Future of Cash2

The Future for Cash in the UK
The initial report of the Strategic

Cash Group
March 2010
Contents
1 Introduction 4
2 Current and historic demand for cash 7
2.1 Historic demand for notes 11
2.1.1 Demand for notes for transactions 11
2.1.2 Demand for notes as a store of value 13
2.1.3 Demand for notes arising from loss or destruction 17
2.1.4 Forecasting demand for banknotes 17
2.2 Historic demand for coin 19
2.2.1 Demand for coin 19
2.2.2 Demand for coin as a store of value 22
2.2.3 Demand for coin arising from loss or destruction 22
2.2.4 Forecasting demand for coin 22
3 Environmental influences over the next ten years 24
3.1 Stakeholders in the circulation of cash 24
3.1.1 Consumers 24
3.1.2 Large retailers 24
3.1.3 Small businesses 25
3.1.4 The Bank of England, and the Royal Mint 25
3.1.5 Banks 25
3.1.6 Cash handling organisations 25
3.1.7 Independent ATM deployers (IADs) 26
3.2 Alternatives to the use of notes and coin for transactions 27
3.2.1 Debit cards and credit/charge cards 27
3.2.2 Prepaid card 27
3.2.3 Mobile payments 27
3.2.4 Contactless 27
3.2.5 Cheques 29
3.3 External factors influencing the circulation of cash 30
3.3.1 The future for ATMs 30
3.3.2 Note accepting, and coin accepting, machines 30
3.3.3 The ‘green’ agenda 30
3.3.4 Immigration 31
3.3.5 Review of the Note Circulation Scheme 31
3.3.6 Counterfeiting 32
3.3.7 Economic conditions 35
4 Trends expected over the next ten years 36
4.1 Forecast cash transactions and withdrawals 36
4.2 Forecast for cash re customers and technologies 38
4.2.1 Forecasts re individual customers 38
4.2.2 Forecast re business customers 39
4.3 Other potential variations from expected trends 41
4.4 National Payments Plan 42
Appendix 1: Members of the Strategic Cash Group 43

Appendix 2: Diagrams of the circulation of notes and coins in England and Wales 44
Appendix 3: Volume and value of payments above £1 by sector (UK) 46
02 I The Future for Cash in the UK

Foreword
As one of its first tasks, the Payments Council - the body responsible for setting
the strategy for payments in the UK - published a National Payments Plan in May
2008, covering all the ways payments are made or will be made over the next ten
years. A number of actions were highlighted within the plan including exploring
the strategy role of the Payments Council in note and coin developments in the
UK. The Strategic Cash Group (SCG) was set up to respond to this and other
issues raised. Members of the SCG are listed in Appendix 1.
This is the first of two reports being prepared to meet the commitments in the
National Payments Plan. SCG has used this as an opportunity to look at a wide
range of issues regarding banknotes and coin, and the arrangements that ensure
they circulate. This report describes the issues and developments that are likely
to shape the future for cash in the UK, over a ten-year horizon. It identifies a
number of issues for further consideration. The second report will provide a
further assessment of the issues highlighted in this report.
Disclaimer
Staff from the Bank of England, the Royal Mint and HM Treasury participated in
the discussions of the Strategic Cash Group because of their roles in the
production and issue of cash and development of related policy. However, the
findings and recommendations of the Group do not bind these organisations, and
in particular, do not represent Government policy.

Section 1
1. Introduction
Cash is a distinctive instrument, as it is always worth its ‘face’ value. Demand for
1
The remaining 5%
dispensed are new
cash is driven by:
notes.
 it being a general medium for the settlement of transactions;
 it being a store of value, as an instrument backed by the full faith of the state;
 the need to replace existing stocks of cash as they wear out (notes) or are
lost or set-aside (particularly low value coin).
Demand for cash arises quite differently from any other payment medium.
From the perspective of a consumer, the acquisition of notes typically
involves swapping value in a current account for banknotes, while coin is
generally acquired as a consequence of transactions. The use of cash can
appear to be free – usually its acquisition is costless for the public and
(particularly with low inflation) holding it can appear to be cheap or almost free.
People use cash in a habitual, instinctive manner, expecting adequate supplies of
cash to be generally free, and freely and conveniently available.
As a payment instrument, cash differs from the other payment instruments in six
main ways:
1. Cash circulates. It is as important for the well-being of the economy that

cash can be deposited as it is that cash can be dispensed. Retailers and other
businesses need to be able to deposit cash and receive value just as much as
consumers need to be able to acquire cash for shopping. The proportion of
cash which is re-circulated is very high: around 95% of banknotes dispensed
from ATMs are used notes which are being re-circulated1. Similarly for coin: a
very high proportion of the coin used is coin which is not new, but is being
recirculated. Both for notes and coin, the pattern of circulation is complex
and involves many parties. Diagrams are shown at Appendix 2.
2. Cash is always valuable. It is permanently worth its face value, and that value
is backed by the full faith of the state. This has three significant
consequences:
 because of its ‘bearer’ status, cash needs to be protected securely at all

stages in its circulation, from the high security cash centres through the
banknote protection devices used to protect cash in transit to the security
systems used in ATMs and branches. The costs of keeping cash secure are
therefore significant;

Section 1
 cash is a non-interest bearing asset – consequently considerable

2
In this report, figures
are for 2008 unless
effort is devoted to minimising holdings of cash on the balance sheet of
stated otherwise.
any cash-owning organisations eg banks and retailers;
3
Cash Services Group
 cash can be counterfeited. Levels of counterfeiting are very low for most
(CSG) acts as a focal
denominations, and people have a high degree of confidence that any
point for the provision
currency proffered is genuine, which can mean that they do not check it of strategic direction on
carefully. This is convenient for them and for the purchaser, but can lead co-operative
to inadequate authentication, thus encouraging counterfeits. (non-commercial)
issues for Cash as a
3. Cash provides full and final settlement of a transaction. There is no component of the UK
attendant payment system, telecoms system or rule book needed for Money Transmission
settlement to be finalised. A typical withdrawal of cash from an ATM (£652) – and Payments Industry
itself just one transaction visible to the banking system – will typically be and as the cash industry
lobby group on all
used for six or seven other transactions, none of which will be individually
aspects other than
visible to the banking system. Similarly, a retailer depositing cash will deposit
those relating to
the net surplus from many transactions. Neither the Bank of England, Royal
Scottish notes and
Mint, other note issuer nor any member of Cash Services Group3 settles every Northern Ireland notes
cash transaction in the way a payment scheme and its members settles all and coin
‘its’ payments. Transactions settled with a Bank of England banknote, or with
coin, are settled with a currency backed by the full faith of the state. New
regulations for the banknotes issued by the issuers in Scotland and Northern
Ireland now provide the holders of those notes with protection against the
insolvency of the issuer which is in effect broadly similar to that of a holder of
Bank of England notes.
4. Anonymity. Banknotes generally, and coin always, pass from hand to hand
without the individual payment instrument being recorded or traceable.
5. Once issued, the circulation of cash is uncontrolled. The rules of a

payment scheme define the roles each party can play, and sets out their
rights and responsibilities. For cash, however, new players and new
business models are at liberty to enter the market for cash circulation
services. Comparatively little is defined beyond the rules of engagement with
an issuer of cash, and even those can be the subject to remodelling (for
example, as when the Bank of England modified the basis on which it
supported the circulation of its notes in 2001).
6. It is regarded as a public good by its users. It should be readily available at

little or no additional cost to its face value. Organisations engaged in the
wholesale cash sector meet individual demands from their direct customers
and, collectively, they meet the overall demand from society.

Section 1
The UK is unusual in having multiple issuers of currency. Cash in the UK is issued

4
In this report, the
issuers in Scotland and
by HM Treasury via the Royal Mint (coin); the Bank of England (banknotes for
Northern Ireland are
England and Wales); the Bank of Scotland, Clydesdale Bank and the Royal Bank
referred to as S&NI
of Scotland (banknotes for Scotland); and Bank of Ireland, First Trust Bank,
issuers.
Northern Bank and Ulster Bank (banknotes for Northern Ireland)4.
Since 23 November 2009 the issuance of banknotes by the seven commercial

banks in Scotland and Northern Ireland has been subject to regulation by the
Bank of England under Section 6 of the Banking Act 2009 and associated
Regulations and Rules. The key feature of this is to protect note holders’
interests in the event of the failure of a note issuing bank, by requiring full
backing of the note issue at all times by UK public sector liabilities and
ring-fencing those assets for the interests of note holders.

