ICAEW chart of the week: Banknotes in circulation

Our chart illustrates how banknotes in circulation have grown during lockdown despite a decline in cash usage. Will the new £50 note launched on Wednesday cause a further rise?

Chart showing steady growth in banknotes in circulation from £26bn in 2001 to £69bn in 2017, followed by three flat years including £70bn in 2019, before a jump to £80bn in 2021. The latter comprised £18bn in £50 notes, £45bn in £20 notes, £15bn in £10 notes and £2bn in £5 notes.

At 28 February 2021, there were 357m paper £50 notes worth £18bn, 2,237m polymer and paper £20 notes worth £45bn, 1,540m polymer £10 notes worth £15bn and 407m polymer £5 notes worth £2bn – a total of £80bn in circulation. This excludes around £8bn in Scottish and Northern Irish banknotes and in the order of £5bn in coins.

With around 60m people in England and Wales (as Scotland and Northern Ireland have their own banknotes), this is equivalent to approximately six £50 notes, 37 £20 notes, 26 £10 notes and seven £5 notes per person. Of course, not all of these are in purses, wallets or stuck down the back of sofas – many live in cash drawers and safes at high street banks, retailers and other businesses, as well as a certain proportion that have migrated around the world.

There has been some speculation about the reasons for the jump in cash holdings during the pandemic, which appears counterintuitive given the significant decline in cash usage as contactless and online payments have become more popular. Part of this may be hoarding in the context of a national emergency, while others have speculated that criminal enterprises have struggled to launder cash at a time when many retail businesses have been closed. Another potential driver is the crossover between the old and new £20 notes, with the polymer £20 launched in February 2020 while the paper note it replaced is still in circulation. With the announcement that both £20 and £50 paper notes will be withdrawn in September 2022, there is likely to be a flood of cash coming back to the Bank of England next year.

The new Turing £50 note completes the changeover from paper to polymer, joining the Churchill £5, the Austen £10 and the Turner £20 polymer notes. The Adam Smith £20 note and the Boulton-Watt £50 note are the last paper notes still in circulation.

Speaking at Bletchley Park, where Turing carried out his famous codebreaking work, Bank of England Governor Andrew Bailey said: “Our banknotes celebrate some of our country’s most important historical figures. That’s why I am delighted that Alan Turing features on the new polymer £50 note. Having undertaken remarkable codebreaking work here at Bletchley Park during the Second World War, he went on to pioneer work on early computers, as well as making some ground-breaking discoveries in the field of developmental biology. He was also gay and was treated appallingly as a result. Placing him on this new banknote is a recognition of his contributions to our society, and a celebration of his remarkable life.”

More information on banknotes is available from the Bank of England.

This article was originally published by ICAEW.

Plastic is the future for cash – one way or another

22 September 2020: Physical cash use is declining fast, leaving the fixed cost base for processing cash transactions at risk of stranding. As cards and digital forms of payment become more prevalent, what will happen to those who still need access to cash?

The National Audit Office (NAO) issued a report on 18 September 2020 on the production and distribution of cash. It looks at what the Bank of England, the Royal Mint, HM Treasury and financial regulators are doing in response to a 59% decline in the volume of cash transactions between 2008 and 2019, as well as efforts to improve the efficiency of cash production and reduce counterfeiting.

According to data from UK Finance, cash payment values fell from £267bn in 2008 to £141bn in 2019 and were (prior to the pandemic) forecast to fall to £59bn by 2028.

Coin production has fallen significantly, with 383m coins manufactured for circulation in 2019-20 compared with 1.1bn in 2010-11. Notes in circulation have continued to increase (to 4.4bn notes with a monetary value of £76.5bn in July 2020), but only around 20%-24% of these are used for cash transactions and 5% used for savings, leaving over £50bn whose location is uncertain – a point which the NAO believes deserves further investigation.

A key finding from the report is that there is no single body in government responsible for overseeing how well the cash system is performing, despite the establishment of a Joint Authorities Cash Strategy Group (JCAS) focused on access to cash for those that need it, in particular for the million or so UK adults who do not have a bank or building society account.

The UK’s entire cash infrastructure across the public and private sectors is estimated to cost around £5bn a year, with many of these being fixed costs that with declining usage are putting pressure on the cash system. 

The number of ATMs fell by 12% over the two years to December 2019 to around 60,000, with a fall of 17% in the number that were free-to-use to around 45,000. The Payment Systems Regulator (PSR) has been working with the industry to maintain free-to-use ATMs in geographic areas where provision is most limited, although the NAO recommends greater attention is given to more deprived areas.

Demand for notes and coins declined by 71% between early-March and mid-April 2020 during the COVID-19 lockdown but has since recovered. The NAO believes it is still too early to assess the longer-term impact on cash access and usage but moves amongst some retailers to suspend acceptance of cash during the pandemic could further accelerate the switch to non-cash forms of payment.

The NAO is positive about the steps the Royal Mint and the Bank of England have taken against counterfeiting. In 2016, about one in 30 £1 coins was a counterfeit, but surveys since 2018 have found very low counterfeiting rates for the new £1 coin. The introduction of the polymer £20 note, traditionally the denomination favoured by counterfeiters, should also help reduce the cost of fraud to consumers and businesses.

The Royal Mint reported a reduced loss of £3.9m on its coin-making activities in 2019-20, with actions to improve efficiency including a 22% headcount reduction within its currency division and the mothballing of two of its six plating lines. The Bank of England has also worked with De La Rue to improve efficiency, albeit each polymer banknote costs 60% to 80% more than a paper one, even if they are expected to last at least 2.5 times longer. 

The NAO recommends that HM Treasury takes another look at the roles and responsibilities of the bodies involved in the cash system, setting out more clearly the specific outcomes it wants to deliver for consumers and small businesses and how this should be balanced against the cost of doing so. It also believes that a plan is needed to take action if some groups become left behind as the cash system changes.

Martin Wheatcroft FCA, adviser to ICAEW on public finances, commented: “The NAO has provided some extremely useful insights into how the UK’s cash system is coping with declining usage and it makes a number of sensible recommendations for improvements. 

“However,” continued Wheatcroft, “the report does not answer the more fundamental issue of whether cash has a long-term future at all, and in particular whether the multi-billion costs of running cash and other legacy payment systems could be better deployed.

“Ultimately, is it now time to look beyond a managed decline of the cash system and explore more radical options?”

Front cover: NAO report 'The production and distribution of cash'. Click on the image to go to the NAO website.

This article was originally published on the ICAEW website.