Financial trade body UK Finance has reported that credit and debit card spending overtook cash payments in the country last year for the first time ever.

The trade body said that despite 2.2 million people in the UK still using physical money more than electronic payments in shops, nearly 3.5 million rarely use cash at all. How has banking been brought into the digital age and will smart banks replace traditional banking systems?

UK Finance predicts that the number of cash transactions completed in the UK will decrease from 13.1 billion in 2017 to 6.4 billion in 2027. In ten years’ time, the trade body expects physical money to account for 16% of all payments.

The report found that from the 38.8 million transactions made in the UK last year, nearly 90% were made by consumers. Of this, 85% of spending was ‘spontaneous’ while the remainder was used for bills and other regular commitments. The number of credit card payments also grew to 3.1 billion, in line with the general rise in unsecured lending. In addition, UK Finance found that 71% of UK residents now use mobile app-based banking, either through apps launched by conventional banks or through smart banks such as Monzo. This has created a combined 1.6 billion faster payments being sent every year.

The increasing prevalence of contactless payments for items less than £30 has revolutionised the way people shop for everyday products and services. The explosion of smart banks such as Monzo — which offers unique features such as live spending trackers and interest-free cash withdrawals abroad — has certainly added to the rise in plastic spending.

Transitioning to a cash-free society

It is difficult to envisage a society in which physical cash is replaced entirely by electronic payments. According to UK Finance CEO Steven Jones, the emergence of electronic banking may have significantly reduced the number of cash transactions. However, this does not mean the disappearance of the old payment method.

Jones said in a statement: “The choice of payment options available in the UK is allowing people to choose to pay the way that best suits them. But we’re far from becoming a cash-free society and despite the UK transforming to an economy where cash is less important than it once was, it will remain a payment method that continues to be valued and preferred by many.”

There are some benefits to being a cashless society. It could mitigate some transactions on the black market (although the widespread use of cryptocurrency is making that less likely) and ensure correct payment of taxes. It would result in digital money becoming more susceptible to government fiscal policy, such as changing interest rates to encourage saving or spending depending on the country’s economic needs.

Laurentiu Ghenciu, vice-president of strategy at 2Checkout, told Verdict: “The UK is becoming more cashless, but are we becoming cardless soon after thanks to tech? Apple Pay, Alipay, Android Pay could make plastic obsolete. New usage data shows 38% of Brits use PayPal to purchase goods and services online. Businesses should, therefore, be able to cater for any payment service, either cashless or cardless that their customers use.

“Plastic can be fantastic, but do Visa, MasterCard and American Express have a limited shelf-life in the UK, especially against new FinTech companies? New research shows digital payment methods like PayPal are taking on, and beating, the ‘old skool’ card providers Visa and MasterCard.

“New research from digital commerce provider 2Checkout, who rivals Stripe, being released tomorrow shows PayPal is the second most popular payment method in the US and UK, currently behind Visa and MasterCard in both countries.”

On the flipside, there are issues with going cashless such as potential additional fees for minimum spends. Even if fees are eventually abolished for the consumer, small retailers and businesses will likely have to absorb the extra costs. Sensitive issues around data privacy could also arise when shopping, as it is much easier to track payments made from cards or smartphones than cash.

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Increased use of contactless

Across all payments made in the UK in 2017, contactless cards accounted for 15%, which includes payments made through smart devices. These work by in-store payment devices picking up a radio-frequency identification (RFID) signal from the card, avoiding chip and PIN, or signature methods.

Both Apple and Google have incorporated RFID technology into many of their smartphones and devices. The user simply holds their smartphone or watch close to the machine to make a payment.

Monzo and the rise of smart banks

In recent years, several FinTech startups have emerged aiming to reinvent current account banking for the future. Enter Monzo; one of many smart banks for the smartphone generation that has no physical branches or chequebooks. The app performs all contact between bank and customer.

Monzo says on its website that it is “focused on building the best current account in the world and ultimately working with a range of other providers so that Mondo can be an intelligent hub for your entire financial life.”

Since its launch, Monzo card users have spent more than £20m in over 130 countries. Monzo, like other smart banks, offers novel features that are highly attractive in today’s globalised world. First off, it allows users to withdraw up to £200 cash from an international ATM for free, resetting every 30 days. Those who wish to withdraw more than £200 in that period will pay a 3% charge. Card payments made abroad are completely free of charges, as are online transactions made in foreign currencies. Monzo customers receive a Debit Mastercard and the company offers the Mastercard official exchange rate with no markup.

Monzo has another unique feature — a live spending tracker. This records all payments made by the Monzo card and offers suggestions on budgeting, dividing your spending into popular categories.

Tom Blomfield, Monzo’s CEO, said: “It’s much more emotional. A lot of young people feel anxious and stressful about money. They lose track of their spending, with some payments taking three or four days to appear, so they exceed their overdraft. What Monzo does is auto-budget for you. It tells you how much you’re spending, say, on eating out. It’s really easy to send and receive money — so if four of you are in a restaurant it splits the bill instantly.

“We’ll be moving on to gas and electricity companies — we’ll have smart software that optimises your spending. You kind of know you should be switching here and there to find the best deal, but life gets in the way. With Monzo, we auto-switch you to the best deal. For example, we don’t offer our own savings account — we’ll just put [your money] in the best ISA or savings account for you.”

Payments nearby

Monzo’s latest feature ‘Nearby Friends’ makes it easier to send money to friends and family. The new geolocation functionality uses Bluetooth to make anyone else using Monzo visible so that users can initiate payments without needing to exchange phone numbers.

Monzo iOS Platform lead Andy Smart wrote on the company blog: “Thanks to the magic of Bluetooth, you can see anyone else that uses Monzo nearby. To protect people’s privacy, you’ll only find people who also have the feature open at the same time. With just a couple of taps, you can send people money, without the need to swap numbers or do any other admin.”

‘Nearby Friends’ uses Google’s peer-to-peer networking application programming interface (API) to “easily discover, connect to and exchange data with nearby devices in real-time, regardless of network connectivity”. One of Monzo’s rivals, Revolut, has also released a very similar feature called ‘Near Me’.