Section 2
2. Current and historic demand for cash
The Payments Council has a wealth of information about payments, and about
cash as a payment instrument. Cash is used for more transactions than all other
forms of payment combined; as shown below, the value of cash transactions is
comparable to that of debit cards (but the value of cash transported between
cash centres, and to and from the High Street, is much higher).
Selected UK Payment Volumes and Values
Volume Value
(billions) (£ billions)
Cash 22.6 267
Debit Cards 5.4 241
Credit/Charge Cards 2.0 139
Direct Debits 3.1 935
Direct Credits* 2.4 3000
Cheques 1.4 1429
Value transported by G4S, around 700

Loomis, etc
* Including internet and telephone banking
In recent years, the trend has been for a gradual decrease in the annual volume
of cash transactions (there were 25.3 billion cash transactions in 1998) while the
value has increased slightly in nominal terms, but not in real terms. In 1998,
based on industry data and market research, cash spending was £248 bn. Using
CPI inflation that would be worth £324bn in 2009.
The average (mean) value of a cash transaction, £9.30, is much lower than for
other payment mechanisms. The median value is £3.50, as many cash
transactions are at the lower end of the distribution, as shown below:
Consumer Cash Payments by Value Band

8
7
6
Volume billions
4
3
2
1
0
< £1 £1 to £5 £5 to £10 £10 to £25 £25 to £50 £50 +

Section 2
But surveys indicate that cash is also used for many higher value retail
transactions. For purchases above £50 last year, 640 million transactions were
made in cash, whereas over 900 million were made by debit card and around
400 million by credit card. Most cash is used for retail purposes, and secondarily
for travel and entertainment; the extent to which consumers use cash rather
than alternatives varies by sector; both are shown below (with further details in
Appendix 3):
Consumer Cash Payment Volumes by Sector
24
22 Financial
20
18
16 Non-financial Regular
Volume billions
Bills
14
12 Person-to-Person and
10 Person-to-Business
8
Travel & Entertainment
6
4
2 Retail
0
Percentage of all consumer spending (value) by cash in selected sectors
Regular bills
Person-to-business
Travel & Entertainment
Retailers
Person-to-person
0% 10% 20% 30% 40%
Almost everybody uses cash: in 2008, 98% of adults were cash users, making an
average of 8.6 cash payments per week. But, in contrast to other payments
mechanisms, the heaviest users of cash are older adults, and those in
socio-economic groups D and E:

Section 2
Cash Payments per week per adult in each demographic group

5
The survey does not
cover Northern Ireland;
anecdotal evidence is
E
D that people in NI are
C2 more likely to have a
C1 ‘northern’ than
AB
‘southern’ pattern of
65+
cash usage.
55 to 64
45 to 54
35 to 44
25 to 34
16 to 24
Female
Male
0 1 2 3 4 5 6 7 8 9 10 11
Around 20% of adults rely exclusively on cash, that is to say, they only used cash
during the month in which they were surveyed for the Payments Council’s
Consumer Payments Survey. These people were more likely than average to be:
 young adults (age 16 – 24) or older adults (age 65+)
 socio-economic groups E or D
 lower household income
 Northern (comprising around 25% of the population in Scotland, North East or

North West England, compared to 10% in London5)
The range of institutions which collectively make up the ‘cash circulation system’
maintains the availability of cash for the UK economy. Many people are bank
customers, and get their cash from their bank via an ATM, etc; others withdraw
benefits from a Post Office; and businesses will have a relationship with a bank.
But cash circulates well beyond the point from which it is dispensed by any
institution in the cash circulation system. This ‘system’ has little influence over
where cash is used, does not profit directly from its use but has some role in
ensuring adequate and reliable supplies of notes and coin. In other words, there
is a public good element to cash circulation.

Section 2
There are distinct patterns in the acquisition of cash by businesses and

consumers:
 some businesses (e.g. vending machine operators, bus companies outside

London) tend to receive large quantities of coin from customers;
 retailers and many other businesses buy in coin and low denomination notes
from their cash supplier, while paying in the higher denomination notes
received from customers;
 some businesses (ranging from doctor’s surgeries to manufacturers and

airlines) make little or no use of cash;
 consumers predominantly withdraw their cash from cash machines, as shown

below.
The acquisition of cash
Acquisitions Value Acquired

% %
(millions) (£ millions)
ATM Withdrawal 2,862 79 190,101 74
Benefits in Post Office 228 6 27,658 11
Plastic Card at Counter 65 2 12,731 5
Business/Employer 124 4 10,134 4
Cheque Encashment 48 1 8,881 3
Cashback 260 7 6,695 3
Other 47 1 636 0
Total 3,634 100 256,836 100

Section 2
2.1. Historic demand for notes 6

NCS = Note
Circulation Scheme,
which is used to manage
2.1.1 Demand for notes for transactions the supply of Bank of
England banknotes to
The Bank of England issues four denominations of banknote to the public: the the commercial sector.
demand for each one has its own characteristics. Consumers tend to acquire £5s There are currently five
over Post Office counters, and from retailers as change. By contrast, the £20 is NCS members: G4S
typically procured by consumers from ATMs to obtain value for use with retailers Cash Centres UK; Bank
and elsewhere; the £10, which is mostly procured from ATMs by consumers or as of Scotland; Post Office;
change from retailers, has a dual role as a change item and a store of value. The Royal Bank of Scotland;
and Vaultex UK (a joint
£50 is used as a store of value, and for transactions in a few establishments.
venture between HSBC
and Barclays).
Most of the demand for banknote value for transactions in England and Wales is
currently met by £20 notes; and to a lesser extent by £10 notes. The £20/£10
proportion dispensed is influenced by:
 banks and ATM deployers, who are conscious of the cost-effectiveness of the
£20;
 consumer preferences;
 the Bank of England (which aims to have an appropriate mix of notes in

day-to-day circulation, to facilitate transactions).
Consumers and retailers in England and Wales are particularly dependent on a

single denomination of banknote, the £20. Currently it comprises 64% of the
value of notes which the Bank of England has in circulation; and it comprises 65%
of the value dispensed from ATMs and also 65% by value of the throughput at
cash centres. Partly this arises from the move from consumers withdrawing cash
over counters to withdrawing it from ATMs: with an average dispense around
£65, £20 notes are convenient for that; £50s are not very useful for many retail
cash transactions.
There is persistent anecdotal evidence that there is unfulfilled demand for brand
new £50 notes (for transactions or for hoarding), but not for used ones. There is
understandable reluctance by the Bank of England to issue a new £50 note, only
for it to be destroyed after a single use. There is also understandable reluctance
by the NCS6 members to press the Bank for £50s they believe will be used just
once, as they are required to compensate the Bank of England if they forward for
destruction a note which is fit for further circulation. The evidence does not
point to this being a major issue.
It is generally accepted that there is unmet demand for £5 notes in England and

Section 2
Wales. Currently there is a widely-held view that £5 notes are disproportionately

expensive to distribute, as ATMs or branches dispensing £5s will generally need
more frequent deliveries of notes, and they are significantly more expensive to
sort than other notes. Commercial banks have sought arrangements for these
costs to be compensated. The Bank of England has conducted two pilot studies
– one with a major supermarket, one with a High Street bank’s ATM estate.
These studies have identified situations where greater dispense of £5s would not
give rise to appreciable additional costs. If these conclusions come to be
accepted, it is conceivable that the supply of £5 notes will increase. The second
report will cover progress here. The Bank has also recently commenced
discussions with the commercial cash industry on changes to the arrangements
for sorting and circulating its banknotes. The proposed reforms seek to ensure
that an appropriate mix of banknotes is dispensed to the public by altering the
incentives for note distribution across the four denominations.
The £1 note was replaced by the £1 coin in 1983; adjusted for retail price inflation,
£1 in 1983 would be worth around £2.50 now. The second report will consider
issues associated with the potential for a £5 coin. Ultimately this would be a
decision for HM Treasury.
Since the onset of the financial crisis in summer 2007 there has been stronger
growth in demand for £50s, pointing to an increase in demand for banknotes as a
store of value.
The demand for notes is influenced, as set out above, by transactions and by
interest rates (at low interest rates the opportunity cost of holding cash is low);
but it is also influenced by arrangements in the cash circulation system. For
example, in recent years, the retailing sector has tended to move:
 from small-scale High Street outlets depositing their takings frequently at a

local bank branch (where a proportion of notes would promptly be
re-dispensed), and collecting their requirements for change from there
(where it had recently been paid in by a local bus depot, for example);
 to larger outlets distant from the High Street, where cash is paid in less
frequently, is paid in via CIT, and so a higher proportion of notes paid in go
through cash centres; and where deliveries of change are also made
periodically by CIT.
This development has taken place over a similar period as the move to
dispensing cash through ATMs. These two trends have driven, and been enabled
by, the increasing proportion of the cash circulation cycle that is handled by

