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Speech by Charles Randell, chair, FCA, delivered at the retail Banking Conference 2019 in London.

All bankers should watch ‘It’s a Wonderful Life’. It captures the range of feelings people have about bankers. George Bailey is the good banker who has the interests of Bedford Falls at heart. Henry Potter is the bad banker who comes to town with a plan to drive Bailey Building and Loan out of business so that he can exploit the town’s citizens.

But if there’s a remake of ‘It’s a Wonderful Life’, the plot needs to change. Today’s issue isn’t banks coming to town, it’s banks leaving town.
The picture in Burslem

A couple of weeks ago I visited Burslem, a town of 22,000 people, one of the 6 that make up Stoke-on-Trent. It’s the mother town of the Potteries, once home to Royal Doulton and Wedgwood, and home to many magnificent examples of Victorian civic architecture.

Burslem’s also been in the news as the first town of its size to have no bank branch and no free-to-use ATMs. 3 banks have closed their branches and the nearest ATM to the town centre charges 95p for withdrawals. The local MP, Ruth Smeeth, took me round to show me the impact that the lack of free access to cash has on her constituents.

Burslem’s a beautiful town, but it’s one with economic challenges. Local manufacturing jobs have dwindled. It’s a low wage and low income area, on average. Food bank and high cost credit usage – legal and illegal – spike during the school holidays when free school meals aren’t available. We know that people on lower incomes are disproportionately high users of cash, partly because they find it useful to budget with cash: you can’t spend what isn’t in your wallet. Now that Universal Credit is paid directly into bank accounts – which may result in fewer people being completely unbanked – it does mean that to budget in this way you have to take cash out.

So there’s a big cash economy in Burslem, in the pubs, hairdressers, cafes and takeaways. At the twice yearly Burslem fair, which funds local charitable activities. At the Swan Bank Church, which is one of the other ties binding this community together.

LINK, the ATM operator network, uses a radius of 1 kilometre from the nearest free-to-use cashpoint to assess whether ATM operators should receive additional premiums for keeping ATMs open. And on a map, viewed in our office or in a bank’s headquarters in London, it looks like there’s a free-to-use ATM within 1 kilometre of Burslem town centre. But once you’ve walked past the one at the McColl’s store on the way in from Longport station, you realise there’s a steep hill up to town. If your mobility is impaired, if you’re elderly or pushing a buggy, it could be impossible to make the trip. And if you’re in Burslem enjoying the nightlife on which the town centre depends, it’s a long round trip to a free-to-use ATM. Of course, at night the only place in the town centre where you can take money out without a fee – the Post Office counter – is closed. And in the daytime there can be long queues and not much privacy in the Post Office.
The view from a distance

Viewed from a distance, the big picture doesn’t look too bad. Yes, the number of bank branches has decreased dramatically in the last 5 or 6 years – between 2012 and 2017, the UK lost over 3,000, or nearly a quarter of its bank and building society branches. But when the FCA’s Strategic Review of Retail Banking Business Models looked into the impact of branch closures, it found that, region by region, branch closures have been fairly evenly spread. Where branches do close, we found a compensating increase in mobile banking, and a drop in usage of nearby potential substitute branches, showing that people often do find alternative ways to access banking services. And there’s a voluntary best practice code, operated by the Lending Standards Board, that aims to manage the impact of branch closures on affected areas.

There are also a lot of free-to-use ATMs. Although the numbers have started to decline, at the end of 2017 there were more free-to-use ATMs in the UK than ever before – nearly 55,000 – and 97% of cash withdrawals are made without a cost to the consumer. And this despite a steep and continuing decline in the demand for cash from ATMs. For the first 2 months of 2019, weekly transaction volumes have fallen by an average of 8.4% against the same week last year. In January 2019, £500 million less was withdrawn from the LINK ATM network compared to January 2018.

People may not be using as much cash, but they are interacting with their money more than ever before. UK Finance estimates that in 2017 38 million people, or 71% of adults, used online banking, and there were 5.5 billion log-ins to banking apps. There are more ways to access services, like applying for a mortgage or personal loan, that used to have to be done face to face in a branch. And there are more ways to pay than ever before – contactless cards, digital wallets, mobile payments, faster payments. As the use of cash has declined overall, and the cost of accepting smaller card payments has decreased relative to handling cash, some businesses and retailers are deciding to go completely cashless.
The ‘poverty premium’

But this wonderful life of online banking and mobile payments is cold comfort if you can’t do any of these things.

