Ahead of his appearance at the BSA's Digital Mutual on the 3rd and 4th November, Wayne Duke, principal architect at Sopra Banking Software, discusses the similarities between banking and the music industry. Could a push for digital services in banking compliment rather than cannibalise real-world products like cash just as has been the case with vinyl records?
And with the UK government pushing to maintain cash networks within communities, he also considers the possibilities for building society branches as a retro-banking experience.
The decline of physical currency is nothing new. Electronic payments, both online and in-store, have long been ominous omens for the future of cash. And it seems that the Covid-19 pandemic has only accelerated this decline. But how likely is it that in the near future we’ll abandon cash altogether, and what would that mean for the banking industry?
For hygiene reasons, since the emergence of Covid-19, retailers have been increasingly encouraging consumers to use contactless payment methods rather than cash. As such, 54 percent of consumers in the UK have used new forms of payment since the outbreak of the pandemic, according to a report released in May. Even ice cream trucks have begun accepting contactless payments.
Clearly, customer behaviours are changing, and businesses are adapting to meet those changes.
However, amidst the UK’s shift toward digital payment, the Treasury Select Committee has undertaken an inquiry on how to keep cash available in society, introducing a new government scheme Community Access to Cash Pilot (CACP) earlier this year – an initiative that aims to “ensure that we keep cash access for individuals, and help retailers accept and bank cash.”
This begs the question as to why, in our digital age with instant payments and online banking, the UK government is still keen to keep cash.
One key reason is to help prevent the financial exclusion of some of the more vulnerable members of society. The common assumption is that this refers to non-digitally savvy elderly people, but physical cash is also considered important to the financially vulnerable – those with a lower income or poor financial control. Contactless payments often mean people are more care-free with their spending (made more likely with the increase in contactless payment limits). Cash, on the other hand, is physical and tangible, and as such many people find it easier to control what they spend.
Some financial institutions, particularly building societies, have also taken steps to keep cash alive and well. Local bank branches play a key role in keeping cash relevant and in circulation in smaller communities. However, as more and more bank branches close due to the significant reduction in footfall and the costs that come with having a physical branch, it’s increasingly difficult for small communities to access their banks, therefore discouraging them from depositing and withdrawing physical cash.
In order to combat this and to continue to provide as many customers as possible with a local branch (and therefore physical cash), a number of banks have grouped together to trial business banking hubs. These hubs allow businesses to deposit funds from any cash transaction; but rather than this being at a branch of their specific bank, it occurs instead in a hub shared and funded by a number of banks, whose operation could even be outsourced.
Clearly, while digital transformation is indeed a hot topic for the banking industry, many would prefer for traditional cash transactions to remain an option. In this sense, banking isn’t too dissimilar from the music industry, which has been hugely impacted by the advent of digital. Companies such as Apple, Amazon and Spotify are all fighting to be the dominant players in a streaming market worth 8.8 billon dollars and accounting for nearly 80 per cent of the all music revenue.
Nevertheless, despite these astronomical figures, and the amount of attention being put on digital in the music industry, the supposed retro technology of vinyl records is making a surprise comeback (in 2019, vinyl outsold CDs for the first time in 40 years). The reason? We can only assume that a small but significant proportion of music fans still prefer the physical touch and sound quality of the more traditional format, and are prepared to pay for it.
Rather than giving banks and building societies a headache in satisfying both ends of the cash-digital spectrum, it could in fact provide them with an opportunity to provide the “retro-banking” facilities of the branch. Open banking and its expansion through the open finance initiatives, has allowed banks and fintechs to exchange expertise, knowledge, and innovative products and services.
And there’s no reason why the persisting need for cash couldn’t be part of this ecosystem, as banks with no physical presence could pay third parties to manage the “high-street banking” (cash and cheque) part of the business for them.
This may be something that building societies wish to consider as a way to help them support their own future and the future of the UK’s branch network as a whole.
It would seem that, far from digitization forcing cash out, it’s simply providing consumers and banks with more options and opportunities. In the same way that vinyl has found its niche in 2020, cash could do the same.
Wayne Duke will be speaking at the BSA's virtual Digital Mutual conference on 3rd and 4th of November - for more information see here.