We’re not spending money, so why are we hoarding it? | USAEMALL.com

Unlock the Editor’s Digest for free

Roula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.

Think of the last time you paid for something in cash. This may be a struggle for the 22mn adult Britons who only use it once a month or less, though easier for the 1.5mn whose day-to-day spending relies on it.

Notes and coins now account for just 12 per cent of all payments, according to banking trade body UK Finance. So if Brits are spending less cash, how come we’re hoarding more bank notes than ever before?

This growing cash paradox was illustrated by Bank of England data this week, showing that a record £86bn worth of fivers, tenners, twenties and fifties are currently in circulation. The biggest annual jump in the five years since the pandemic, the increase is not simply a function of inflation. And if fewer of these notes are passing through tills and our wallets, more are presumably being stuffed under the proverbial mattress. The question is, why?

Before you all shout “it’s a tax dodge!”, let’s consider some more subtle drivers. The bank’s own explanation is that bank notes are now being used more as a store of value, in line with trends seen in other countries. In troubled times, including global pandemics and financial crises, there is comfort in having physical cash on hand. Investors dumping volatile equities in favour of gold and money market funds are demonstrating similar instincts.

Back in 2022, the bank’s research found 60 per cent of UK households were stashing more cash since the onset of Covid-19, with the median amount being £167. Domestic hoarding was then thought to account for between £10bn to £30bn of bank notes in circulation. Since then, digital payments have become even more ubiquitous while bank branches and cash points are harder to find, increasing the impact of any cyber attacks or system outages. Having some cash on hand as a backup option feels sensible.

Another theory? We simply lack the opportunity to spend the cash that we have accumulated. Across the UK, banking customers are withdrawing £100mn less per day from cashpoints than they were before the pandemic, according to Link, which runs the UK’s cash machine network. Graham Mott, Link’s director of strategy, says peaks in withdrawals on Fridays as people took cash out for the weekend are now a thing of the past.

In cities especially, more businesses are going cashless — a trend that accelerated during the pandemic. And digital payment processes are not only faster, but require fewer expensive employees. If you tap and pay at a supermarket self-checkout, order takeaway food on a huge interactive screen or scan a QR code to settle a restaurant bill, every piece of human interaction that technology removes saves on staffing costs.

In restaurants that have not succumbed to this trend, a further paradox of modern life is the “signing a cheque” gesture that people of a certain age (like me) still make when asking for the bill. In reality I’ll probably pay for my meal by tapping my phone on a terminal instead. But if I have received great service, I like to discreetly pass a cash tip to the person in question to ensure they get the full benefit. A small gesture, but one that is always appreciated.

With the tax burden at a 70-year high, the hidden cash economy is the more obvious reason for the enduring popularity of paper notes. Babysitters, cleaners and gardeners are all commonly paid in cash. When I asked people to recall their last cash transaction, paying for haircuts, manicures and beauty treatments also featured. While few admitted it, hawkers of illegal substances are another obvious category of recipient.

And if you’re struggling to find a tradesperson to undertake any kind of work on your home, offering to pay in cash may suddenly open up their availability. Not that I am justifying this behaviour, but the desire to get a discount for cash marries well with sole traders aiming to stay under the £90,000 VAT threshold. One of many cliff edges within the UK tax system, crossing above this level means having to add 20 per cent to prices — the turnover of small businesses tends to “bunch” just beneath it.

Flying under the radar by not banking the proceeds could explain why so much cash is out there — and why higher value notes are in hot demand. The number of tenners in circulation has dipped, while £50 notes are up over 10 per cent year on year. Good luck trying to spend one, though. Try one of the many small high street businesses actively encouraging the use of cash: those taking smaller volumes of card payments are charged disproportionately higher fees when we tap to pay.

This, and the need to keep the UK’s cash infrastructure alive, suggest those hoarding physical money should get out there and spend, spend, spend it.

Claer Barrett is the FT’s consumer editor and author of the FT’s Sort Your Financial Life Out newsletter series; [email protected]; Instagram and TikTok @ClaerB