NoteMachine response to HM Treasury’s Access to Cash: Call for Evidence November 2020
1. NoteMachine welcomes the opportunity to submit written evidence to this call for evidence as it has been campaigning for several years to protect access to cash, particularly free access, in the UK. NoteMachine is fully engaged with officials, regulators, industry and consumer groups on this issue.
2. There is a mass market for cash in the UK in that it is important for everyone, not just the elderly and vulnerable. Pre-Covid-19, around 43 million distinct cards withdrew money from ATMs across the UK every month, assuming a card per person, which means approximately two-thirds of the adult population still regularly used cash. At the height of the first wave, around 20 million cards were still being used to withdraw cash despite the national lockdown and footfall being down by more than 80%.
3. Now more than ever, cash is a lifeline for the vulnerable and those most impacted by the pandemic. Cash is essential for those needing others to shop on their behalf, whether elderly, vulnerable or self-isolating. Cash, and particularly ATMs, are also vital in rural areas which have an older population and where alternative facilities may be inaccessible. Finally, careful budgeting, which is easiest with cash, is critical for employees, the self-employed and sole traders. This becomes more important in the context of significant financial uncertainty.
4. Cash is also a vital driver for local economies and, as such, should be considered a key part of the economic recovery. Local economies will not recover without cash. Cash provides local liquidity, and with footfall currently restricted in large towns and cities few things are so important. Similarly, local retailers need cash to reduce other costs in their business, such as card processing fees.
5. NoteMachine fully supports the government’s commitment to legislate to protect access to cash but urges it to act immediately or else risk the UK’s cash infrastructure collapsing altogether, which would be irreplaceable once gone. As part of this, it is essential government and / or regulatory action considers protecting and maintaining the UK’s free to use (FTU) ATM network which dispenses circa 90% of UK consumer cash.
6. NoteMachine and other Independent ATM deployers (IADs) are keen that government and regulators recognise the crucial role that IADs play in easily providing widespread access to cash and the additional services they can provide for consumers e.g. deposit taking machines allow for small businesses to deposit cash locally (and more easily), keeping cash circulating within the local economy.
7. Prior to Covid-19 and its restrictions, changes to the way ATMs were funded had put the cash infrastructure in a precarious position, forcing IADs to convert machines from free to pay to use (PTU) and withdrawing machines completely in many cases. This was caused by LINK’s decision to cut the interchange fee (fees paid by banks to IADs every cash withdrawal) and move away from the independent cost study that set this fee and, crucially, accounted for trends in transaction volumes. Covid-19 and the declines and rises in cash withdrawals from implementing restrictions and then easing them, respectively, has brought the need for a volume adjustment mechanism into sharp focus when determining the interchange fee going forwards.
8. There is a simple solution to protecting (free) access to cash which does not require legislation. By funding the ATM infrastructure fairly and sustainably through changes to the way the interchange fee is set would ensure greater access to cash and a healthy and competitive marketplace within which to operate.
9. The interchange fee should be set by an independent cost assessment, thereby reflecting the costs of transactions fairly. A tiered or zonal interchange fee should also be introduced so ATM infrastructure funding is distributed fairly throughout the UK and will protect ATMs throughout all communities, despite their population and withdrawal volume levels. This would mean city centre ATMs receive a lower interchange fee, reducing risk of oversupply and encouraging deployment and / or redistribution into tertiary and rural areas.
Question 1: How can the government ensure the UK maintains an appropriate network of cash withdrawal facilities over time through legislation?
10. The government must ensure there is a sustainable economic and regulatory environment in which all market players can operate, including independent ATM deployers such as NoteMachine which play a key role in providing access to cash.
11. ATMs are an essential utility providing critical infrastructure for the UK economy. To remain free to use, this infrastructure requires a stable level of funding to ensure the utility’s costs are sustainable for a fixed period. This could be provided via an interchange fee, or similar mechanism, funded by banks to ensure their customers can access their cash. This would not require government legislation, but government could use legislation to ensure this structure is put in place, if deemed necessary.
12. With around 75% of ATM infrastructure costs being fixed, ATMs must be funded sufficiently to remain viable. However, in 2018, LINK announced a series of cuts to the interchange fee – the fee paid by banks to IADs for every cash withdrawal. Two of these cuts have taken place and a further cut was scheduled for January 2021. NoteMachine welcomes the cancellation of the planned final cut, but this is not sufficient to protect the network.
13. The original mechanism that set the interchange fee was considered fair and considered cash usage trends as part of its built in ‘volume adjustment mechanism.’ It would have protected the cash infrastructure as demand changed in the UK. The cost of enabling free access must reflect the volume of transactions as well as the largely fixed cost of the ATM infrastructure itself.