Section 2
large scale, industrial methods rather than local, manual ones. This has
promoted economic efficiency, and the reliability of sorting has also improved.
Specialist machines have been deployed, including:
 High Speed Note Sorting machines in cash centres and high speed coin
sorting and sacheting machines in coin centres;
 vending machines with note accepting devices, able to vend higher value
items than previously – railway tickets, for example;
 self check-out machines deployed at supermarkets and other retailers, where

consumers can pay by cash or card, and those paying cash receive change in
cash;
 coin accepting machines, both those deployed by Coinstar (which give

vouchers for use in the retailer where they are sited) and by banks (which give
value by crediting a bank account);
 note accepting machines deployed by banks, which give value by crediting a

bank account;
 ATMs, many of which are accessible 24 X 7; there is roughly one ATM for
every 1000 people in the UK.
Some of these devices may have the effect of increasing the demand for cash.
For example, an ATM filled by a CIT company will typically have each partially-
emptied cassette of notes replaced with a full one. Analysis in 2005 showed that
the notes returned unused (‘countback’) were usually around 20% of the value
dispensed for £20s, and 30% for £10s. By contrast, a branch-filled ATM will
dispense all of its notes in time. To some extent, the growth in this ‘inventory’
of notes within the ATM estate may have been offset by reductions in holding
of cash within branches. The second report will consider further the
‘industrialisation’ of the cash circulation system.
2.1.2 Demand for notes as a store of value
Compared to the quantity of information about the use of cash for payments, the
information is much less detailed about cash stored for its value. Each issuer of
banknotes will know how much it has issued for others to own, and how much of
that has been returned to its ownership. The difference is referred to as Notes in
Circulation (NIC); the Bank of England publishes its NIC figure each week. At the
end of 2009, there were £48.6bn Bank of England notes in circulation. There is
around £3.2 bn of Scottish notes in issue, compared to £1.7bn issued by NI banks.

Section 2
The value of NIC tends to increase. By way of example, the value of Scottish
notes in circulation is shown below:
Scottish notes in circulation
4,000
3,500
3,000
2,500
Tot (£m)
£m
2,000
1,500
1,000
500
-
1991 1993 1995 1997 1999 2001 2003 2005 2007
Year
The value of Bank of England NIC also showed a steady increase, as shown
below:
Bank note trends
30,000 300,000
25,000 250,000
20,000 200,000
£ millions
millions
15,000 150,000
10,000 100,000
5,000 50,000
0 0
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
Volume of cash payments (millions) Value of cash payments (£millions)

Total BoE NIC (Excluding 10/-, £1, £millions) Retail cash centre inflow (£millions)
Retail cash centre outflow (£millions)
The graph above shows that the value of cash transactions increased around
14% over the period 1996 – 2008; but the value of cash processed through cash
centres increased by around 74%. The difference could be attributed to three
main factors: changes in the proportion of notes that are processed at a cash

Section 2
centre rather than locally re-cycled; changes in logistics, dispense and

processing (demand from ATMs and the ‘industrialisation’ of cash handling in the
retail sector could both be a factor here); and changes in the value of cash
transactions in the black economy.
As mentioned above, each denomination of note has a different pattern of use,

and the velocity of circulation of each also varies. One would expect the lowest
value notes to have the highest velocity of circulation, since they are more
commonly used in transactions. By contrast, the highest value notes would be
sorted the least often, since these are closer to pure stores of value. However,
this assumption does not hold for £5 notes and, as can be seen clearly in the
chart below, the velocity of circulation of the £5 has declined over the past
fifteen years. Turnover of the £5 has persistently decreased, as it has been
perceived as unattractive for widespread use in ATMs; for a given value, it is
much more expensive to sort than other notes; and retailers do not have a strong
habit of procuring quantities of £5s for change. (Ongoing work in this area is
referred to in section 2.1.1.)
Velocity of circulation
10
9
8
7
6
5
4
3
2
1
0
1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009*
£5 note £10 note £20 note £50 note
* to September 2009
Note: Velocity is measured as the number of times per year on average that
notes of each denomination are processed through wholesale cash centres.
Source: Bank of England

Section 2
Notes reported as being ‘in circulation’ could actually be:
 in the process of being transferred between consumer and retailer (i.e.

actually circulating);
 for processing with a CIT company, dispense or short-term storage;
 in the front of a cassette in an ATM, imminently to be dispensed to a
customer;
 in the back of an ATM cassette, possibly not to be dispensed but to be
returned as ‘count-back’, i.e. unused notes returned to a cash centre for
counting and re-packing into another cassette;
 in the vault of a banking branch/ Post Office;
 with a retailer, awaiting either depositing or handing out as change to a
customer;
 with a consumer, imminently to be spent;
 with a consumer, saved;
 abroad, awaiting dispense to an incoming visitor to the UK;
 abroad, saved;
 mutilated, and in the process of being returned to the Bank of England for
assessment and refund;
 lost, destroyed or collected for their perceived value.
Under the rules of the Bank of England’s Note Circulation Scheme (NCS), there
are two types of its banknote that have been issued but which are not ‘in
circulation’:
 notes which are being processed to check that they are authentic and fit for
further circulation;
 notes which are surplus to requirements for a period and are stored under
Bank of England rules in a cash centre of an NCS member; this includes notes
which have been identified as unfit for further circulation, and are awaiting
return to the Bank for destruction and replacement.
In short, notes in circulation are being used, or awaiting use, for transactions, and
for the full range of short-term and long-term stockpiling. The extent of such
stockpiling is unknown, unknowable, unpredictable and unmanageable. Such
stockpiles are, in effect, interest-free loans to the state. When interest rates are
higher an individual’s self-interest should tend to keep such stockpiles lower; but
in current economic conditions, there is much less such pressure. A retailer or
business will face similar pressures, but may be more aware of the costs of
depositing cash compared to the cost of holding it. Since the onset of the
financial crisis, there has been stronger demand than before for the Bank of

Section 2
England’s £50 notes; also for its £20s, indicating greater use of notes as a store 7
This is at the Bank’s
of value. discretion, as a measure
to sustain confidence in
2.1.3 Demand for notes arising from loss or destruction its notes. It does not
compensate those who
have wilfully destroyed
The Bank of England provides a service to the holders of its notes, so that a note
its notes, for example,
which has become unusable, for example mutilated (chewed by an animal) or
as a publicity stunt.
contaminated (with blood or floodwater), can be returned to the Bank for
inspection and refund7. When the Bank does withdraw a denomination of
banknote (e.g. 10/- or £1) or a banknote design, a very large proportion of those
in circulation do get returned, though not always promptly. The Bank honours its
promise “to pay the bearer” without time limit. Less than 1% remains
outstanding in the long term. This suggests that, unlike coin, loss or destruction
is not a significant issue for notes.
2.1.4 Forecasting demand for banknotes

As set out above, the drivers of demand for banknotes are varied and complex.
Demand has a strong seasonal pattern, with a peak ahead of Christmas, and
smaller ones ahead of Easter and bank holidays. Thus forecasts are prepared to
cover the calendar year; the Bank of England prepares one, focussing on the
notes it expects to have in circulation; NCS members each prepare one (on the
same template), which is aggregated to show the overall position. These two
forecasts are reviewed at monthly meetings between the Bank and NCS
members.
The aim of these forecasts is to ensure adequate supplies of banknotes, whether

new or used. There is a small distinction between the objectives of the various
parties: note handlers aim to meet customer demand for the denominations
requested (‘customer’ in this context being a bank seeking notes for ATMs, or a
retailer seeking change), whereas the Bank formally aims to supply only the
value demanded. This distinction mainly applies to £10s and £20s. The Bank
currently replaces each unfit note with one new one; but in supplying notes for
the growth in NIC, the Bank gives due weight to the need not to so oversupply
notes that they become problematic to store, and it seeks to ensure an
appropriate mix of its four denominations in circulation. That said, the Bank’s
inclination to encourage £10s into circulation is more pronounced during the
unpressured months of the year: there are no recorded instances where a cash
handler facing an acute and inevitable shortage of £20s, for example in late
November or December, has been supplied with £10s instead.

Section 2
A key factor is the supply of banknotes which have been paid in for counting and
sorting (called ‘unsorted’); during much of 2009, customers seem to have been
slower than usual to pay in their £20 banknotes, leading to less unsorted notes
than usual, which has been an operational and commercial issue for NCS
members. However, the Bank of England, like the other UK issuers of banknotes,
has ample supplies of new notes available. It is axiomatic that any public
perception of a shortage of cash would stimulate demand for it, and that the only
reliable way to sustain confidence in the availability of cash is to be able fully to
meet all reasonable demand for notes or for coin.

