retail environment
Notes from a Small Island
The UK’s Journey from Paper to Polymer Banknotes
American travel writer and humourist Bill Bryson provided the world with the definitive guide to the idiosyncrasies of the British—or Brits—in his satirical book Notes from a Small Island. This outsider’s view pokes fun at the compulsion to constantly apologise and the need to cling onto eccentric traditions.
According to the main feature in the winter issue of LP Magazine EU, “Where Cash Is no Longer King,” the desire to hold onto cash is itself viewed as an eccentric national characteristic, particularly among the Nordic nations where paper money and coinage account for as little as one in six of all transactions. But the Brits are not just keen to hold onto cash, they seem to positively cherish the banknote and—along with over thirty other countries including Australia, Canada, Singapore, and New Zealand who have already done so—are investing in “polymer” or plastic to preserve their currency. In short, the £5, £10, £20, and £50 denominations all have a future as notes from a small island.
The payments landscape may have changed considerably in recent decades with more people using debit and credit cards—including the growing trend towards contactless technology, Internet banking, mobile wallets, and smartphone apps—but cash continues to be important in the United Kingdom, with demand for Bank of England notes growing faster than nominal GDP.
Indeed, according to the Bank of England’s own figures, there is little desire to follow the Scandinavian countries to trash cash. There is instead the desire to embrace and cherish notes in this small island nation, and as such, there is the equivalent of around £1,000 in banknotes in circulation for each person in the UK. And the UK is far from alone in its love of the “crinkly stuff.”
More than two-dozen countries, including Romania, Vietnam, and Israel, have switched from old-fashioned cotton paper notes to so-called substrate or polymer ones. Recently, the Bank of England announced that the Sir Winston Churchill £5 note will be made of plastic from autumn 2016. Fiji and Canada also ditched their crinkly paper notes for plastic in 2013, and Australia, which pioneered plastic-based money, has successfully used the notes since the late 1980s. There is an anecdote in Australia that it is OK to go surfing with cash in the pockets of your shorts as there will be no damage to the notes.
Indeed, the ability to put polymer notes through a rapid spin cycle—and experts have tested its durability by doing just that—brings a new meaning to the phrase money laundering.
The UK has not made the transition lightly. The shift from paper to polymer followed a three-year research programme and a public consultation during autumn 2013 where there was strong support for the new currency.
The Cost of Conversion
As well as cutting its production costs by a substantial £100 million, the Bank of England says that these new plastic notes, which are 15 per cent smaller than their cotton counterparts, will significantly improve financial security measures. Polymer banknotes are constructed using an extremely durable material that is much harder to counterfeit and so will reduce the occurrences of fraud and imitation money.
In a speech in Bristol, chief cashier at the bank, Victoria Cleland said, “Experience from central banks that have issued polymer banknotes has been positive. Canada, for example, has seen a real reduction in counterfeit levels since launching its polymer series a few years ago. Polymer is also cleaner and more durable, leading to better quality notes in circulation.”
Critics however argue that this comes at a cost with businesses and banks that will reportedly face a cost of around £236 million to ensure that these new notes can actually be used. In order to make sure that the polymer money can be accepted and dispensed, ATMs, vending machines, and self-service facilities will need to be recalibrated by specialist engineers and in some cases completely replaced.
This cost is likely to be met by industry, but the Bank of England argues that it will be cheaper long term.
The Bank’s research revealed considerable benefits in polymer banknotes. They are cleaner, more secure, and more durable than paper banknotes. They will provide enhanced counterfeit resilience and increase the quality of banknotes in circulation. Polymer notes are also more environmentally friendly than paper and, because they last longer, are cheaper over time than paper banknotes.
The results were supplemented by feedback gained during a ten-week public consultation programme, which showed 87 per cent of respondents in favour of a move to polymer.
Cleland added, “A key strand in the successful issuance and distribution of the new banknotes will be action from the cash industry to ensure their businesses are ready. That’s why we are supporting a series of five industry-led working groups, representing all parts of the cash supply chain. Feedback on this collaborative approach has been positive, and the industry is confident in how the programme is moving forward.”
Ben Crosland, senior manager at the Bank of England education team, who has eight dedicated staff working with him to help businesses and individuals through the transition from paper to plastic cash, argues the slower, more considered approach will also be adopted during the education process, and the introduction will not be an overnight phenomena.
Crosland said, “The £5 Winston Churchill note will be the first to be introduced in September 2016 followed by the £10 with Jane Austin on the back in the second half of 2017. But it will not mean the death of paper just yet: the new polymer £20 will be introduced by 2020, and there are no current plans to change the £50. One of the reasons we are starting with the £5 note is because it’s very transactional; it travels around the cash cycle very quickly, often in the form of change for larger notes. This means the current paper £5 can get tired and needs to be replaced more often. Our new polymer £5 will last longer.”
Polymer notes will be a halfway house to the Nordic approach—a longer-lasting plastic currency that experts believe will last longer, be more difficult to counterfeit, and will cost less during its cycle.
The cost of cash, protecting it while it is moving around the economy, and the opportunities for counterfeiters and fraudsters are the very reasons countries such as Sweden—the nation that introduced banknotes in the first place—want to reduce their dependence on hard currency. But the Bank of England holds fast to the view that cash is far from dead and can be managed cost effectively. This is despite evidence that indicates no more than half of the Bank of England’s current paper and cotton notes in circulation are likely to be held for use within the domestic economy for legitimate purposes. This includes cash used for transactions and for “hoarding.” The remainder is likely to be held overseas or for use in the shadow economy. However, given the untraceable nature of cash, it is not possible to determine precisely how much is held in each market.
