The replacement of the currency featuring Queen Elizabeth II with King Charles III is a process that may take several years. All the money in circulation must filter back through banks. Even once that process is completed, the older currency is still legal tender. As in Australia, a UK coin or note with the former monarch’s effigy retains the same value.  

But it may surprise you that this is not the most radical change to impact physical currency in the UK.  

At the end of the month, billions of pounds in the UK will be largely worthless as the country moves from paper banknotes to polymer banknotes. 

We tend to call all physical notes ‘paper money,’ but that has not been strictly accurate for some time following the move to polymer banknotes. Here in Australia, our banknotes are among the safest in the world, with security features designed to identify every note as legal tender. It is difficult to produce ‘funny money’ in Australia that is not quickly identified as fake.  

Australia is a world leader with this technology. Polymer banknotes were first developed by the Reserve Bank of Australia (RBA) and CSIRO.  

The first polymer banknote was introduced in Australia in 1988. By 1996, we had entirely switched over to polymer notes from paper.  

In the UK, however, they have been much slower to make the changeover. The first polymer notes were introduced in 2000, but only in Ireland by the Northern Bank. It was recently in 2016 that the Bank of England introduced £5 polymer banknotes, with polymer £10, £20, and £50 notes introduced since.

After 30 September 2022, all paper currency will cease to be legal tender. The Bank of England believes that people are holding approximately £14.5 billion in banknotes of soon-to-be-worthless currency. That is about 477 million banknotes. Most of these banknotes are the more recently released £20 and £50 notes.  

Britons are being asked to spend the paper notes now or deposit them into a bank account to ensure the paper money exits circulation. They can also exchange notes at the bank, with most banks expected to continue to swap paper notes with polymer banknotes after the 30 September deadline. So, while paper notes may not have value at the local coffee shop, they retain value at the bank. 

Part of the reason there are still so many UK paper notes in circulation is due to money hoarding. It is part of a trend that has been noticed here in Australia.  

Today, there is less cash circulating in the economy as people pay for everyday purchases with cards, mobile phones, or smartwatches. But there has been a banknote surge with people storing their wealth in paper money rather than using a commercial bank.  

According to the RBA, half to three-quarters of all banknotes on the issue are hoarded. That is the equivalent of between $50-75 billion. Seventy-three per cent of banknotes in Australia are $50 and $100 notes. Today, there are more $100 notes than ever before, but seeing one in real life is rare (unless you are currently hoarding them). 

“Banknote hoarding is an indication of the black-market economy and a lack of trust in banks,” said Payment Services Group consultant Bradford Kelly.  

The RBA report that the store-of-wealth function of banknotes is often seen during times of economic stress - certainly seen following the Global Financial Crisis and COVID-19 pandemic.

With less physical money actively circulated, there is less of a need for the RBA to produce as much replacement money. At least, that would be the case if the RBA were not replacing every coin and banknote featuring Queen Elizabeth II.  

There is a churn of money every day, with the RBA shredding what is said to be a million dollars' worth of banknotes every hour. New banknotes are then issued to replace the value of the destroyed notes with these replacements issued in line with where demand is. So, there are fewer $5 and $10 notes in circulation now as demand is higher for larger denomination notes, thanks to hoarders.  

Destruction has already been at record lows. The mid-90s introduction of polymer banknotes means that our banknotes last longer.  

But money continues to be destroyed and replaced to ensure that currency has the latest security features and retains physical structural integrity. Banks and armoured guard companies scan every note using high-speed machines that utilise cameras and other technology to determine how good the money is. If it meets standards, it is sent out again, but torn and worn money is sent to a facility to meet its fate.  

All the shredding and note production takes place at a facility near Melbourne run by Note Printing Australia, a subsidiary of the Reserve Bank of Australia. 

For further reading: Bloomberg, AFR, Note Printing Australia, RBA and News.com.au