Cash payments still make up around a third of all payments in the UK, and around 2.2 million people say they use cash for all their day-to-day transactions. Many of these people are on low incomes. Our Strategic Review of Retail Banking found that local authority areas with more branch closures have slightly higher rates of unemployment on average, and higher proportions of people living in deprivation.

So having to pay to access cash disproportionately affects those who are least able to afford it. I recently saw the poverty premium in action when I visited a project supporting mothers and their children who live in insecure accommodation, and who depend on statutory payments from the local authority to get by. But the local authority does this by issuing them with prepaid cards which charge a minimum of £1 and up to £3.75 for cash withdrawals, meaning that a high percentage of the money the mums need is taken away again.

Cash is also disproportionately used by older people. Where branches close, we don’t see any increase in mobile banking among the over 60s. So while most people adapt to alternative technology, there are some who need a lot more help to do so. And whether you’re old or young, if you’re poor, online banking means access to a computer or paying for data on your phone. Issues people in this room probably don’t have to think about.

Of course bank branch closures can hit rural areas particularly hard. In rural areas only around 50% of consumers live within 5 miles of their nearest branch, compared to 90% in urban areas.

And without local branches to deposit cash, it’s costing businesses and charities more to accept it, to transport it, to deposit it, and it increases their risk of being robbed. So branch closures are impacting retailers and other small businesses.
The Post Office

One idea that’s often mooted as a solution to these issues is the Post Office. Indeed, one of the criteria which LINK use for assessing whether a remote ATM needs to be replaced is whether there is a Post Office nearby with reasonable opening hours that could provide a substitute. The CEO of financial services and telecoms at the Post Office spoke at a recent Treasury Committee hearing about how managers of departing branches literally hold the hands of vulnerable customers as they are introduced to postmasters and told how their banking needs will now be met.

But while the Post Office’s Banking Framework has expanded its ability to offer cash withdrawals and deposits, it doesn’t have a universal service obligation for its banking services. The increasing costs of cash handling means that its banking business is not profitable, and to offer a full bank branch service would require huge investment from central government. Users also report slower cash and cheque clearing at Post Offices compared to banks.
The current role of regulation

You may ask why we need to discuss this at all when there are already several regulators with responsibilities for cash and payment systems – the FCA, the Payment Systems Regulator and the Bank of England.

I don’t believe we need more regulators but we do need to discuss their roles. The regulators haven’t taken on the role of compelling a bank to keep the last branch in town open. If we did, there would be an even stronger incentive for banks to close branches they deemed unprofitable as quickly as possible, to avoid being the last bank in town. So we would need a fair system for recognising the costs of staying open which are borne by the last bank and deciding who should bear those costs and whether and how the bank should receive a reasonable return on its capital.

A lot of thought would also need to be given in designing a system for a national regulator to make good individual decisions about what access to cash or branches people in Burslem or any other individual local community should have. Every community is different, so this has to be a decision involving local people, even if it will be challenging to weigh up the strength of local community feeling against the high costs of maintaining the necessary infrastructure.

For comparison, we might look at telephone boxes. Their usage has almost flatlined since the rise of mobile phones. But, if you’re out of battery, or if you don’t own a mobile phone, or if you’re somewhere with no signal and you really have to make a call, maybe a 999 call, they might still be your only option. Maintaining them comes at a cost, estimated at £6 million a year in 2017. But BT has a universal service obligation to provide a reasonable network of phone boxes, and OfCom rules offer local communities a veto – funded by the industry – if BT wants to remove the one and only phone box on a site.

The Post Office has a similar commitment to consult with local communities in the event of a branch closure as part of its commitment to maintain the size and accessibility of the Post Office network.

There is no universal service obligation for cash or banking. As I’ve mentioned, there is a process for consulting the local community about branch closures through the voluntary Access to Banking code. However, some people have suggested that the criteria for defining what makes a branch ‘regularly used’ to make these decisions are unreasonable and differ starkly between banks, and that stricter geographic criteria should be used. It’s also telling that the House of Lords Committee on Financial Exclusion found that no decision to close a branch had ever been reversed as part of this process.

