Update on the future of Wholesale Cash Distribution in the UK

Public update on the work undertaken by the WDSG to develop a new Wholesale Cash Distribution model for the UK, and next steps.
Published on 15 December 2021

Executive Summary

The cash landscape in the UK is changing rapidly. Transactional cash use has fallen from over 50% of payments in 2010 to only 17% of all payments in 2020, with the trend accelerating during the Covid-19 pandemic.footnote [1] But cash remains vital for many in society. Over 5 million adults rely on cash in their day-to-day lives and cash remains the preferred payment method for 21% of the population.footnote [2] Cash is vital for the 1.2 million people who have limited access to banking services and can be an essential budgeting tool for the 3.8 million in financial difficulty.footnote [3] Importantly, cash also plays a vital contingency role for everyone when other forms of payment are unavailable or interrupted.

It is therefore critical that access to, and the provision of, cash keeps pace with the changing payments landscape. Action is needed to ensure access to cash and deposit services continue to meet households’ and businesses’ needs, and that cash remains an economically competitive payment method.

Actions to support retail provision of cash must be supported by changes to the wholesale provision of cash if the overall cash system is to be economically viable, sustainable and resilient. The current infrastructure was designed for a world with higher cash usage and cash processing volumes have fallen almost 50% in the last five years. Should this trend continue there is a risk that the current cash infrastructure could increase the costs of cash management, creating risks of disruption to consumers and businesses who need access to cash.

The continued provision of high quality banknotes is an important element of the Bank of England’s role in maintaining confidence in the currency. Therefore, in May 2019 the Bank of England convened relevant stakeholders under the Wholesale Distribution Steering Group (WDSG) to ensure that the Wholesale Cash Distribution (WCD) model for the UK is effective, resilient and sustainable in an environment of declining cash volumes. WDSG membership consists of those organisations that currently participate in the wholesale cash supply chain in the UK.footnote [4]

The WDSG has previously agreed and published a list of success criteria for a revised wholesale distribution model. Since then, an important aspect of WDSG’s work has been considering what future model may best meet these success criteria. Following careful consideration, and comparison of a utility model against firm-led efficiency improvements, it has been determined that there is insufficient support for the utility model, and that at this time the actions of individual members, guided by the WDSG success criteria, are best placed to deliver the required modernisation of the UK cash infrastructure.

The WDSG has agreed that industry-wide commitments will help ensure that the wholesale cash infrastructure continues to support the effective retail provision of cash. That is why today, the UK banks that fund or participate in the wholesale infrastructure and the UK wholesale cash operators have made the below commitments.

Resilience

  • Commitment to ensuring there is adequate resilience of the wholesale cash infrastructure so it can effectively underpin access to cash for wholesale and retail customers across the UK.

Efficiency

  • Commitment to working with the Bank to ensure processing efficiencies are maximised and costs are managed as usage of cash declines in the UK, so that cash remains an accessible payment method for as long as it is needed.

Sustainability

  • Commitment to reducing the environmental impact of wholesale cash processing, in particular by:
    • aiming for Net Zero for each organisation’s own operations by 2030; and
    • aiming to use 100% renewable electricity for each organisation’s own wholesale cash operations by early 2024.

These industry-wide commitments will be supported by individual statements of commitment to taking the necessary steps to deliver their part of these industry-wide commitments.

To underpin this approach, the Bank of England, given its statutory objectives, and role as Chair of WDSG, has asked that by the end of 2022 Q1, the UK banks that fund or participate in the wholesale infrastructure and the UK wholesale cash operators agree individual plans with the Bank of England which will set out in detail how each of them will contribute towards the delivery of these industry-wide commitments. The Bank of England will hold each bank or wholesale cash operator accountable for the delivery of its individual commitment and plan. The aggregation of these individual commitments and plans by the Bank of England will ensure the industry wide commitments are met. To help support this, HM Treasury will provide the Bank of England with the powers that it needs to keep the wholesale infrastructure sustainable and resilient into the future.

In addition, the Bank of England is undertaking a thorough review of the Note Circulation Scheme (NCS) rulebook, which sets the rules and standards that govern the storage, sorting and distribution of banknotes in the UK. The review will consider changes to promote efficiency, reduce costs and encourage innovation while continuing to maintain the public’s confidence in the currency. The Bank will consult with market participants on proposals during 2022.

