seek to pass on the costs of meeting requirements and providing cash services solutions to their customers.

Consideration should also be given to cash acceptance as well as access to cash. They are, arguably, two sides of the same coin. Addressing the accessibility issues will only be beneficial to consumers if the cash they withdraw can be spent where and when they choose. Whilst many agree cash acceptance should not be mandatory, there is an argument in favour of considering ways to re-position more favourably the use of cash at point of sale.

Conclusions – what’s next?

At the end of July 2024, the FCA published Policy Statement PS24/8, setting out the final rules for its access to cash regime. Under the new rules, banks and building societies will be required to:

• Assess cash access and understand if additional services are needed, when changes are being made to local services.
• Respond to local residents, community organisations and representative groups, who will be able to request an assessment of whether there are gaps in local cash access.
• Deliver reasonable additional cash services, where significant gaps are found.
• Keep facilities, including bank branches and ATMs, open until any additional cash services identified are available.

The final rules reflect some changes from the draft rules consulted on, including a longer period for banks and building societies to carry out cash access assessments to give local communities more time to make their case and an ability for firms to review the provision of identified cash services after two years.

In May 2024, His Majesty’s Treasury announced the designation of large banks and building societies that will be subject to the FCA’s new access to cash regime. These institutions will be responsible for assessing and addressing gaps, or potential gaps, in cash access that significantly affect consumers and businesses. Additionally, His Majesty’s Treasury designated two LINK entities (Link Scheme Limited and Link Scheme Holdings) as operators of cash access coordination arrangements. These entities will also be subject to the FCA’s new rules, allowing LINK to coordinate cash access assessments on behalf of designated firms.

The rules will enter into force on 18 September 2024. The FCA has emphasised that firms designated by the Government, and therefore subject to the new access to cash regime, must identify gaps in cash provision, assess a wide range of local needs, and provide additional cash access services promptly if assessments find a significant gap in provision.

For firms that have already announced closures of cash access services taking place before the rules come into force, these will not be subject to the new regime. However, the FCA has highlighted that firms should not rush through closures before 18 September 2024, as they should, under its Finalised Guidance 22/6, communicate closures to customers at least 12 weeks before they take effect.

This article first appeared on Lexology. You can find the original version here.