With ATMs, there’s a stronger set of safeguards. LINK has made commitments to maintain the broad geographic spread of ATMs and specific commitments to maintain an estate of protected ATMs based on a test that there should be an alternative free-to-use ATM or suitable Post Office within 1 kilometre. LINK does this by increasing the payments to the operator of the ATM machine. Which, at present, is up to £2.75 per withdrawal or, in the most extreme cases, LINK paying an operator to manage a machine directly on its behalf. These interventions are paid for by LINK’s members, and passed on to their customers. The good news is that we’re now seeing examples of this process working to restore protected ATMs that have closed.

But it’s a challenging task for LINK to make decisions which recognise all the local realities which mean that, for example, an ATM some distance from a town centre like Burslem may not serve a community’s needs, taking into account wider social issues and local context like broadband speeds, population profile and access to social care, and public transport.
Access to Cash Review and the long-term strategy

It’s in light of these issues that I welcome Natalie Ceeney’s Access to Cash Review, whose final report was published last week.

As the use of cash declines, there are big questions to be asked. We’ve grown used to access to cash being free. But of course someone has to pay for it. Aside from the cost of banknote and coin production, a complex infrastructure of cash centres, depots and transportation exists to allow cash to be in the right place. The Access to Cash Review estimates that this costs £2 billion annually. Many of these costs are fixed, and most are borne in the first instance by a concentrated group of private companies. The Review also suggests that there is no guarantee any other competitor would step in should one of the infrastructure providers leave the market. So I also welcome the Bank of England’s commitment to bring together industry and regulators to work out how we can reform the UK’s wholesale cash infrastructure to make it more efficient and cost effective for everyone.

Assuming the UK’s wholesale cash infrastructure can be made more efficient and cost effective, the system will come under increasing pressure over the next few years as fewer and fewer people use cash. The cost per transaction is likely to rise, even if the service is free to the person using the ATM. In any event, more and more small retailers, operating on wafer thin margins, could refuse to accept cash. Even if there were a universal service obligation on LINK or the banks, its costs would be passed on by the industry and ultimately borne by consumers, and it still wouldn’t make it economic or reasonable for all retailers to accept cash.

So the declining use of cash plays into a much broader debate about financial inclusion which includes the future of communities in a digital age, the way a range of public services are delivered and consumer education. We need to discuss not just who should pay for the cash system, but also what action government and local authorities should take to support people to adapt to a world where cash may not be accepted. And in the meantime, whether we should see cash as a public good, part of a fair society as well as a back up payment system if IT systems fail, the cost of which should be socialised; or whether the cost of cash should be borne by the (sometimes vulnerable) people who continue to use it.

LINK has committed to maintain the broad geographic spread of free-to-use ATMs, but we may need to go further to serve the cash needs of communities: looking at increasing the number of ATMs which accept cash deposits as well as withdrawals, and other ways of keeping down the costs of local cash handling, such as cashback offered by retailers.

And if the banking sector is currently providing a service to a community through branches that we want to maintain, who should pay for this when the last bank in town wants to close its branch? Is it reasonable to expect the Post Office to pick up the baton when its funding model, staff training, branch facilities and statutory backing are designed for postal services, not banking? Are there other models, such as shared branches, community banks, credit unions or local authority supported banking centres which can help to ease the impact of the reduction in bank branches?

The time to face up to these issues is now. Bank branch closures are already a fact, and so is the reducing use of cash. The Access to Cash Review concludes that we might have 15 years before cash transactions fall to just 1 in every 10. But we simply don’t know for certain how quickly online banking services will develop and how quickly more people will choose to use less cash.

So it’s right that we plan for a range of future outcomes, and that there’s a broad social debate about financial inclusion in a digital age.

Mobile banking, cashless transactions and a range of other technological developments may mean a wonderful life for some people. But we mustn’t forget that for some time to come, others will need access to cash or bank branches. The FCA and the Payment Systems Regulator have both highlighted these issues. We welcome the publication of the Access to Cash Review and are ready to play our part in this important discussion.