Taken together, these commitments and associated actions, will ensure that the UK continues to benefit from an effective, resilient and sustainable wholesale cash infrastructure well into the future.

Part 1: The Evolving Cash Landscape

The cash landscape in the UK is changing rapidly and will continue to do so. Transactional usage of cash has been declining for the last decade, falling from over 50% to only 17% of all payments in 2020, with this trend accelerating during the pandemic (see Chart 1, Box A). However, for a significant portion of society cash remains as important as ever. This is particularly true for older age groups and those with lower household incomes.footnote [5] Cash is the preferred payment method for 21% of the population.footnote [6] 1.2 million adults in the UK have limited access to banking services and there are 3.8 million adults living in financial difficulty for whom cash can be an essential budgeting tool.footnote [7] For many other individuals and businesses cash plays an important contingency role when other forms of digital payment are unavailable or interrupted.

Chart 1: Payment volumes (millions) 2010–20

From 2010 to 2020 the number of payments made in cash reduced significantly from just over 20 billion to just over 5 billion per year.

Footnotes

  • Source: UK Finance, UK Payment Statistics.

The independent Access to Cash Review (ACR) published in March 2019 concluded that the UK is not ready to become a cashless society.footnote [8] A number of recommendations were put forward in the ACR to ensure cash remains a viable payment option, by guaranteeing consumer access and preserving consumers’ ability to pay for goods and services in cash. In the March 2020 Budget, the Government committed to bringing forward legislation to protect cash for those who wish to use it. In July 2021, the Government published the ‘Access to Cash Consultation’ which set out its legislative proposals for protecting access to cash. This included plans to introduce geographic access to cash requirements; designating certain banks and building societies to meet these requirements; and giving the Financial Conduct Authority (FCA) powers and responsibilities to hold firms to account. These will be important steps in ensuring that ‘retail’ access to cash for the public is protected.

This work was supported by the Joint Authorities Cash Strategy Group (JACS), which was established by the HM Treasury in June 2019 to enable HM Treasury, the Bank of England, the FCA and the Payment Systems Regulator (PSR)footnote [9] to work together to ensure the cash system remains sustainable. To date JACS has been working closely with stakeholders to explore how industry can provide an appropriate and sustainable model of accessing cash, and mitigate the impacts of changes to cash infrastructure, for example through wider use of shared services and initiatives involving local communities, to ensure the cash needs of consumers are being met.

The wholesale cash infrastructure also has an important role to play in ensuring cash continues to be a viable payment method for as long as it is needed. This system is responsible for: taking delivery of new banknotes from the Bank of England, commercial issuers in Scotland and Northern Ireland and new coin from The Royal Mint; storing, sorting and distributing these notes and coins to and from banks, ATMs and retailers; and the withdrawal of notes and coin that are no longer fit for circulation. However, the current infrastructure was designed for a world with higher cash usage (see Box B for further details on the current infrastructure). Cash processing volumes have fallen – from 24.5 billion banknotes in 2015 to 13.27 billion banknotes in 2020, a 46% decline – and this reduction has resulted in increasing unit costs for cash processing. As noted in the 2020 WCD consultation document, without action, there is a risk that the Wholesale Cash Distribution (WCD) system becomes less resilient, undermining access to cash more generally.

Ensuring effective cash distribution is a key priority and responsibility of the Bank of England as the issuing authority for banknotes, the Royal Mint which issues coin on behalf of HM Treasury, and HM Treasury given the importance of the wholesale system for continued provision of, and access to, cash.

Box A: Impact of Covid-19 on Cash

Covid-19 has had a pronounced impact on both the use of cash and the demand for cash in the UK.

Transactional use of cash has fallen further since the pandemic began, with 6.1 billion cash payments made in 2020, a 35% decline on 2019, while total payment volumes only declined by 11%. Furthermore, ATM withdrawals (a proxy to transactional cash use) fell by around 60% in late March 2020 compared to the same period in 2019. As lockdown restrictions have been lifted, withdrawals have gradually increased but are still below pre-Covid levels – in August 2021, ATM withdrawals were 30%–40% lower than the same period in 2019. There are a number of reasons for this, in particular lower overall levels of consumption, higher online shopping, and consumers becoming more comfortable with contactless technology. As a result, UK Finance estimates that 17% of total payments in the UK were made in cash last year, down from over 50% a decade earlier.

