The 2019 ISA season is now in full swing, and it's as good a time as any to focus on financial planning - and, within that, looking ahead to your retirement years to ensure financial security.
Is the time right for digital cash?
Last week's crippling disruption of Visa, and the widespread failure of card payments across Europe, caused quite a stir. The network meltdown left millions of customers unable to make payments on goods and services, and saw many ATMs running out of cash.
It also thrust into focus how heavily dependent Western societies have become on this electronic payment provider. Visa processed nearly £5.5 trillion in transactions around the globe last year - a staggering 40 per cent increase on 2016. And in Britain, over 95 per cent of debit cards operate on the firm's network.
The volume of digital payments in 2017 dwarfed that of cash for the first time, and countries such as Sweden are said to be on track to become 'cashless' within the next five years. In the UK, over 40 per cent of the value of our GDP was facilitated through card payments.
While the Visa disruption was resolved within 24 hours, it has created concern about the risks involved with the current global payments system, and inadvertently gifted momentum to a fledgling alternative: digital cash.
What is digital cash?
Digital cash, sometimes referred to as 'eCash', is an official, electronic form of money. As with notes and coins, digital cash would be issued by the Bank of England (BoE), rather than private or commercial banks, and thus guaranteed by our central bank (in the same way that cash is). As such, it carries no risk, as, by definition, the BoE can never go bankrupt.
This is contrary to money sitting in your bank account at present, which is ultimately a claim on that commercial bank, who creates the money. Although small (and mechanisms such as the Financial Services Compensation Scheme provide further mitigation), there is therefore risk associated with commercial bank-created money. And given that this type of money boasts the lion’s share of the current total circulation, this risk increases, particularly in times of financial turmoil.
How does digital cash work, and what are the benefits?
In practice, many experts suggest the most straightforward method of implementing digital cash would be to enable consumers to open deposit accounts with the BoE. The Bank already issues digital currency, but this is in the form of 'reserve accounts', which are the preserve of commercial banks.
Extending accounts to the wider public and facilitating transactions between them would mean money could be transferred instantly within our central bank system. The key symmetries with normal cash - and contrary elements to online payments - are that anonymity of how this money is spent is preserved, and the exchange of digital cash does not require a commercial bank's involvement (and thus should not involve any fees).
But there are other potential benefits associated with digital cash too:
Reduced dependence on large banks: A shift towards payments in central bank money reduces the volume of dependence on ordinary bank deposits, which carry liquidity and credit risks. Furthermore, Government guarantees currently protect deposits, which creates a moral hazard for banks when it comes to leveraging. This shift should therefore make for a safer financial system.
Helpful for small businesses: Entrepreneurs and small businesses invariably hold accounts with high-street banks, which can be costly and inefficient. By running payments through eCash accounts, these entities will be given a significant leg-up.
More inclusive: As banks are fundamentally lenders, they do not offer accounts to everyone, as there are certain criteria which must be met. Digital cash accounts merely act as payment service facilitators, and should have a much broader reach.
Control money creation: While banks create money, alternative lenders such as peer-to-peer lending (P2P) platforms do not, and money is lent and borrowed on a pound-to-pound basis. As greater market share shifts towards P2P platforms, the BoE can assume more control of tempering the levels of money creation, rather than leaving it to commercial banks.
A Visa safety net: The idea of digital cash was arguably born as a substitute for normal cash. Yet the Visa crisis shows that, even while cash remains alive and well, an alternative to the online retail payment system, as we know it, is merited.
Are there any dangers associated with digital cash?
The biggest concern of all is that, if it is quick and simple to convert money held in a commercial bank into digital cash, a flight of deposits could ensue. This would be disruptive in terms of a commercial bank's business models, and conceivably even result in widespread bank runs.
So, it would be incumbent upon authorities to manage this in an orderly way. That said, it is unlikely (in normal times) that consumers would wish to convert all their savings into eCash anyway, as it would be sensible to keep money in interest-bearing accounts.
Digital cash isn't about to render banks obsolete by any stretch of the imagination. What it would do though is necessitate higher reserves, and probably incentivise banks to push up savings interest yields. While this may be countered by an increase in borrowing costs as a result, it would still create a natural recalibration of a system which has, for the best part of a decade, seen the balance unfairly skewed against diligent savers.
There remain unanswered questions about digital cash. How would it be managed? Would it be recorded on a centralised ledger, or even on blockchain? Would it hasten the demise of cash, or halt it? And what other unforeseen teething issues might there be?
Nonetheless, there are many compelling arguments in favour of its implementation, and this is a concept which is almost certainly nearing reality. Besides, with memories of the 2008 financial crisis still fresh in our minds - and the actions of the banks which helped precipitate it - anything which can make our financial system safer warrants serious consideration.
The Lifetime ISA (LISA), announced in 2016, would prove to be one of George Osborne’s last flagship gestures to UK savers and investors as Chancellor, eventually launching against a backdrop of anti-climax a year later in April 2017.
There is barely a week to go until the conclusion of the 2017/18 financial year, which means that, as ISA season begins to hot up, time is running out to take advantage of your ISA allowance.
Over the last decade, there can be little dispute that the reputation of mainstream banks – and particularly the so-called ‘Big Four’ (HSBC, Barclays, Lloyds and RBS) – is at its lowest ebb.
The peer-to-peer (P2P) lending industry is now regulated by the Financial Conduct Authority (FCA). The regulatory framework has been designed to protect customers and promote effective competition.
Loan underwriting is the process that we undertake to analyse all of the information provided by each loan applicant and their credit file to assess whether or not that applicant meets our minimum loan criteria. As part of that process all data is verified, analysed and summarised to paint a picture of each applicant.
When you earn interest from a regular bank savings account, for example, the bank automatically deducts basic rate tax (currently 20%) before paying your interest. With interest earned from peer-to-peer lending, tax is not deducted automatically so lenders will need to declare their income to HMRC.
As 2018 draws to a close, with our bellies full of Christmas turkey, it's only natural to look back on the past 12 months and reflect. No doubt, it's been a turbulent one economically and politically, and not everyone has had it all their own way.