The Big Question: Is the relentless march towards a cashless society a good thing?

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The Independent Online

Why are we asking this now?

The Payments Council predicted yesterday that banknotes and coins will be used for fewer than half of all transactions within five years. The Way We Pay 2010 report revealed that the use of cash has slumped in the past 10 years. Instead we're using plastic, with chip and pin and contactless cards set to dominate payments in the future.

According to the report, debit card usage has climb fourfold since 1999 – four times as fast as spending. Mike Bowman, head of policy and markets at the Payments Council, said: "Although cash won't disappear in our lifetime, the continuing payments revolution will make it an ever smaller part of our spending."

But everyone still uses cash don't they?

Only for small amounts, it seems. The Payments Council said that while 21 billion consumer payments were in cash last year, four-fifths of them were for amounts less than £10. Meanwhile for regular commitments, such as bills, cash has plummeted from 19 per cent of all payments in 1999, to just nine per cent last year. The number of people being paid in cash-in-hand has also shrunk, from one in eight in 1999 to just one in 20 in 2009. Even the tradition of waving a fiver or tenner in a boozer for service is disappearing as just 40 per cent of pub spending now involves cash, compared to 90 per cent a decade ago.

What about cheques?

They are set to disappear altogether. The Payments Council has suggested they be phased out by 2018. In evidence they point out that the use of the cheque book has been in steep decline since 1990 as people choose quicker payment methods. Last year, just 0.8 per cent of retail transactions were made with cheques. The Payment Council's 1999 prediction that just over one billion cheques would be used by individuals in 2009 proved to be almost twice as much as the actual number written, which was just 577 million.

The disappearance of the cheque is a contentious issue, particularly with older people. Michelle Mitchell, Age UK charity director, warned: "The withdrawal of cheques would cause serious difficulties to some older people who don't feel comfortable with the chip and PIN system and don't like carrying around big amounts of cash," she said. "We urge the next Government to ensure the use of cheques is guaranteed until alternative payment methods are in place which older people feel comfortable with."

However, pensions and benefit payments have already largely made the switch from cash. Ten years ago, 87 per cent of state benefits were paid in cash, whereas today 79 per cent of payments go directly into bank accounts.

How are people paying for things without cash or cheques?

Plastic cards and online banking is the modern way to pay. Since the introduction of chip and pin, the debit card has become the most popular way of paying, quadrupling in a decade to £264bn-worth of payments last year. Mike Bowman said: "Since chip and PIN speeded up transactions, it's become socially acceptable to buy small items by card now, for example in a sandwich shop or a pub. Now there are no fiddly bits of paper and time-consuming signatures and there's no tutting from the queue behind."

There'll be an estimated £6bn in debit card payments in 2010 and by 2018, one in four of all transactions is forecast to be made on a debit card, up from just one in 20 in 1999.

Even that could prove a conservative estimate as contactless cards make it even easier to pay, encouraging more to use plastic for everything from newspapers or sweets, to bigger-ticket items such as TVs or computers. Millions in London already successfully use contactless Oyster cards which just need to be waved over a 'reader'.

Contactless payment for small purchases has the potential to drive debit card usage even higher. There's a huge opportunity for us to replace billions of these with a quick swipe past a card reader, said Bowman.

Aren't the big banks simply encouraging the switch to plastic to boost their profits?

According to analysts at McKinsey, a move to a cashless society could save European banks between £45bn-£90bn a year. That's because the process of handling cash can be expensive as it needs to be transported from shops, garages, hotel and restaurants and so on to banks. That's labour-intensive and expensive in terms of security. Cheques, too, are expensive for the banks to handle, with one estimate putting the cost of dealing with every cheque at 50p, as they, too, need to be physically moved from retailers to banks and between banks.

A switch to card payments cuts out all the physical movement and vastly reduces the security costs. There's no doubt that companies involved in sorting out payments are set to boost their profits. These are not the high street banks but companies such as Visa and Mastercard which process payments. They profit at both ends, charging the banks for their services and charging retailers per transaction.

Credit cards are charged at between 1-2.5 per cent of the cost of the transaction while debit cards cost shops and other a flat fee of between 10p and 40p per payment.

So retailers will be hit by the switch?

Small shops in particular have to pay more for plastic cards as they don't have the bargaining power of the big high street retailers.

With a chip and pin machine costing a small shop owner £100 rental a year and £30 a month, many would still prefer to use cash. The high charges are why you'll often see signs declaring that there'll be a 50p charge or so for a debit card use below certain amounts. The cost of processing the plastic could otherwise mean the retailer making a loss on small items, such as sweets and papers.

Does that mean that cash won't totally disappear?

Yes. Many firms will continue to prefer being paid in cash and many people will prefer using it. In other words, people power will win out. Ron Delnevo, managing director of ATM network Bank Machine, said: "Cash is here to stay because – despite dubious tactics used by the Card schemes to force us into electronic payment methods – the British public simply won't be told what to do."

In other words, as long as there is a demand, there will still be cash. The same is true of cheques. Despite the Payment Council's 2018 deadline for cheques, if enough people continue to use them, the finance industry and shops and firms will continue to support them. The bottom line is that they want your money, in whatever form you choose.

Is plastic the best way to pay?


* It's the most convenient method of paying

* It's the quickest way to pay and is getting faster with contactless cards ending the need to use a pin

* It's the most secure way to carry money. If cash is stolen you'll lose it: with cards you won't normally be eligible for losses


* Cash is quicker for day-to-day purchases. Handing over £1 for a paper is faster than getting out the plastic

* Many businesses won't accept plastic cards. Street markets, collections, and whip-rounds demand cash

* There'll always be times when plastic won't do – money from the tooth fairy, or pocket money, for instance

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