Why is cash still important?
The ubiquity of cash and its acceptance ensures that everyone has the ability to pay. No particular technology is required and the barriers to entry for individuals are minimal to none – a pocket and some basic maths. Cash enables everyone to discretely and efficiently purchase what they need or want.
Cash is a robust and reliable payment method. Cash is not subject to IT systems outages or a lack of mobile signal / reliable WiFi that can impact external processing infrastructure as discussed in our recent article – although the technology that underpins the ATMs are not immune to such disruption.
Another feature of cash usage is that it enables discrete payments. Your data is safe when you use cash as transaction data and identity is not captured by financial institutions or payment networks (unlike the digital footprint on a debit or credit card statement). Cash (owing to its physicality) is also useful as a budgeting tool – no notes or coins left and you have run out of money!
It is important to acknowledge that there are many advantages to digital and mobile enabled payments which have significant benefits. The pandemic accelerated the long-term trend of declining cash usage. The hygiene of contactless transactions was encouraged as a health and safety precaution. In response many businesses became "card only". The move away from cash and the "handling" of cash was a welcome side-benefit for many businesses – the drudgery of the daily cashing out.
It is however a cause of anxiety among consumers that some shops refuse to accept cash. There are also inherent risks associated with cash for both businesses and consumers, for example counterfeit or damaged banknotes or coins and vulnerability to theft. There are also challenges to easy access to cash for vulnerable consumers with the number of free-to-use ATMs in decline – itself a consequence of the increase in card payments.
The 2023 launch of Cash Access UK highlights the commitment of the banking and finance industry, and the Government, to protecting consumers' and small businesses' ability to access cash as well as deposit and basic banking services. Addleshaw Goddard played a key role in supporting major banking providers on the establishment of Cash Access UK and continues to be at the cutting edge of developments in this field.
So how does "cash" work?
Where do banknotes come from?
The Bank of England issues new banknotes and makes them available for purchase at face value by members of the Note Circulation Scheme ('NCS'). The NCS governs the distribution, processing, and storage of banknotes. NCS members store banknotes at secure cash centres around the UK where they are made available to end customers such as banks, building societies, ATM operators, foreign exchange companies, and retailers.
What is OBSC?
'Off Balance Sheet Cash' is a cash supply model whereby the end customers ordering the banknotes, such as ATM operators, do not hold the banknotes as an asset on their balance sheet. This approach helps end customers avoid giving a misleading impression of their working capital. Instead, the cash supplier retains title to the banknotes until the moment before they are withdrawn from the ATM by the cardholder – at which point title momentarily transfers to the ATM operator and then to the cardholder once the banknotes are dispensed.
OBSC is not necessary in all cases, e.g., where a bank supplies banknotes to a building society for use in its high street branches where it is more usual for a large amount of cash to appear on the balance sheet.
How is cash transported to ATMs?
Where a cash supplier receives an order from an ATM operator, the banknotes will typically be packed into relevant cassettes at a cash centre and will be made available for collection by a secure cash in transit carrier ("CIT Carrier") for onward transportation to the relevant ATMs for replenishment. A cash in transit services agreement is essential for documenting the CIT Carrier's responsibilities and allocating liability for risk in the cash whilst in "transit" for collections and deliveries.
Banknotes that are not validly dispensed or are retracted back into the ATM (e.g., because the cardholder forgot to take their cash or didn't take it quickly enough) will be filtered into a separate compartment within the ATM (often known as a 'purge bin') and will be collected and returned by the CIT Carrier to the cash supplier for processing. In most cases the cardholder's account is recredited when the banknotes are retracted.
What are the mechanics of ATM transactions?
Link Scheme Holdings Ltd operates the Link network which is the UK's largest ATM network. Almost every ATM in the UK (both free-to-use and pay-to-use) is connected to the Link network which enables banks and building societies to offer their cardholders nationwide access to cash. Visa and Mastercard operate similar networks for cash withdrawals.
Apart from the cardholder, each ATM cash withdrawal transaction involves an “Issuer” and an “Acquirer”. Issuers are banks and other financial institutions who issue the debit or charge cards used in the transaction. Acquirers provide and operate ATMs and connect them to the Link network (or similar network). The Acquirer receives an interchange fee to cover the cost of its transactions from the Issuer, when one of the Acquirer's free-to-use ATMs is used for a cash withdrawal by a cardholder where the relevant ATM is not owned by the cardholder's bank.
The Link network enables balances owed by Issuers to Acquirers to be settled using the Bank of England's Real Time Gross Settlement ("RTGS") system. When a cardholder with a Link enabled card makes a request to withdraw cash at an ATM, the Acquirer sends relevant cardholder information together with the transaction request to the Link network. The Link switch reads the information, undertakes basic checks, and forwards an authorisation request to the Issuer for the cardholder. The Issuer carries out checks to validate the request before providing a response which either approves or declines the requested transaction. The Link switch receives the response and relays it to the Acquirer who will then process or indicate that the transaction has been declined. A similar procedure applies for the Visa and Mastercard networks.
Funds for approved cash withdrawals are settled by the Issuer to the Acquirer through the RTGS system. The Acquirer then instructs the Bank of England, via Vocalink, to settle to the cash supplier's RTGS account. Acquirers that are not members of the Visa and Mastercard networks use a card scheme sponsor ("Sponsor") for settlement. In these cases, settlement from the Issuer's RTGS account is made to the Sponsor's bank's RTGS account. The Sponsor then ensures that the value of the banknotes dispensed by the ATM operator is settled to the cash supplier through the RTGS system.