14. A new infrastructure funding model should be put in place which provides the level of funding required to recover fixed costs and provide sufficient return for those providing the ATM network. The cost should be agreed based on overall industry costs and a funding model to cover this should be locked in for a minimum of five years to provide stability and protect against volatility in transaction volumes.
15. The agreed level of funding to support the free access to cash network would then be translated into an interchange fee to distribute a level of locked-in infrastructure funding. A fixed element of the mechanism would recognise the cost of providing the scheme, thereby protecting the infrastructure whilst a variable element would recognise costs associated with volume.
16. Such a scheme should apply to all card schemes, not just LINK acquired transactions, to further protect the scheme from issuers ‘free riding’ but using alternative card schemes.
17. NoteMachine accepts there were some risks emerging around oversupply – particularly in city centres. To address this, a tiered or zonal interchange fee should be introduced so ATM infrastructure funding is distributed fairly throughout the UK and will protect ATMs throughout all communities, despite their population and withdrawal volume levels. This would mean city centre ATMs receive a lower interchange fee, reducing risk of oversupply and encouraging deployment and / or redistribution into tertiary and rural areas.
18. Under such a funding structure:
- NoteMachine commits to reverting over 2,500 machines back to free. If the rest of the market were to follow this would mean a total of 5-6,000 machines turning back to free.
- NoteMachine also commits to installing free to use ATMs to maintain the overall spread of these ATMs throughout the UK. This would be at no additional cost to the LINK scheme, other than changes to the interchange cost pricing mechanism outlined in this submission.
- NoteMachine will also put in place inbound cash deposit solutions where bank branches have closed or are inaccessible to smaller businesses. This will help to ensure a healthy circulation of cash in local economies, which are reeling from the social and economic impacts of Covid19.
Question 2: What is the potential for cashback to play a greater role in the provision of cash withdrawal facilities, and how can legislation facilitate further adoption of cashback?
19. Cashback, or cashback without a purchase specifically, is not a viable replacement for a properly funded ATM network which provides free access to cash. Whilst retailers may wish to provide this service, it should not be mandated via legislation or any other means.
20. Increasing the role of cashback in the provision of cash withdrawal facilities would pose significant problems for small retailers, including security concerns around keeping cash on site. ATM crime cost £6.5m in 2019 and £2.5m in 2020 to date. Small businesses exist to sell products rather than dispense cash. The latter exposes the business and its employees to personal injury as well as financial losses.
21. Cashback also poses significant logistical issues for retailers who have insufficient cash liquidity to provide this service without a significant cost burden. On the other hand, ATMs are relatively lowcost and are stocked via a streamlined process.
Question 3: How can the government ensure the UK maintains an appropriate network of cash deposit-taking facilities over time through legislation?
22. As banks withdraw services via branch closures, there is a need for new, innovative deposit-taking inbound cash solutions which fill this gap for individual consumers and SMEs and help to keep cash local, spent in the surrounding economy and therefore helping towards economic recovery.
23. Many banks operate the LIS5 intelligent deposit solution for their ATMs. NoteMachine’s intelligent deposit solution uses the VocaLink switch to process the deposit transactions using LIS5 messaging standard. The LIS5 messaging standard is already used by most financial institutions to accept / decline cash withdrawals and to accept / decline cash deposits via the Post Office. Therefore, connectivity development work for FI’s would be minimal. NoteMachine believes that all banks should be required to operate LIS5 to allow for cash deposits and enable inbound cash solutions from other providers.
24. A utility price – like the interchange fee – should also be established to fund this, so operators like NoteMachine can provide consumers and businesses with this service. A fee structure set at around 60% of bank paying in costs would allow NoteMachine to operate such a scheme throughout the UK at every location which is distant from a viable alternative. This will mostly be a service for SMEs and will be key to local economies, ensuring a smooth circulation of cash.
Question 4: What are the key factors and considerations for maintaining cash acceptance in the UK?
25. There is a growing trend, accelerated by the Covid-19 pandemic, towards retailers either not accepting cash or encouraging non-cash payments. This is despite a lack of evidence that cash is transmits the Covid-19 virus.
26. The Bank of England has said that “the risk posed by handling a banknote is no greater than touching any other common surface, such as handrails, doorknobs or credit cards” while the World Health Organisation has denied that cash, and specifically banknotes, transmit Covid-19.
27. The low cost of handling cash has been identified as a key driver for cash acceptance. However, the cost of handling card transactions is much higher, typically 30-50 pence per transaction for a retailer. As such, cash must remain a viable method for businesses.
28. Cash acceptance must remain for those that rely on cash for budgeting or other reasons, such as a lack of digital skills or access to card payments and banking. Crucial to this is also maintaining free access to cash so certain groups are not disadvantaged compared to those with alternatives to paying with cash.
29. With the above in mind, government should legislate to ensure that all retailers accept cash in order to prevent a damaging decline in cash acceptance.