Section 2
2.2. Historic demand for coin

2.2.1 Demand for coin
In 2008, there were 550 pieces of coin circulating for each adult, with a value of
£70, and 31 new coins were issued, as below:
Coin in circulation, and Issued, per adult
Circulating (£) Pieces Circulating Pieces Issued
£2 12.26 6.13 0.49
£1 28.88 28.88 1.19
50p 8.06 16.11 0.74
20p 9.10 45.49 2.40
10p 3.20 32.03 1.88
5p 3.71 74.27 5.57
2p 2.59 129.68 5.98
1p 2.14 214.17 13.24
Total 69.95 546.77 31.49
The UK has large amounts of coin in circulation for the size of its population,
much more than anybody would carry around to support their cash transactions.
The reasons for this are not known, though we will seek to present some
explanations in the second report, but might include:
 the UK coin circulation system is inefficient such that large quantities are lost
or stored over the long term (circulating coin is largely a private sector
activity, so this reason suggests that there is a lack of regard for the cost of
holding it);
 the UK coin circulation system has an increasing proportion handled via CIT
and coin centres, so that more coin is needed as ‘work in progress’ in the
system. This would apply to higher denominations more than lower ones, as
the proportion of the amount in circulation that goes through coin centres
increases with the face value of the denomination;
 UK consumers lose large amounts of coin, so that much less is actually

circulating (the Royal Mint’s last analysis of lost coin was in 2001, and another
is planned for 2010);

Section 2
 UK consumers overall keep large amounts of coin at home;
 over the past year or two, and probably increasing in future, retailers have
installed self-checkout tills. These may well use more coin (of most
denominations, but covering the full value range) than the equivalent manned
tills.
In contrast to banknotes, coin is not generally returned to the issuer. Only coin
that is physically distorted, long-term surplus to the UK’s requirements (of which
there has been none since decimalisation), or replaced by a newer design, is
returned to the Mint.
As shown below, the amount of coin in circulation since the mid 1980s has
generally increased:
 the growth of the £1 has been strong and its value in circulation is much the
largest. It replaced the Bank of England’s £1 banknote in the mid 1980s. The
UK is much more reliant on this single denomination of coin than any other
denomination;
 the value of the 50p, the 10p and the 5p in circulation peaked, declined and
recovered when new designs were introduced;
 overall, as for notes, some of the demand for coin will have been driven by
developments among coin-using businesses, as coin received for
transactions may be taking a slower route via CIT and coin centres before
being dispensed again.
Coin in Circulation
700 1,600
600 1,400
£ millions (Excl £1 coins)
1,200
£ millions (£1 coins)
500
1,000
400
800
300
600
200
400
100 200
0 0
1972
1974
1976
1978
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
1p 2p 5p 10p 20p 50p £2 £1

Section 2
Consumers rarely intentionally acquire coin; most of the coin they acquire is
acquired reactively, as change from a purchase. As mentioned above, the
number of cash transactions has been declining in past years (though the
financial crisis may have stimulated the demand for cash transactions, as many
people find using cash enhances their ability to budget effectively). Other things
being equal, the demand for coin for transactions should have been falling as
well.
Some businesses rely heavily on coin for the bulk of their revenues; these
businesses operate vending machines, car parks, toll booths, etc. Their use of
coin parallels the demand for their goods or services. Many other businesses –
retailers, leisure facilities and others that accept cash payments – acquire coin
to give to consumers as change. Broadly speaking, the UK’s demand for each
denomination of coin arises from the gap between what businesses pay in, and
what they require; demand for coin is not directly driven by demand from
consumers. Coin handling organisations manage this gap via the weekly
meetings of the Coin Distribution Working Party (CDWP). The amounts traded at
CDWP vary with the seasons, ranging from practically nothing immediately after
Christmas to a peak of around 60 transactions per week for a total of around
500 tonnes of new and used coin with a face value of around £20 million.
It is a feature of the circulation of coin that, unlike notes, contingency stocks are
not routinely maintained by the issuer, though stocks can be held at the Royal
Mint in agreement with HM Treasury. For coin (as for notes), the coin handling
organisations hold stocks to cover operational contingencies but these are not
intended to cover demand being significantly different from forecast. These
stocks are held at coin centres, of which there are 18 in England, 8 in Scotland
and 2 in Northern Ireland.
An additional feature of the management of the circulation of coin is that, unlike

banknotes, there is some imprecision as to how much coin is actually in
circulation. As coin is smaller and less valuable than banknotes, it is particularly
susceptible to being lost or abandoned. Thus, to estimate how much coin is
actually in circulation, the Royal Mint periodically:
1. extracts a large sample from coin that has recently been paid in by
customers;
2. sorts it by denomination and by year of issue;
3. compares that with the amount of each denomination and year known to
have been issued;

Section 2
4. calculates a wastage rate for each denomination; and
5. estimates how much is actually ‘in circulation’.
This procedure was last undertaken around 2001. The Royal Mint is planning to
carry out a new “vintage” survey in 2010.
2.2.2 Demand for coin as a store of value

Anecdotal information suggests that some people store all denominations of
coin, and pay them in periodically (perhaps before Christmas or holidays) – via a
Coinstar machine or similar (in 2008, Coinstar alone collected over £200m in
coin). Others store higher denominations of coin – the £2 may be particularly
attractive for this. Yet others hoard low value denominations of coin, though this
seems to be done more as a convenient way to avoid carrying them around than
as a store of value: it is implausible that low value coin is stored for its value.
2.2.3 Demand for coin arising from loss or destruction

The Royal Mint typically issues each year, for each adult in the UK, around 13
pennies and 6 two pence pieces. These are not needed to support the declining
number of cash transactions, and it is implausible for them to be stored for their
value. The most probable use of most of these new bronze coins is to replace
coins which have been lost, abandoned or hoarded, while the rest are used to
increase the ‘work in progress’ of the cash circulation system. Anecdotal
evidence is that some consumers would rather abandon coin than carry it to
where it can be spent. We will cover aspects of this in the second report.
2.2.4 Forecasting demand for coin

As for banknotes, the demand for coin is largely met by re-circulating used coin;
new coin supplied by the Royal Mint provides only a small fraction (e.g. 5%) of
annual supply of each denomination. It is not easy accurately to forecast the
total demand for coin needed for circulation in the UK (additionally, the demand
from business customers has been unusually erratic since the onset of the
financial crisis). Consequently, forecasting the small amount that will be needed
as new coin is subject to larger inaccuracies.

Section 2
Since 2001/2, there have been two forecasts of the annual demand for new coin:
 The Royal Mint has produced an annual forecast, based on the quantities of
new coin that have been supplied in previous years.
 CDWP members have produced a monthly forecast of their week-by-week

inflows and outflows, based on previous years and adjusted for known
changes of customer; the demand for new coin is derived from the gap
between total demand for each denomination, and the total supply of used
coin by denomination.
These two forecasts are compared at CDWP so that any differences are
understood. From this the Mint quantifies the new coin that it will be expected to
provide. This forecasting procedure has been reviewed in recent months. A
more refined forecasting and ordering procedure has been agreed. We will
comment on progress here in the second report.

Section 3
3. Environmental influences over the
next ten years
3.1. Stakeholders in the circulation of cash 8

In 2009, David
Mundell MP promoted a
private member’s bill on
The circulation of cash involves many parties and thus many perspectives (see
this topic.
diagrams in Appendix 2, for example). Taking some of the main stakeholders in
turn, and exploring how they might impact the future for cash: 9
Formerly the
Technical Standards
3.1.1 Consumers Board, the ACBI
provides a forum to
85% of UK adults held a debit card in 2008; 94% held some type of plastic assist the Bank of
payments card; most consumers have a non-cash way to pay for purchases. As England with its
such, they have a choice of how to pay for purchases, and base this choice on responsibilities for all
habit, transaction value, perceived costs and inconveniences, marketing or peer banknotes issued in the
UK, and facilitates
pressure, and many other factors. The government’s aim to promote financial
debate and
inclusion is reducing the number of people who don’t have a bank account,
co-operation between
thereby increasing the number of people who have an alternative to using cash.
its members on
non-competitive
In England and Wales, Scottish & Northern Ireland (S&NI) banknotes are less
banknote issuance
acceptable than many S&NI citizens would like8. In part this is because the levels matters.
of counterfeit S&NI notes passed in England & Wales are disproportionately
higher than the levels seen in the countries in which they are issued. The 10
See http://
Association of Commercial Banknote Issuers is tackling this by enhancing
9
www.scotbanks.org.uk/
the availability of information about the authentication features of S&NI notes. bank-
Website information on the authentication features for Scottish notes has been note_denominations.ph
p.
available for some years . However, it seems unlikely that the use of S&NI notes
10
in England or Wales will become significant overall.
3.1.2 Large retailers
Large retailers usually accept cash payments and card payments (the exception
being retailers who only trade over the internet). The use of cheques has been
phased out by many large retailers; some no longer offer debit card cashback.
Some retailers are installing self check-out tills, where consumers can swipe
their purchases, and pay; some tills only accept cards, others accept cards and
cash. It could be useful to know more about how this impacts their use of cash.
Large retailers’ cash flows tend to be supported by CIT, and cash or coin centres.
Some, if not all, large retailers manage cash to enhance operational efficiency
and customer service.
The British Retail Consortium, whose members comprise large retailers, has
stated publicly that cash payments are cheaper than credit card payments. This
analysis seems broadly compatible with Belgian and Dutch studies. Large