In terms of cash demand, the Covid-19 pandemic has led to a significant increase in the value of banknotes in circulation. Annual peak-to-peak growth in notes in circulation was 10% in 2020 and, at the end of July 2021, the value of Bank of England banknotes in circulation had increased by 19% since March 2020 when Covid-related restrictions were first implemented in the UK. This suggests that cash is increasingly being used as a store of value, which is consistent with the role it has played throughout history as a safe asset in times of uncertainty, and when interest rates are low.

Looking ahead, there is considerable uncertainty around the long-term outlook for cash demand. Factors such as household confidence, the UK’s economic outlook, and the level of interest rates will all influence future trends in banknote circulation. What is certain is that a significant number of people still need or choose to use cash. Over 5 million adults rely on cash in their day-to-day lives. Furthermore, a Bank of England-commissioned survey in July 2021 also found cash to be the first preference payment method for 21% of respondents, only a small decline compared to pre-Covid levels (23% in January 2020).

Box B: Current Wholesale Cash Distribution (WCD) Infrastructure in the UK

The current WCD infrastructure in the UK comprises multiple market participants including cash issuers, financial institutions, cash centre and cash-in-transit operators.

The Bank of England is responsible for the issuance of Bank of England banknotes in England and Wales. The Bank does this by providing notes to the Note Circulation Scheme (NCS) which governs the distribution, processing and storage of Bank of England notes, promoting confidence in the physical currency through maintaining the availability of high quality and genuine banknotes.

In Scotland and Northern Ireland, commercial banknote issuers respond to demand by issuing their own banknotes, which are backed by Bank of England banknotes.

Coin is issued by the Royal Mint on behalf of HM Treasury who are the issuing authority for coin. The wholesale processing, storage and distribution of coin is undertaken by the same NCS firms responsible for Bank of England banknotes.

Figure 1: Current Wholesale Cash Distribution Infrastructure in the UK

The participants involved in wholesale distribution of banknotes include: the Bank of England as banknote issuer, Natwest, Vaultex (joint venture between Barclays and HSBC), G4S (outsourcing arrangement via Santander and Lloyds) and Post Office as Note Circuclation Scheme members. Scottish and Northern Ireland banks are commercial banknote issuers, these include: Clydesdale, Bank of Scotland, Royal bank of Scotland, AIB, Danske, Bank of Ireland and Ulster. 

UK coins are manufactured and issued by The Royal Mint on behalf of HM Treasury. They are distributed and processed by  est, Vaultex (joint venture between Barclays and HSBC), G4S (outsourcing arrangement via Santander and Lloyds) and Post Office

Footnotes

  • AIB (formerly known as First Trust) relinquished its right to issue its own banknotes in June 2020. Notes in circulation remain legal currency until 30 June 2022.

Part 2: The Work of Wholesale Distribution Steering Group (WDSG)

In order to ensure the continued sustainability and effectiveness of the cash system, and specifically to ensure cash remains an accessible payment method for as long as it is needed, the Bank of England convened relevant stakeholders in May 2019 under the WDSG to help identify a new WCD model for the UK that is effective, resilient and sustainable in an environment of declining cash volumes.footnote [10]

WDSG membership consists of those organisations that currently participate in the wholesale cash supply chain in the UK, including the NCS members, backing Financial Institutions (FIs) and the Scottish and Northern Ireland banknote issuers as observers. HM Treasury, and The Royal Mint as manufacturer and issuer of UK coin (on behalf of HM Treasury), and the current wholesale commercial operators also attend as observers. The WDSG agreed a series of success criteria by which potential future cash distribution models would be assessed against (see Box C), and invited industry to bring forward options. The work of the WDSG is public with a record of each meeting published on the Bank’s website.footnote [11]

In 2020, independent industry analysis commissioned by the WDSG concluded that a consolidated ‘utility’ model might best meet these success criteria, with further consideration required on the efficiency improvements that could be delivered by individual market participants. A public consultationfootnote [12] was undertaken between June and August 2020 to invite feedback from the wider cash stakeholder community on this initial analysis.

The consultation defined a wholesale cash utility as a single consolidated entity formed and funded by a number of financial institutions who wish to provide wholesale cash services to their customers. The utility would be operated by a single new legal entity, with its own governance structures and arrangements. It would own the entire wholesale cash centre processing and storage infrastructure, but in order to promote competition, it was proposed that the operations of the cash centres and wholesale Cash in Transit arrangements would be outsourced through competitive tender periodically.

