Is the end of cash finally on the cards?

A decade ago, one in eight workers still got paid in cash, but by 2009 only one in 20 took notes and coins home in a little envelope,

according to the UK Payments Council. By 2018 the figure will be one in 50. The last decade saw not only the rise of internet banking and shopping but also the years when cards took control of our wallets, particularly the debit card.

Transactions in cash fell from 73 per cent in 1999 to 59 per cent in 2009, and in the same period debit card spending rose from 65bn to 264bn. Even in pubs, cash spending has dwindled from 90 per cent to 40 per cent. We may have 63,000 holes in the wall in the UK and six in 10 transactions still involve cash, but 80 per cent of these are less than 10.

If we had not made the move to other forms of payment we would need 102bn more cash in our wallets each year (2,050 per adult) to meet our spending needs today compared to a decade ago.

Only 0.8 per cent of retail payments are now made by cheque. Meanwhile, card usage has flourished, with credit cards taking a back seat to the increasingly dominant debit card and spending on them fourfold in 10 years, with six billion payments made a year. A conservative estimate says one in four of all transactions will be by debit card by 2018, spurred on by new "contactless" technology.

Banks are keen to make inroads into the 18 billion cash transactions under 15 we in the UK make each year, by replacing the cash used for small purchases like sandwiches or drinks in the pub with a swift swipe of a card past an electronic reader.

There are already about 10 million contactless cards in circulation displaying the wave symbol, and there will be four million more by Christmas. The new buzzword in banking, they allow people to pay for cheaper items – up to 15 in one transaction – without having to key in a PIN or hunt around for cash.

Until now use of the technology has largely been confined to cafs and bars in London and the south-east but it is spreading nationwide, with big-name retailers like Tesco, the Co-op, Boots, Ikea, and Little Chef either trialling or rolling it out.

From next year 100 Co-operative stories nationwide will accept

contactless payments via a card issued by Barclaycard or Visa. The user touches the "reader" with the card, and the cost of the items is automatically deducted.

The technology has been trialled at sandwich shops like Pret-a-Manger and Eat. Supporters of the cards say they are convenient and speed up shopping. Detractors say they will help to make it more difficult for consumers to control their spending.

There have been high-profile TV ads for the cards, but many people are still unaware of what "contactless" means. The technology uses short-range wireless technology, so the reader at the till point can only pick up a signal from your card when it is very close. The retailer enters the amount of your purchase into the machine, you approve it, then hold the card in front of the reader, which displays confirmation of the transaction.

A spokesman for Barclaycard said the payment method is not only convenient but safe. Individual purchases are limited to 15, and to prevent a thief going on a spending spree with your card, you will be

asked to enter a PIN if a certain number of transactions or amount of spending has been hit – typically after 50 of spending.

Barclaycard say retailers and customers will both benefit from transactions taking only an average of 12.5 seconds, compared to 24 seconds for cash and 27 seconds for a card/pin purchase.

Barclays/Barclaycard have issued eight million of the contactless cards so far, but Halifax and Bank of Scotland have also issued 650,000,

credit card giant MBNA are rolling out the cards by the end of this year and Lloyds TSB by spring 2011. What's needed now is a major retailer like Tesco or Sainsbury to embrace the technology, but they're taking things slowly.

"The advantage for a bank is that more people are using cards more," said a spokesman for Barclaycard. "People seem very comfortable with the technology, and for the country and for banking it's important to take out the hidden costs (of handling cash.)"

A step beyond the contactless card is payment for purchases using a mobile phone containing an electronic chip carrying your bank details. It could mean bypassing queues, entering, buying and exiting the shop in a matter of a moment or two.

Visa is carrying out the biggest of several European trials of this mobile phone technology in the Spanish resort of Sitges south of Barcelona. About 1,500 residents are participating in the trial, a co-operation between Visa, Spanish bank La Caixa and mobile company Telefonica (owners of 02 in the UK). Five hundred retailers were persuaded to take part, and each was given an adapted sales terminal.

The customers were given Samsung phones that look normal, but each has embedded in it a chip similar to that in a debit/credit card. The retailer keys in the amount to be debited, and if the total is less than e20 the customer simply holds their phone next to the terminal. Bank details are transmitted and a tick appears on the phone's screen when the transaction is complete.

For more expensive purchases a PIN number is still required and, as with contactless cards Visa also runs, a PIN is asked for every few transactions as a safety precaution.

The Sitges experiment ends in November, but results so far suggest a high level of satisfaction and Visa says all sorts of advanced safety features are built into its mobile payments system to combat

counterfeiting of the chip, and the payment facility can also be

password protected.

It helps that, on average, it takes us 13 minutes to report a stolen phone; we take much longer to realise a purse or wallet is missing. Visa says customers will be reimbursed for unauthorised payments in between the theft of the phone and reporting it to the bank if they can prove payments were fraudulent and that they were not negligent with either the phone or their bank details.

Apple is believed to be developing an iPhone with mobile payment technology, and other phone companies are bound to follow suit. We could, in the future, have all kinds of cards embedded in our phones.

Risk expert Laurie Beagle of Sheffield-based P&A Receivables Services, says: "I think these technologies are a good idea but obviously

security is all-important. We shouldn't underestimate the damage someone can do in 13 minutes; they can destroy your life.

"People will have to be much more aware of the safety of their phone, as phones will become a bigger target to fraudsters if they have bank details on them.

"They will also have to be wary of keeping all of their life on one machine, including data like diaries with information of when they will be away from home."

Iain Clacher, lecturer in accountancy and finance at Leeds University Business School says that, despite the advances in technology, he doesn't see the end of cash coming at any time soon.

"Like mobile phones, debit cards and chip and PIN, it's hard to imagine life without them now – even though some people had to be forced into them. But I like cash, and think it is better than cards because psychologically cards make you feel like you're not spending anything, with the detrimental effect of racking up huge bills."

No-one's saying cash will ever be completely replaced. For a start it's the currency of the black economy – estimated to comprise about 12 per cent of the UK's GDP – one reason the authorities would like to see it used less.

But, despite some people's deep emotional attachment to it, cash is beginning to fade from view: this year debit card transactions will overtake cash for the first time, and, even if 61 per cent of us are not borrowing on our credit cards, we have more of them than the rest of Europe put together.

So like it or not, worried or not, the day when cash becomes somewhat exotic is not that far away.