Section 3
retailers are sensitive to charges for cash and payment services, and to the
11
Professor Colin
Talbot, cited at http://
relative differentials between them.
re-
search.nottingham.ac.u
3.1.3 Small businesses k/NewsReviews/
newsDisplay.aspx?id=38
Small businesses increasingly accept card payments in addition to cash. Corner
stores remain, however, particularly reliant on cash; it is conceivable that, over 12
Professor Friedrich
time, contactless debit cards might come to be popular with this sector. Schneider, cited on
Self-employed individuals may continue to prefer cash. page 3 of the FT of
21/22 Nov 2009.
The extent to which cash circulates in the black economy is not known, but one
estimate of the size of the black economy in 2004 was £53 – 137 billion11; 13
The Royal Mint aims to
another is that it is around 10% of GDP (i.e. around £60 bn). Cash transactions
12 meet demand for each
would account for a large proportion of that, indicating that – compared to denomination of coin,
while the Bank of
legitimate consumer cash spending of £267 billion pa – a significant minority of
England retains the
cash transactions take place in the black economy.
right to meet demand
for value with
3.1.4 The Bank of England, HM Treasury and the Royal denominations of its
Mint own choosing.
14
A retailer’s card
The Bank of England and HM Treasury/the Royal Mint aim to meet demand for
transactions are
their currency13. The supply of currency brings the benefit of seigniorage (to the
‘acquired’ by a bank or
State) which, at times of higher interest rates, can be appreciable. other organisation,
which arranges with the
3.1.5 Banks card scheme to deliver
to the retailer value for
those transactions from
Banks understand the need to supply their corporate and individual customers
the issuers of the card.
with cash services. They understand the costs involved; they levy what charges
can be levied in a competitive market. They also issue debit and credit cards; in
some cases, they acquire cards transactions14. Collectively they are
stakeholders in the card schemes which regard cash as a competitor.
3.1.6 Cash handling organisations

In general, banks have – with a couple of exceptions – outsourced the
processing of cash to one of two specialist organisations which operate cash
centres (which just handle banknotes) and coin centres. The two organisations –
Vaultex UK and G4S – interface directly with the Bank of England and the Royal
Mint for the acquisition of new currency and the disposal of unfit notes or coin.
The Post Office operates its own cash and coin centres. The five organisations
which deal direct with the Bank of England for new and unfit banknotes are:

Section 3
G4S Cash Centres UK; Bank of Scotland (Lloyds Bank has a well established
relationship with G4S); Post Office; Royal Bank of Scotland Group; and Vaultex
UK. These are the members of the Bank of England’s Note Circulation Scheme
(NCS), and they are also the main players in the circulation of coin.
There are 28 NCS cash centres in England and 18 coin centres; in Scotland there
are 8 cash centres and 8 coin centres; in Northern Ireland there are 2 cash
centres and 2 coin centres. There are no cash or coin centres in Wales. These
arrangements are under review.
3.1.7 Independent ATM deployers (IADs)

Around 39% of ATMs charge a fee for dispensing cash (and most are operated by
IADs), but around 97% of withdrawals, and of cash withdrawn, are from free-to-
use ATMs (mostly operated by a bank or building society). The ATM market is
increasingly regarded as mature, in terms of the density of ATMs.

Section 3
3.2. Alternatives to the use of notes and coin for

transactions
3.2.1 Debit cards and credit/charge cards

These are well established as alternatives to using cash for transactions. In
2008, a typical debit card holder used that card around 170 times, around twice
the number of transactions made by a typical holder of a credit or charge card.
Cash is used more often – around eight times a week – but the total amount
spent via cash and via debit cards is similar. Debit cards are now available on
most basic bank accounts and there may be more migration from cash by the
holders of these accounts.
3.2.2 Prepaid cards

The prepaid card market is still in its infancy. Some prepaid cards are
‘open-loop’ and can be used with face-to-face and online retailers. They may
appeal to those who wish to manage their budgets, and to certain businesses
wishing to manage their costs. Also, they can be marketed as a safer and
cheaper substitute for foreign currency when travelling. Closed-loop cards are
linked to single or a limited number of retailers; the most widely-used is London
Transport’s Oyster card. Both types of prepaid card have potential to be a
substitute for cash transactions. Consumer and retailer perception of the
relative costs and merits of cash and prepaid cards is likely to be a key factor in
influencing future growth.
3.2.3 Mobile payments

Mobile payments are those where the mobile device plays an integral role in the
initiation or completion of a payment. While volumes are still small, some
applications are direct substitutes for cash: paying for parking or a congestion
charge, person-to-person transfers and person-to-SME transfers, for example.
It is conceivable that, at some stage, mobile devices could have an additional
contactless functionality; if this became popular it would perhaps be a substitute
for contactless card transactions more than cash transactions.
3.2.4 Contactless transactions

Some banks in the UK are making significant progress with contactless cards.
From the perspective of cash circulation, the numbers of contactless cards and
terminals are still very small. At the end of 2009, there were approximately 7.8
million contactless debit and credit cards in issue and 22,500 terminals capable

Section 3
of accepting contactless transactions (monthly updates are available from

www.contactless.info ). The number of cards in issue has doubled in five months
and the UK Cards Association expects that 1 in 6 cardholders in the UK will have a
contactless card by the end of 2010. The Olympic and Paralympic Games in
London in 2012 are sponsored in part by Visa and by Lloyds Banking Group,
which view this as an opportunity to promote the use of cards, particularly
contactless cards. Visa might aspire to ensure that some of the Olympics’
venues are cashless.
If the rate of growth of contactless cards and terminals continues and

acceptability improves, over a ten year timeframe it is possible that contactless
cards may become usable in many retailers for lower value transactions: fast
food outlets, transport operators, newsagents, vending machines, etc. They will
be of little interest to retailers selling high value goods (e.g. jewellers) and they
may be of modest importance to retailers with only a small proportion of low
value transactions (e.g. petrol stations, supermarkets).
Bearing in mind that around 75% of cash transactions are for values below £10
(the current limit on UK contactless cards is £15), the long-term scope for
contactless is considerable, in terms of the potential numbers of transactions.
There is less scope in terms of value: in 2008, the value of cash payments for
cigarettes/tobacco; drink for home consumption; books/magazines; transport
tickets/fares/hire charges; take away/delivered food/sandwiches; and National
Lottery totalled £21.3 billion (out of a total cash spending of £267 billion). It is
these low value purchases which could be paid for by contactless cards or – if
the technology becomes established – by mobile devices with contactless
functionality.
In the second report, we will cover progress with contactless. If contactless

transactions become popular, their impact on the circulation of cash might
include:
 smaller cash deposits from those retailers accepting a significant proportion

of contactless transactions;
 a modest reduction in the demand for cash by consumers;
 for retailers with a high proportion of contactless transactions, a reduction in

their requirements for change;
 a consequent easing in the demand for new coin. Potentially this could arrive
in the UK around roughly the same time as in other countries, leading to the
possibility of a world-wide surplus of minting capacity.

Section 3
3.2.5 Cheques
Cheque volumes have been falling for some years. The Payments Council has set
a target end date for cheque clearing of 2018, subject to suitable alternatives
being available. Any end of cheque clearing envisages that the remaining
payments by cheque will transfer to appropriate substitutes, among which is
cash. It is forecast that, of the cheque payments which would remain in 2019
without the phasing out of the cheque clearing, most will transfer to automated
credits, card payments or direct debits. But possibly around 60 million
transactions pa (or 0.4% of the cash total) would transfer to cash; probably their
average value would be higher than the £10 usual for cash but the impact on
cash circulation overall is expected to be small or imperceptible.