The consultation also invited views on alternative scenarios, namely rationalisation within individual firms and industry wide consolidation. The consultation set out the underlying assumptions of these scenarios and, based on these initial assumptions, a comparison to the utility.

Box C: WDSG Success Criteria

In June 2019 the WDSG agreed the following set of success criteria, against which any new potential WCD model would be assessed against. The criteria were developed to ensure that the future WCD model would be effective, resilient, sustainable and deliverable.

Effective

  • the WCD infrastructure should enable demand for cash to be met efficiently, cost effectively and comprehensively across all regions;
  • the WCD infrastructure should maintain or improve the quality and authenticity of banknotes in circulation;
  • the WCD infrastructure will facilitate the authentication standards for coin at levels to be agreed between HM Treasury(via the Royal Mint) and the industry; and
  • the WCD infrastructure will support the development of enhanced cash services available to users of cash (consumers and businesses).

Resilient

  • the WCD infrastructure is secure and resilient and can survive plausible market shocks;
  • the WCD infrastructure is conducive to effective oversight to maintain resilience; and
  • the WCD infrastructure supports the role of cash as a viable contingency for other payment methods in reasonable circumstances.

Sustainable

  • the design process should take into account user interests with the aim to achieve general support from the wider cash stakeholder community;
  • the proposed design should be underpinned by a positive business case over the medium term;
  • WCD complies with UK law and regulations;
  • the WCD infrastructure is efficient and cost effective against the background of reducing transactional volumes;
  • WCD must be able to demonstrate that it will not result in any substantial lessening of competition and innovation at appropriate points in the distribution chain, while maintaining or enhancing access to cash services;
  • WCD is flexible and capable of supporting a range of future cash transaction volume and value scenarios; and
  • WCD minimises the environmental impact of wholesale distribution of cash.

Deliverable

  • changes to WCD can be practically delivered within available capacity and capabilities (ie, suppliers, skills and infrastructure);
  • the transition and deliverability risks are acceptable and can be appropriately managed and/ or mitigated; and
  • once implemented, changes to WCD are likely to deliver the outcomes desired by stakeholders.

Part 3: Work Undertaken Since the Public Consultation

A significant majority of respondents to the consultation were strongly of the view that action is necessary to ensure WCD infrastructure remains sustainable in the future, against a backdrop of declining cash volumes.footnote [13] However, respondents gave different views, on whether a utility model would be the best approach, or whether rationalisation by individual participants might be better placed to deliver against the success criteria. Overall, there was a sense that the delivery timetable for the utility was very ambitious and may not allow sufficient time for the necessary competition processes.

Respondents encouraged WDSG members to undertake a robust assessment of a number of key areas to ensure any future model can maximise potential efficiency gains. They also challenged members to look closer at alternative industry-led solutions, and consider carefully whether these could deliver similar or greater benefits, at least over the short to medium term, when compared to the utility model.

Following the consultation, detailed work was undertaken to refine the utility model. This included further modelling of the business case and more accurate estimates of the potential efficiency improvements and up front and ongoing costs. The updated model and associated business case was then presented to members for individual consideration.

WDSG members have subsequently undertaken their own individual assessments of the utility model. Through this work it became clear that for some members the potential gains from a utility model were smaller than originally envisaged, and the scope for improvements in efficiency, resilience and sustainability via alternative firm-led rationalisation and consolidation programmes could be larger. A number of risks were also identified with the utility delivery and transition plan, particularly around IT systems, operations and competition processes.

The WDSG has agreed that instead of a utility, industry wide-commitments are needed to help ensure that the wholesale cash infrastructure continues to provide services to customers and supports the effective retail provision of cash.

Part 4: Industry Commitment and Next Steps

The work of the WDSG to date has underlined that individually led actions may be best placed to help ensure that the wholesale cash infrastructure continues to support the effective retail provision of cash. How this is delivered, and the outcomes, will be central to the success of this work.

Therefore, the UK banks that fund or participate in the wholesale infrastructure and the UK wholesale cash operators have made the below commitments.

Resilience

  • Commitment to ensuring there is adequate resilience of the wholesale cash infrastructure so it can effectively underpin access to cash for wholesale and retail customers across the UK.

