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Cash no longer king

Jonathan Wright

Jonathan Wright - Fidelity Personal Investing

“You know where you are with cash” is a much-used phrase of a friend of mine’s father. Now semi-retired, it has been his faithful mantra over the past fifty years, which has proved quite a wise one judging by the success of his many business ventures.

Cash no longer king

He’s got a point, keeping track of your spending is easier when you deal in cash. Many debt charities suggest ditching the plastic altogether in favour of paying by cash so you can instantly see the effects of your spending.

Much as I loathe paying for car parking I’m a huge fan of parking phone apps as they take the stress out of having the correct amount of change in your pocket. The downside of course is I’m spending more on parking than I once did, as well as not getting the health benefits of walking into town.

It certainly appears cash is no longer king. In 2017, debit card use in the UK overtook payments made in cash for the first time. The growing use of contactless cards has contributed greatly to this. Greeted with much caution when they were launched over ten years ago, contactless cards are increasingly replacing cash at the till and now account for about a third of all card purchases.

According to the Access to Cash Review report published this week - funded by the cash machine network Link - 98% of UK adults now have a debit card which has led to the amount of contactless payments growing 99% in 2017 to 4.3 billion. This is more pronounced amongst younger spenders, with those aged between 25 and 34 the most likely to use contactless cards, than those over 65 years.

With a maximum limit of £30 per transaction it is in the smaller payments end of the market that cashless payments have gained the most ground. It is easy to see why. For consumers it means no more worrying about having the correct change and fewer trips to the nearest ATM. For retailers it means faster transactions, so fewer queues at the tills and fewer security issues with counting and depositing cash at a bank.

Unsurprisingly, the Report predicts the use of cash will continue to fall. UK Finance, the industry association for banks and payment providers, predict that cash will fall to 16% of payments by 2027 from 34% today.

The question is how easy will it be to continue using cash? Not very, I would suggest, as banks reduce their number of branches and ATMs, and small businesses decide to go cashless altogether to reduce the costs and risks of keeping cash on the premises.

While this is bad news for some, it’s good news for the payment technology providers. Whether you pay now with a debit card, ahead with a prepaid card or later with a credit card, Visa and Mastercard have all of this covered and dominate the market.

Visa, for example, operates in more than 200 countries worldwide and has one of the world’s most advanced processing networks - VisaNet - that is capable of handling more than 65,000 transaction messages a second. Meanwhile Mastercard boast their payment processing network is the world’s fastest.

At their heart both are technology companies that help provide a convenient and secure alternative to cash payments, taking their cut with each payment made for providing such a service.

Of course it’s not just the growth of contactless payments that have boosted the profits of these payment providers, the move towards shopping online has also led to a wider use of debit and credit cards as consumers pay for their internet purchases electronically.

And let’s not forget the other popular online payment method, PayPal, which was acquired by eBay in 2002 for $1.5billion, netting its largest shareholder at the time, Elon Musk, $165 million.

While we may never become a completely cashless society, how we pay for the products and services we buy is changing rapidly, leading to opportunities for technology companies able to harness this demand profitably.

In our Select 50 list of recommended funds, you’ll find Mastercard in the top 10 holdings of the BNY Mellon Long Term Global Equity Fund. While Mastercard, Visa and PayPal feature in the top 10 holdings of the Rathbone Global Opportunities Fund.

Important information

The value of investments and the income from them can go down as well as up, so you may get back less than you invest. Overseas investments will be affected by movements in currency exchange rates. Select 50 is not a personal recommendation to buy or sell a fund. Reference to specific securities should not be construed as a recommendation to buy or sell these securities and is included for the purposes of illustration only. This information is not a personal recommendation for any particular investment. If you are unsure about the suitability of an investment you should speak to an authorised financial adviser.