Section 3
3.3. External factors influencing the circulation of cash

3.3.1 The future for ATMs
ATMs are by far the predominant way for consumers to acquire banknotes: in
2008, 69% of adults were regular users of cash machines, and cash machines
dispensed 71% of the cash acquired by individuals. Cash machine usage covers a
wide spectrum, but ATMs fall into two broad categories:
 owned by a bank or building society, these often have a storage capacity in

excess of £100,000, and dispense an average of 210 transactions each day,
averaging £77 for on-us withdrawals and £62 for not-on-us withdrawals
(i.e. via LINK, which handles 76% of ATM withdrawals);
 owned by an independent ATM deployer (IAD), these have small capacities

(some are replenished by the merchant) and often are located in convenient
locations so that a withdrawal fee is accepted and paid by the consumer. IAD
ATMs dispense around 18 times a day, averaging £52 per withdrawal, all of
which are handled via LINK.
The cash machine market is increasingly mature in terms of market penetration.
3.3.2 Note accepting, and card accepting, machines

Some banks are deploying note accepting, and coin accepting, machines, which
can check currency to some extent for authenticity and fitness, prior to it being
dispensed from the branch at which it was paid in, thereby reducing the distance
cash travels before being re-dispensed. The Bank of England is already working
with the manufacturers of these machines concerning the authentication
capabilities of their products. Cash recycling more generally is a topic that will be
discussed further in the second report.
3.3.3 The ‘green’ agenda

Cash circulates, so it should be well placed to be regarded favourably by the
increasing numbers of consumers who favour environmental and recycling
objectives. Coin is particularly well placed in this regard, as it visibly circulates
between retailers and customers, and is durable. Banknotes are less durable, but
the cotton fibre from which the paper is made is from resources which are
potentially renewable.
The two points about cash which could most readily be the subject of comment

Section 3
comment from Green activists are:
 the cash circulation system, which increasingly transports cash some distance
to where it can be processed by machine before being transported on to the
point of dispense. This is primarily a logistical matter, and concern could be
expressed regarding the distance travelled, and the extent to which
recyclable packaging is used. There is a potential analogy with the discussion
about food ‘miles’, and food packaging. The Royal Mint, to its environmental
credit, adopted recyclable liners for the despatch of new coin in 2006, in
place of the disposable packaging used previously;
 coin involves mining for steel, copper and nickel. To the extent that coin is
being hoarded, this has an environmental impact. There is a case for seeking
to improve the efficiency of coin circulation and we plan to progress this,
using the second report to give an update.
3.3.4 Immigration
According to the Office for National Statistics, the number of people immigrating
to the UK rose from around 400,000 pa in 1998 (around 1% of the UK adult
population) to around 600,000 pa in 2007 (around 1.2% of the UK adult
population), while the numbers emigrating rose from around 250,000 pa in 1998
to around 350,000 pa in 2007. Given migrants are less likely to have access to a
full set of payment services, it seems reasonable to assume that many
immigrants are heavier users of cash than an average citizen, so that net
immigration into the UK may have stimulated the use of cash slightly.
3.3.5 Review of the note circulation scheme
The Bank of England has in hand a review of its Note Circulation Scheme; to the
extent feasible, we will comment on developments in the second report. It will be
a few months before any changes are finalised, but potential changes include a
greater emphasis on increasing the number and quality of £5 notes in circulation
and aligning NCS arrangements more closely with the Bank’s denominational mix
policy.
This has potential to reduce the demand for higher denomination coin to an
extent which is modest but potentially significant in its impact on the demand for
new coin. It might also lead to some reduction in the demand for £10s and £20s.

Section 3
Separately the Bank has established the new arrangements for backing S&NI
banknotes. Coin can be used to back S&NI notes, even if located in England or
Wales, and this could impact aspects of the economics of storing and processing
coin.
3.3.6 Counterfeiting
It is key to the effective circulation of cash that people have confidence in the
notes and coins they receive. The loss from accepting a counterfeit falls entirely
on the person who last accepted the fake, so the impact on individuals is quite
sharp (compared to card fraud, for example, where the values are much higher
but the losses are borne by banks). Consequently, issuers take counterfeiting
very seriously, recognising that any threat to confidence in a denomination could
have much wider consequences than would be indicated by the overall size of
the counterfeiting crime. Issuers are at pains to ensure that police forces are
aware of this and give appropriate emphasis to tackling counterfeits.
In the UK most counterfeit currency is made by organised criminal gangs. Thus

the issuers work closely with the Serious Organised Crime Agency to support
their work to stop or disrupt counterfeiting. In other countries, amateur or small
scale opportunist counterfeiting is more prevalent than in the UK. Counterfeiters
seem not to engage in other types of payments fraud, so there would seem to be
little synergy to gain from linking anti-counterfeit work more closely with
anti-fraud work.
Number of counterfeits discovered in circulation (000’s)
Image courtesy: Bank of England.
The Bank of England publishes data on counterfeits of its notes (see chart
above). In 2008 the number of counterfeit notes removed from circulation as a

Section 3
percentage of genuine notes in circulation was 0.03%15. The face value of

15
Details can be found
at http://
counterfeits discovered in 2008 was £14 million (compared to some £46 billion in
www.bankofengland.co.
circulation); the Bank expects figures for 2009 to be around 20% lower. The
uk/banknotes/about/
majority of counterfeit notes are of the new style Adam Smith £20 note. Few
counterfeits.htm
fake £50s are found, but public unfamiliarity with that note leads to a higher level
of suspicion than is objectively merited on grounds of avoiding a counterfeit. 16
See Freedom of
The Bank of England has extensive material publicly available so that people can Information release
find out how to check if a note is genuine. http://www.hm-
treasury.gov.uk/d/
Counterfeits of Scottish notes have a face value of £1m-£2.5m pa. foi_poundcoins_narrativ
e.pdf> http://www.hm-
Overall levels of counterfeit notes in the UK tend to be modestly higher than in treasury.gov.uk/d/
most comparable countries. The UK appears to have a higher skill base among foi_poundcoins_narrativ
its counterfeiters. e.pdf
Seven of the Royal Mint’s eight denominations of circulating sterling coin are not
subject to much counterfeiting. There are isolated, small scale instances of low
quality counterfeits being found in circulation (for example, made of lead and
then painted). Some foreign coins match the dimensions of certain sterling
coins, leading to difficulties for machines in identifying the fakes. There have
been some attempts to counterfeit the £2, but to date they have been
unsophisticated. The £2 is a bimetallic coin; more sophisticated counterfeits of
the bimetallic €1 and €2 have been seen in the eurozone. None of these seven
denominations is yet subject to systematic surveys for counterfeits.
By contrast, levels of counterfeit £1s are surveyed twice a year: currently around
2.6% of £1 coins in circulation are fakes16. This level of counterfeits is high by
international standards. Currently, there is no plan to upgrade the £1 coin;
though for as long as the £1 counterfeit situation is contained, this seems to be a
viable stance.
For a member of the public, establishing whether a coin is genuine is not as easy
as for a banknote (nor is there as much value at stake). Notes have several
features which can be checked in a few seconds. Checking a £1 coin quickly by
hand does not usually identify a counterfeit: they are usually manufactured to a
high enough standard to pass such a test. A majority of £1 counterfeits can be
detected in coin centres by checking the electromagnetic properties of the coin’s
alloy. The remaining £1 counterfeits are sufficiently similar to the real thing that
they are undetectable by coin centre sorting machines. They can be reliably
detected by individual expert examination, checking whether the designs on the
face, obverse and edge are a combination issued by the Mint (there are 28
legitimate combinations that the Mint has issued, but 5040 theoretically

Section 3
available); the poor quality of manufacture can also betray a counterfeit. £1

coins pass through cash centres at the rate of around 3 billion a year: manual
expert checking would be impracticable.
The growth in £1 counterfeit levels
3.00
2.58 2.52 2.64
2.22
2.50
1.96 2.06
1.69
% Counterfeit
2.00
1.46
1.26
1.50
0.92 0.92 0.98
1.00
0.50
0.00
08
07
08
09
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06
07
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Image courtesy: The Royal Mint
During 2007/2008, CDWP members engaged with the Royal Mint to draw up and
implement an enhanced regime for checking for counterfeit £1s passing through
cash centres. At the same time, the police became more successful in closing
down counterfeit manufacturing and distribution facilities. These enhanced
resources, supplied at significant cost, slowed the growth as shown above. It
seems likely that such a level of checking will have to be sustained for the
foreseeable future, incurring costs which impact adversely on the usual
economics of circulating coin. These costs fall on the individuals and retailers
who accepted the fakes at face value, while operating costs fall on coin centres
and police forces.
It is generally accepted that if £1 counterfeit levels start to rise again, a new

design of £1 coin with enhanced security features should be introduced. Already
there is routine media coverage of the presence of £1 counterfeits, but public
confidence has held up adequately so far. If that were eroded, a new design
would be issued, one which is harder to counterfeit, and where it is easier reliably
to identify real from fake. This would place a significant cost burden on the
public purse, and a lesser one on CDWP members and the public in supporting
the changeover. Such a programme would take several years to implement; this
could be shortened if there were available an agreed design for a new £1 coin,
and an agreed plan for introducing it. The Royal Mint is about to add to the