Efficiency

  • Commitment to working with the Bank to ensure processing efficiencies are maximised and costs are managed as usage of cash declines in the UK, so that cash remains an accessible payment method for as long as it is needed.

Sustainability

  • Commitment to reducing the environmental impact of wholesale cash processing, in particular by:
    • aiming for Net Zero for each organisation’s own operations by 2030; and
    • aiming to use 100% renewable electricity for each organisation’s own wholesale cash operations by early 2024.

These industry-wide commitments will be supported by individual statements of commitment to taking the necessary steps to deliver their part of these industry-wide commitments.

To underpin this approach, the Bank of England, given its statutory objectives, and role as Chair of WDSG, has asked that by the end of Q1 2022, the UK banks that fund or participate in the wholesale infrastructure and the UK wholesale cash operators agree individual plans with the Bank of England which will set out in detail how each of them will contribute towards the delivery of these industry-wide commitments. The Bank of England will hold each bank or wholesale cash operator accountable for the delivery of its individual commitment and plan. The aggregation of these individual commitments and plans will enable the Bank of England to ensure that the industry-wide commitments are met. To help support this, HM Treasury will provide the Bank of England with the powers that it needs to keep the wholesale infrastructure sustainable and resilient into the future.

In addition, the Bank of England is undertaking a review of its NCS rulebook to ensure it remains fit for purpose, and does not act as a barrier to any future innovation (see Box D).

Collectively these actions and commitments should give consumers and businesses confidence that the WCD infrastructure in the UK will continue to be effective, resilient and sustainable, and cash remains available for as long as it is needed.

Box D: Review of the Note Circulation Scheme (NCS) Rulebook

As the Bank of England has previously discussed with WDSG members, it is going to undertake a review of the NCS rulebook.

The NCS governs the distribution, processing and storage of Bank of England issued banknotes in the UK, promoting confidence in the physical currency through maintaining the availability of high quality and genuine banknotes. The NCS rulebook seeks to achieve this by ensuring the NCS participants meet the required operational and risk management standards.

As the future wholesale cash distribution infrastructure evolves in response to declining cash usage, so too must the NCS rulebook. In reviewing this, the Bank of England aims to support industry efforts to promote efficiency, sustainability and resilience, in particular by creating greater opportunities for innovation across the wholesale cash cycle. The review will cover the following areas:

  • Processes governing the issuance of new notes into circulation to ensure appropriate redistribution of used notes, improve the variety of banknote denominations available to the public, and minimise the cost of note issue to the UK taxpayer.
  • Policies that promote the sharing of banknotes between NCS members, to improve industry coordination and management of wholesale cash stocks.
  • Standards related to the stocks of Bank of England notes in the NCS centres across the UK, including the scope to simplify and streamline processes and procedures.
  • Mechanisms that support the sorting, authentication and recirculation of banknotes, including whether there are changes that could encourage increased flexibility and innovation.
  • Potential support for local recycling of cash closer to the point of circulation to facilitate more resilient and distributed cash handling.
  • The sampling of banknotes returned to the Bank for authentication, quality assessment and destruction, to further improve sorting carried out by NCS members, thus enhancing the standard of notes in circulation.

The NCS review will be a consultative process and the Bank of England will be engaging with industry participants on its proposals during 2022.

  1. UK Finance, UK Payments Statistics.

  2. Based on a Bank of England survey of c.2000 adults in England and Wales in January 2021.

  3. Financial Lives 2020 survey: the impact of coronavirus, Financial Conduct Authority.

  4. WDSG Terms of Reference/membership.

  5. Access to Cash Review, March 2019.

  6. Based on a Bank of England survey of c.2000 adults in England and Wales in January 2021.

  7. Financial Lives 2020 survey: the impact of coronavirus, Financial Conduct Authority.

  8. Access to Cash Review: final report.

  9. The JACS group was established and is chaired by HM Treasury, and brings together the PSR, the FCA and the Bank of England to; inform and co-ordinate members’ activities related to cash, and to ensure that regulatory oversight and activity supports end to end cash infrastructure that remains resilient, cost effective, sustainable and able to meet the needs of consumers.

  10. WDSG Terms of Reference.

  11. WDSG page on Bank of England’s website.

  12. Public Consultation.

  13. Responses to the Public Consultation.

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