Reducing the criminal use of cash is a priority for the Bank of England, which is keeping its anti-counterfeiting strategy under wraps, but the polymer notes will present more of a challenge to the fakers.
Ben Crosland added, “Polymer is much harder to counterfeit. We will publish our security features when we launch the £5 note, but all I can say is that it will incorporate a lot of different features to stay one step ahead of the counterfeiters. Having said that, we do not have a huge problem with counterfeit notes in the UK, but it’s not a victimless crime.”
The next stage for Crosland and his team is educating the public and businesses on what to look out for.
“We are already well advanced in working with industry and the cash handlers in terms of cash machines and the upgrading of ATMs, which will all have to be ready by autumn. And in the middle of this year, there will be a major publicity push on features of the new notes. If they are clued up on the new polymer notes, they will begin to feel a lot more confident,” he said.
Secure, Tough, and Clean?
The polymer-based notes are made from a thin, clear plastic film that can be printed on like paper. By turning to plastic, central banks worldwide will be able to slow the movement of fake currency by adopting high-tech security devices, such as holograms and see-through windows that contain hard-to-forge images. These tools make counterfeiting, which plagues countries like China and Peru (which do not use polymer-based banknotes), harder than it currently is with cotton paper notes.
“The technology for counterfeiting is rapidly advancing,” said George Cubaj, editor of the Standard Catalog of World Paper Money. “To be secure, money has to stay on top of new technologies.”
Besides being more secure, the new banknotes are also tough and potentially cleaner than paper money, which is alive with bacteria. Paper-based money, for instance, can transfer live flu viruses for up to seventeen days, according to some experts.
The new notes can last longer too, at least 2.5 times as long as paper currency. A typical $5 bill has an estimated life of 4.9 years, while a $20 bill lasts an estimated 7.7 years, according to the US Federal Reserve. Another benefit of the plastic-based currency is that it can also be recycled and survive searing heat and freezing temperatures.
“Polymer notes can withstand heat as high as 140 degrees Celsius,” said Richard Wall, the director of currency at the Bank of Canada. “And you can even clean them by wiping them down with water.”
Sun Spots and Wallet Woes
These newer, non-paper notes are meant to be more secure and to last longer than paper-based currency. There are few drawbacks it would seem, although critics argue that its lack of “foldability” makes it a challenge to put the money in a traditional leather wallet, which on the other hand could present an opportunity to handbag and “manbag” makers everywhere.
“They have memory and can spring back from being folded,” said Cubaj. That was a problem in parts of Thailand, he added, where it’s traditional to fold banknotes. Other people complain that the new notes are slippery and stick together.
Nigeria, which is still a largely cash-based society, is going back to old-fashioned cotton paper cash this year. The country began testing low-denomination polymer notes in 2007. But the ink on the notes faded under the blazing sun experienced year-round in the African country. And Nigerian bus conductors and other merchants began rejecting the blurry notes. However, this is hardly likely to be an issue in the UK, which sees more rainfall than sunshine in an average year.
For now, some big countries like the United States are sticking with their paper money. There are no plans for the US to convert paper dollars into plastic ones, said Cubaj. One reason: the exorbitant cost to replace it.
“Cash is a comfort zone for people,” he said.
Over the next few years, consumers are likely to use cash for a smaller proportion of the payments they make. Even so, given consumer preferences and the wider uses of cash, overall demand is likely to remain resilient. Cash is not likely to die out any time soon, according to the Bank of England, which continues to work with the cash industry and to invest in banknotes.
The next few years will see the launch of new banknotes for the £5, £10, and £20 denominations.
The future rate of growth in demand for cash is uncertain and will depend on a number of factors including alternative payment technologies, retailer and financial institution preferences, government intervention, and socio-economic developments.
Many commentators argue that although so-called cashless societies have their place, total eradication is almost impossible and, with aging populations who are wedded to cash, not entirely desirable. Also cashless and plastic card transactions can have larger macro- and micro-economic implications. The increase in personal debt, for example, can have a major impact on credit ratings and a country’s ability to prosper. Cash on the other hand is seen as a nation’s conscience—when it is gone you cannot spend it, which makes individuals somehow more responsible with their spending, a lesson most of Europe has learned in recent years.
According to many experts, the polymer push has reached a global tipping point. With twenty-seven countries now on board and the UK’s introduction of the new notes from this year, the rest of world may decide to fall into line, particularly the powerful G8 economies. In fact with twenty-seven participating countries and counting and 35 billion polymer notes already in global circulation, there is no turning back at this stage of the game.
However, Romania remains the only European country at present with polymer banknotes actually in circulation. But the track record for polymer suggests that when the UK makes the switch and Innovia Systems, the company charged by the Bank of England with producing the notes, opens its printing plant in the north of England, other countries may follow. Polymer notes tend to be adopted in waves, with each wave having an epicentre. It was Australia in the Asia-Pacific and Mexico in the Americas. Could the UK be catalyst for Europe and Commonwealth nations?
As it stands, the European Central Bank has no plans to change the euro from paper to polymer and made a press statement to that effect early last year, although it admitted that it will watch the British experiment with interest. The UK, a non-euro country, which is simultaneously trying to renegotiate its membership of the EU, seems to be moving further away from the Eurozone and more towards an island nation. Its experience in reducing its counterfeiting will therefore be critical to how Europe shifts its positions or remains wedded to the paper euro. So all non-polymer nations’ chief economists will be watching and taking notes on the progress of polymer currency from a small island.