Section 3
bi-annual survey by monitoring media coverage and consumer and retailer

confidence; it is also planning to analyse returned counterfeits to identify
specific ‘series’ that can help in identifying new counterfeit operations.
It is recommended that designs of new higher denomination coins with enhanced

security features should be developed and evaluated, and a plan prepared for
their introduction and the withdrawal of the old versions. This is recommended as
a precautionary measure, but is potentially likely to arise within the ten-year
horizon of this report. In the second report we will comment on progress with this
planning. Any decision on whether to introduce a new high security £1 coin would
be for the Treasury after taking advice from the Royal Mint.
3.3.7 Economic conditions
The changed economic conditions since the start of the financial crisis in August
2007 have probably impacted the circulation of cash in a number of ways, most
of which will have stimulated the use of cash:
 grey economy: possibly the largest but most difficult to quantify is the extent
to which, faced with harder economic times, people or businesses prefer to
receive cash for goods or services where the subsequent accounting for VAT
or other tax can be less rigorous than previously. The velocity of circulation
of £20s has dropped recently, indicating that they are spending more time
outside the known channels of cash circulation, or being hoarded;
 store of state-backed value: there is evidence from the Bank of England’s

data on notes in circulation that some increased demand for £50s has been
from customers using the notes as a store of value;
 budgeting: many people do find that, faced with budgetary pressure, it is

easier to budget with cash: a week’s cash can be withdrawn, and during the
week can easily be counted and compared with the amount of the week
remaining. This would impact most denominations of notes, and all coin.
However, there are some who find it easier to budget with cards, as the
precise amount for a transaction is paid: these cardholders find that cash
change is too easily spent.

Section 4
4. Trends expected over the next ten
years
4.1. Forecast cash transactions and withdrawals

The Payments Council’s 2009 forecast for cash transactions shows a continuing
gradual decline in the volume of cash payments, but approximately stability in
the value of cash transactions in nominal terms:
Forecast Cash Payment Volumes and Values
25 300
20 240
Volumes billions
Values £ billions
15 180
10 120
5 60
0 0
2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018
Volumes Values
Source: Cash and Cash Machines 2009
As indicated above, these forecasts could be lower if prepaid cards become more
popular than forecast. If contactless cards become more popular than forecast,
there would likely be more of an impact on the volume of transactions than their
value (with particular potential to impact the demand for coin). During this
period, the reliance on ATMs as the main channel for the acquisition of
banknotes is forecast to increase: in 2018, 82% of the cash acquired by
individuals is expected to be dispensed by ATMs, compared to 71% in 2008.
Forecast sources of cash for individuals
300
250
Values £ billions
200
150
100
50
0
2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018
ATM State benefits/w ages/other
Cheque/passbook Other card
Cashback

Section 4
The amount of cash dispensed by ATMs is expected to stabilise at around £217bn

in 2015, compared to £192bn in 2008. This forecast could be impacted if
contactless cards take off quicker or more slowly than expected.
Card withdrawals at branch and post offices counters are expected to remain a
significant source of cash as they enable the withdrawal of large amounts, or odd
amounts.
These forecasts address the known uses of cash but, as indicated above, there is
a significant usage of cash in the black economy for which, unsurprisingly, there
are no established forecasts.

Section 4
4.2. Forecast for cash: customers and technologies

4.2.1 Forecasts for individual customers
The picture here is probably one of general continuation of current trends, but of
certain sectors changing considerably faster than others. There is no imminent
revolution that we can see ahead.
Teenagers are heavy users of cash. Cash is a payment method which is easy to
use, convenient for parents to supply and simple for budgeting. As today’s
teenagers grow towards more diverse use of payment instruments, tomorrow’s
teenagers may well continue to prefer cash. The main alternative would be
pre-paid cards, where value can be stored, and payments made in a wide range
of internet and retail locations.
Older people are also heavy users of cash: 18% of the 10 million people aged 65+
use only cash when shopping. Cash is a payment method which is easy to use,
familiar and simple for budgeting, even for those who have a debit or credit card
available. The use of cash by older people seems likely to erode only slowly and
this development may be balanced by the general ageing of the population.
Cash usage is stronger in the north of the UK than in the south. It is also stronger
among socio-economic classes D and E, and among those on low incomes (below
£10,000 pa). Many of these are receiving their income through state benefits,
and may well continue to be heavy users of cash unless and until positively
encouraged to do otherwise.
Nonetheless debit card usage will continue to grow, possibly aided by any
availability of debit cards on basic and Post Office accounts. Contactless
transactions, if they become popular, have considerable potential in the long
term to impact the volume of cash transactions. Prepaid transactions might
start to impact volumes and values. Overall, there is a prospect of significant
change in certain pockets of the cash market.
In summary, from the consumer perspective, current trends indicate a further

gradual drift towards cash being used by those who are poorer than average;
more likely to be in receipt of state benefits or pensions than typical; older than
average, or teenagers; and living towards the north of the UK. Thus the prospect
is for a continuing gradual drift towards cash being disproportionately used by
those who are less intensive users of banks, or are not customers of banks.

Section 4
4.2.2 Forecasts for business customers

Many large businesses, and all internet retailers, do not use cash; it is unlikely
they will change that practice. Other large businesses – retailers, for example –
will continue to develop their cash handling operations. Increased deployment
of self check-out tills could well continue; as most of the cash that is spent is
spent on food is at supermarkets, this could well be a significant trend, with
implications for the need for CIT and cash processing services.
Other retailers – those where the volume of transactions does not favour
self-check out tills – may well continue to see the continuing drift to debit card
transactions, augmented, where relevant, by contactless transactions. The
chains of fast food outlets, coffee shops and newsagents may well be in the
forefront of deploying contactless technology. For contactless to become
well-established, the business case needs to work for all those involved. The
prize for acquirers is considerable, if a cash transaction (which of itself brings no
revenue to banks) can be converted to a transaction which produces an
adequate revenue. The cost savings for retailers and the increased convenience
(if any) to customers will all be relevant factors, but this will be offset if
retailers have a higher cost for non-cash transactions.
One exception will be transport operators, where the success of London

Transport’s Oyster Card could well lead to more of them adopting cashless
ticketing. This could be tied to other contactless or mobile technologies. This
could lead to local disruptions in the flow of coin, but the introduction of the
Oyster card proceeded without noticeable impact on the demand for coin, and
other deployments would probably do likewise, for the foreseeable future.
Among small businesses, one of the most cash-dependent sectors is the corner
store selling confectionery, newspapers, tobacco and maybe some groceries.
For these, a cash transaction might seem free, and the slack period in each day
can be spent by counting cash for banking. For them, cash handling may be a nil
or small cost whereas contactless cards, with attendant fees to be paid to the
acquirer, may appear as an extra cost.
As described in section 2.1.2, in recent decades cash has increasingly moved

from local, manual handling to large scale, industrialised processing. This can be
expected to continue, and to grow, but at a slower rate as the flow of cash
processed through cash centres approaches the value of transactions in the UK.
The total value of cash transactions in the UK is the total known to the Payments
Council plus the unknown amount in the grey and black economy: logically, the
total dispensed by cash centres cannot exceed this.

Section 4
The related question would be the impact on Notes in Circulation. Their growth
has been driven partly by the same move to industrialise the cash circulation
system; to the extent that this becomes complete, this impetus for increases in
NIC will diminish. Another factor will be the deployment of note handing
machines: for example, if more ATMs move from branch-fill to CIT-fill, probably
more NIC would be needed to support the increased countback; another example
could be the deployment of self checkout tills at retailers, which might require
greater stocks of £5s and £10s than the equivalent manned checkouts. A further
variable influencing NIC would be the demand for cash in the grey and black
economy. The final unpredictable factor influencing NIC will be attitudes to
holding stocks of notes by consumers, businesses and foreigners.

Section 4
4.3. Other potential variations from expected trends

The trends outlined above set out what is expected if they continue. This section
covers some of the more plausible deviations from expected trends; they are
unpredictable as to impact or timing.
The main one is the possibility that customers acquire a habit of storing more
banknotes than before the financial crisis, so that the increased level of
circulation of the £50 becomes permanent. To some extent this would apply to
the £20 also; but for the £20 (and potentially for the £50) a larger factor could
be whether people use the black or grey economy more than previously, and that
is unpredictable. Related factors would be the interest rates that those funds
could earn on deposit, and the return of public confidence in deposit-takers.
Another issue might arise when, as planned, the Bank of England implements
measures to stimulate the circulation of its £5. This could have some impact on
£10s and £20s in circulation, and maybe on high denomination coin.
For coin, the main unexpected scenario would be a collapse in public confidence
in the £1. The £1 is the UK’s main coin in circulation by value, and by throughput
at coin centres. Already the levels of counterfeits seen are a burden to some
businesses. If they moved to decline to accept £1s, while accepting other
denominations, the pressure on the availability of other higher denominations
could be marked.
For coin, another unexpected scenario would be a significant decrease in coin

hoarding by the public, leading to decreased demand for new coin. This could be
exacerbated if contactless transactions develop to a level that reduces retailers’
demand for coin.
Overarching all these are the charges levied for cash services, and the charges
for non-cash payments: these are generally zero for consumers, but businesses
are likely to be sensitive to the level of charges for cash services, as well as how
they compare with other payment types.

