The death of cash?
Payment-processing takeovers “will do nicely” for the City, says Angus McCrone
Nowadays, you can’t afford to blink. You might miss some new shocker from the Trump presidency. You might miss a Brexit surprise, or a general election or perhaps two or three UKIP leaders – or you might miss the UK Government saying that every car on the road will be electric by 2040. You might even miss the disappearance of cash.
Predictions of the demise of notes and coins have been gathering pace, whether from Bank of England Chief Economist Andrew Haldane or, in July this year in a report for the Government by Matthew Taylor, who said that cash-in-hand payments for work such as window cleaning and decorating should be phased out.
The death rattle of cash, or just a splutter?
The City and the corporate world are bracing themselves – if not for the total disappearance of cash, then at least for its marginalisation at the hands of electronic payments. This is the background to moves such as this summer’s £7.7bn agreed bid by Vantiv of the US for UK card-processing leader Worldpay.
On 5 July, Vantiv said it was offering 385p per Worldpay share (ironically, the statement said that 55p of this would be in “cash” – but presumably not actual banknotes). This was 60% above the share price at which the former Royal Bank of Scotland business, owned in the interim by private equity investors, was floated on the stock market in October 2015.
On the face of it, the Vantiv approach represents a classic response to a fast-growing, international opportunity. The two companies said the merger “…creates a scale world-class payments group in a dynamic market, with deep payments capabilities, product and vertical expertise, and strong distribution channels to serve merchants around the world in the global e-commerce market, and in-store and online in the UK and US markets”.
Beyond the adjectives and the repeated mention of “markets”, however, a defensive motivation is also discernible. The firms said they had identified “…substantial opportunities for cost synergies, which support significant potential shareholder-value creation”.
Only in the next paragraph did words about potential revenue growth appear, and even then prefaced by the word “believe”.
The contactless mindset
The backdrop to the consolidation is that non-cash payments are growing rapidly, with the UK seeing step changes through developments such as Uber and contactless payment for London transport. The younger generation now think nothing of paying by waving their smartphone over a terminal. There is also a realisation on the part of the public generally that paying for small-ticket purchases in the pub or the shop by card saves them time and means not ending up with a pocketful of change.
In 2016, according to Payments UK, some 40% of transactions were done in cash, 30% by debit card including contactless, 11% by direct debit, 10% by credit card, 3% by online or mobile banking, and the rest by other means including cheques and BACS. However, the organisation said in May that it expected debit cards to overtake cash as the number one payment method by the end of 2018.
Even so, the actual end of cash is some way off. It will not come easy for those activities where people prefer to take cash, or part-cash, in order to limit disclosure to the taxman. Then there is the problem of social exclusion: 1.5 million UK adults do not have bank accounts and 9% of adults (mainly elderly people) have never used the internet.
Then there are people who have accounts and are internet savvy, but prefer to keep paying in cash as a way of maintaining discipline over their spending or, understandably, of trying to stay safe from cybercrime and card fraud.
That’ll do nicely
A few in the City have argued that Worldpay is strategically important and should not have been allowed to fall into foreign hands.
However, it seems likely that as the dominance of electronic payments increases, regulation will intensify – the new European Union payment services directive being just one milestone – and so will put pressure on the margins of processing companies. Meanwhile, there is a rising competitive threat from new “FinTech” enterprises, from the internet giants and established rivals such as PayPal.
American Express’s famous advert from the late 1970s, parodied at the time, used the punchline “that’ll do nicely”. For most in the City, it seemed this summer that takeovers in the payments sector will do nicely, too.