In Reply to John Doyle’s “War On Cash”​ Blog (www.thepaymentsbusiness.com/the-war-on-cash)

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In Reply to John Doyle’s “War On Cash”​ Blog (www.thepaymentsbusiness.com/the-war-on-cash), I would respond as follows.

John Doyle CEO of The Payments Business (www.thepaymentsbusiness .com) makes some interesting points in his blog “The War on Cash” www.thepaymentsbusiness.com/the-war-on-cash. However, I would add that there are a number of further consequences regarding the decline of the use of cash at the point of sale in the High Street, which have had some adverse effects on the retail consumer, and the UK’s wider economy. Let me explain:

Yes; cash has declined, but not necessarily only through the use of debit card activity alone initially; more due also to the use of the huge growth over the last 20 years plus of credit cards, and the availability of large credit lines (pre-financial crisis 2007/8) offered to individual card holders by the bank issuers. It is important as regards “The War on Cash” and cash’s decline, to consider the results of this increase in credit card activity.

 This increase in larger credit card lines, and resultant increase in credit card activity came back to haunt card holders (during the financial crisis) with – in my view – ridiculously and unacceptable high APRs at 25% or 35% plus; and many of these APR levels remain so today; even though current interest rates are flat at 0.5%. What a disgrace that card holders were encouraged to use their cards more, and take advantage of the larger credit lines available, and interest free “balance transfers”, thereby getting themselves into more debt; and only then to be further surprised and “economically hit” as their very own high street clearing banks for example, pushed APRs to 30% or 40% once the interest free period on “balance transfers” was complete.

The banks themselves also erred with regards to their own implementation of “Risk Weighted Assets” re Capital required on their Balance Sheets, in order to support this “new and enlarged credit exposure.” If these same banks had undertaken their required due diligence properly, and adhered strictly to the Basel Regulations, they would have clearly understood that each unsecured credit card line incurs a 100% Risk Weighting against a bank’s Capital. Meaning; when the “proverbial then hit the fan” with the 2007/8 financial crisis, all such banks’ true Balance Sheets’ financial structure, were totally out of synch!

Witness HBOS! They collapsed; but this was not only due to overall hard-core overdrafts and mortgage exposure. It was also due to an over-indulged credit card portfolio. Let’s simply call it what it truly was and still is; “GREED” by the bank issuers! I recall the Group FD of HBOS said exactly this at the time pre-crisis, and then was promptly sacked by the HBOS Board for saying so! Sometime later, HBOS collapsed due to their poor risk implementation policy and basic stupidity; just as the aforementioned FD warned. The bank then had to be taken over by Lloyds Bank plc under the request of the then PM Gordon Brown! Some close senior colleagues of mine at Lloyds informed me at the time, that the Group did not want HBOS; but were forced to “buy it” by Brown, his Chancellor and team; and probably The Bank of England. A sort of “too big to fail” argument was no doubt deployed!

When Lloyds finally did look at the HBOS Balance Sheet, and observed the appalling state of the credit portfolio and poor risk capital adequacy deployed to support this activity, they received a real shock. Alas it was too late! They simply had to do what the Labour Government wanted at the time, and get on to manage their newly owned “can of worms” entity. 

The question to be asked is: what can we learn from this scenario? One major outcome that the decline in cash created, was a large demand for quicker and easy solutions, which meant the greater use of “electronic” type payment instruments; and which by nature of their offering (“buy now pay later”) and supposed “ social consumer status”, meant that card holders (without realising) were now more vulnerable to the larger credit offerings given to them by their bank issuers, in order for the banks to keep up with this demand. But the card holders’ perceived “status” and the issuers’ bad customer credit scoring, let the banks themselves as providers of this new “enlarged” credit environment, vulnerable too.  However, fortunately for the banks as suppliers to the consumer, could simply reduce the credit lines on the cards held, or “pull the plug”; thereby, causing severe difficulties for over indulged and cash strapped customers. The banks were additionally fortunate, as they had the UK Government as their “lender of last resort” to bail them out; when the individual card holder and retail consumer had no one!

Ron Delnevos’ article entitled: “Give Cash A Great Big Hug” highlighted in John Doyle’s blog reads well in this respect.

So yes, I agree with John Doyle that cash has declined; but as I explain above, not always resulting in a good outcome. Cheque payments have declined too at the “retail merchants” point of sale, due to the use of debit cards. However, this debit card impact is often overlooked, which is odd given that the debit card is operating as a current account payment instrument with more or less “immediate” clearance; as opposed to the cheque’s 3-day clearance cycle.

Cash has declined due to credit card usage more; but cheques have also declined due to debit card usage, and it is clear that the latter’s impact on cash has been apparent too.

 Nevertheless, however much our industry luminaries wish to replace cash completely, this will not happen in my opinion. Cash will always be required by certain members of the public and society. For example; some people are still paid in cash, others are not comfortable with the various new technical apps now available to initiate payments; and charity donations and door collections, tipping, and race-track betting – a huge industry – all require cash. This will continue for some time to come as governments and the industry regulators deem this approach economically and socially necessary; and possibly enhanced through an Act of Parliament. One positive thing for sure is that the use of cash can erase the vulnerability of credit exposure to the consumer, and also to the banks.

As the saying goes: £1 income, and 99 pence expenditure = Happiness; £1 income and £1.01 pence expenditure = Misery.

I am sure many of you will have experienced the above as credit card holders. My colleagues and I at The Payments Business (www.thepaymentsbusiness.com) would be most interested to hear how you tackled these issues. Feel free to email me Eliot Heilpern Membership Director of The Payments Business at: elioth@thepaymentsbusiness.com

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