Section 4
4.4. National Payments Plan

Most of the points where the future for cash is impacted by the National
Payments Plan (NPP) are set out above, and are summarised here for
convenience. For some of them, the NPP is instrumental in delivering change,
while it is in more of a supporting role in others.
Cheques: the closure of the cheque clearing, currently planned for 2018, is
expected to have a small or imperceptible effect on the circulation of cash.
Credit Clearing: this is under review, with the prospect it might close when the
cheque clearing closes, or before. Current expectations are that there will be no
impact on cash.
Contactless Cards: if these become well-established, they will come, over a

decade or two, to impact the number of lower-value cash transactions but are
unlikely to have as much impact on the amount of cash in circulation, or the
amount of cash to be processed. The payments profile of those retailers that
have a large proportion of contactless transactions will change, though for most
retailers contactless will have a less significant impact. Eventually any growth of
contactless could reduce the demand for coin, particularly new coin.
Prepaid cards: the introduction of the closed loop prepaid Oyster Card has not
noticeably impacted the circulation of cash, indicating that further prepaid
developments will be have to be quite large if they are to be perceptible from the
cash perspective.
Education and Financial Inclusion: the NPP work on education and financial
inclusion should include materials on how to recognise genuine notes and coin;
drawing on existing sources.
Review of the NPP: the NPP will be reviewed after three years, and its next
version could have more coverage of cash issues.

Appendix 1. Members of the Strategic
Cash Group
Andrew Bailey Bank of England (Chairman)
Lee Dobney Bank of England
Steven Roberts/Elaine Draper Barclays Bank PLC
Ian Nisbet G4S Cash Services (UK) Ltd
Graeme Donald Lloyds Banking Group
Sarah Tebbutt HM Treasury
Colin Painter HSBC Bank plc
Keith Rann Post Office
Stephen Green Santander
Martin Bull The Royal Bank of Scotland plc
Andrew Stafford The Royal Mint
Andrew Mills The Royal Mint
Geoff Smith Vaultex UK Ltd
Paul Smee Payments Council
Andrew Wallace Payments Council (Secretary)

Appendix 2. Diagram of the circulation
of notes and coins in England and Wales
Note distribution and processing model: Flows

Schematic diagram of coin flows between banks, carriers, retailers, etc, and
general public

Appendix 3. Volume and value of
payments above £1 by sector (UK)
Volume (millions) pa Value (£millions) pa

Total of which Cash Total of which Cash
Supermarkets 7,282 4,034 139,943 45,992
of which: Goods 6,738 3,901 124,096 43,044
Petrol 544 133 15,847 2,948
Other Food/Grocers Shop 1,318 1,205 7,904 5,947
Department/ Variety Stores 816 401 17,730 3,978
Clothing Shop 567 242 11,905 3,150
Shoe Shop 98 41 2,040 543
Furniture/Household Equipment Shop 133 47 9,861 1,939
Chemists 475 316 3,942 1,691
DIY Shop 336 165 7,765 2,220
Electrical/TV/Radio Shop 73 24 6,056 1,003
Confectioner/Tobacconist/Newsagent 1,110 1,021 5,538 4,153
Jeweller 34 20 2,371 267
Off-Licence 170 153 1,405 1,070
Other Shop 2,399 1,731 36,343 13,498
Internet Only 163 …. 5,348 ….
Total Mail Order 110 28 4,208 805
Total Retailers 15,085 9,428 262,359 86,256
Garages 540 318 26,940 5,426

of which: Petrol 360 217 15,465 4,077
Maintenance 43 16 6,420 940
Vehicle Purchase 15 0 3,907 11
Other 121 84 1,148 398
Hotel/ Guesthouse 102 43 7,841 1,084
of which: Room bills 44 9 5,099 554
Eating and drinking 39 28 1,284 413
Other 18 7 1,459 117
Travel Agents 42 8 17,275 2,600
of which: Holidays 26 1 11,352 741
Travellers Cheques/Foreign Currency 5 4 4,012 1,784
Other 12 3 1,911 75
Airline, Railway, Bus, Coach, Taxi, Car Rental Company 855 708 23,486 3,957
of which: Tickets 789 658 15,818 3,248
Holidays 8 1 1,850 176
Other 59 49 5,819 533
Total Travel/hotel 1,539 1,078 75,542 13,067
Cinema/ Theatre/ Concert Hall 243 157 4,594 1,455

Restaurant/ Cafe/ Snack Bar 1,779 1,494 30,027 11,515
Pub/ Club/ Bar 988 882 22,788 9,385
Other Leisure Outlet 722 590 17,443 5,489
Continued...

Total Entertainment/Leisure 3,732 3,124 74,852 27,843
Banks/Building societies 289 51 109,838 6,797

of which: Repayments (loans/cards)2 158 23 21,368 2,553
Savings and Investments2 89 21 42,791 3,606
Other2 42 7 45,678 638
Other financial organisations 555 254 102,155 16,108
of which: Repayments (loans/cards)2 167 19 19,925 832
Savings and Investments2 22 3 64,290 9,984
Other2 366 232 17,940 5,292
Total Financial 844 305 211,993 22,905
Any Other Organisation 1,399 888 68,849 12,651

Any Other Individual 814 610 45,996 13,533
Total Any Other Organisation or Individual 2,213 1,498 114,845 26,183
Total 23,413 15,432 739,592 176,254
Data not available due to unreliability, a result of figures calculated using 25 or

fewer payments recorded by respondents.
Source: Payments Council, UK Consumer Payments 2009

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The Future for Cash in the UK

The initial report of the Strategic

Appendix 1: Members of the Strategic Cash Group 43

02 I The Future for Cash in the UK

03 I The Future for Cash in the UK

 it being a general medium for the settlement of transactions;

1. Cash circulates. It is as important for the well-being of the economy that

 because of its ‘bearer’ status, cash needs to be protected securely at all

04 I The Future for Cash in the UK

 cash is a non-interest bearing asset – consequently considerable

5. Once issued, the circulation of cash is uncontrolled. The rules of a

6. It is regarded as a public good by its users. It should be readily available at

05 I The Future for Cash in the UK

The UK is unusual in having multiple issuers of currency. Cash in the UK is issued

Since 23 November 2009 the issuance of banknotes by the seven commercial

06 I The Future for Cash in the UK

Selected UK Payment Volumes and Values

Cash 22.6 267

Debit Cards 5.4 241

Credit/Charge Cards 2.0 139

Direct Debits 3.1 935

Direct Credits* 2.4 3000

Cheques 1.4 1429

Value transported by G4S, around 700

* Including internet and telephone banking

Consumer Cash Payments by Value Band

07 I The Future for Cash in the UK

Consumer Cash Payment Volumes by Sector

Percentage of all consumer spending (value) by cash in selected sectors

Travel & Entertainment

0% 10% 20% 30% 40%

08 I The Future for Cash in the UK

Cash Payments per week per adult in each demographic group

 young adults (age 16 – 24) or older adults (age 65+)

 lower household income

 Northern (comprising around 25% of the population in Scotland, North East or

09 I The Future for Cash in the UK

There are distinct patterns in the acquisition of cash by businesses and

 some businesses (e.g. vending machine operators, bus companies outside

 some businesses (ranging from doctor’s surgeries to manufacturers and

 consumers predominantly withdraw their cash from cash machines, as shown

The acquisition of cash

Acquisitions Value Acquired

ATM Withdrawal 2,862 79 190,101 74

Benefits in Post Office 228 6 27,658 11

Plastic Card at Counter 65 2 12,731 5

Business/Employer 124 4 10,134 4

Cheque Encashment 48 1 8,881 3

Cashback 260 7 6,695 3

Total 3,634 100 256,836 100

10 I The Future for Cash in the UK

2.1. Historic demand for notes 6

 the Bank of England (which aims to have an appropriate mix of notes in

Consumers and retailers in England and Wales are particularly dependent on a

11 I The Future for Cash in the UK

Wales. Currently there is a widely-held view that £5 notes are disproportionately

 from small-scale High Street outlets depositing their takings frequently at a

12 I The Future for Cash in the UK

 self check-out machines deployed at supermarkets and other retailers, where

 coin accepting machines, both those deployed by Coinstar (which give

 note accepting machines deployed by banks, which give value by crediting a

2.1.2 Demand for notes as a store of value

13 I The Future for Cash in the UK

Scottish notes in circulation