The British Retail Consortium's (BRC) annual Payments Survey found that cash usage fell to just 15 per cent of all transactions that year compared to 30 per cent in 2020.
Some 90 per cent of retail spending, and 82 per cent of transactions, were carried out using either debit or credit card payments, forcing retailers to spend a total of £1.3bn to accept payments from customers in 2021.
The BRC said that the costs associated with accepting these payments have also been rising. Debit card fees increased by an estimated 28 per cent compared to 2020, and total Merchant Service charges increased by 12 per cent. This translated into an additional £141m in costs imposed by card firms onto retailers just to process debit card transactions.
More than four-in-five card transactions were made using debit cards, with the rest made up of credit and charge cards.
As a proportion of total money spent, cash accounted for just 8 per cent of consumer spend (down from 15 per cent), while credit cards rose slightly to 23 per cent, and debit cards rose significantly to 67 per cent.
The BRC said the rise in the use of card payments in part reflects the increase in online shopping in 2021, when 48.6 per cent of non-food items were purchased online.
Despite overall trends towards online retail, this figure fell to 39.9 per cent in the first 11 months of 2022, as more people returned to the high street as the pandemic eased.
Cash remains vital for many people, particularly vulnerable groups who do not have access to other payment methods. However, decline in its usage has made it harder for many firms to use cash efficiently – increasing the costs associated with handling physical money.
"Government will need to look at solutions to ensure it remains a viable payment option for consumers," the BRC said.
In December last year, the UK's largest banks entered into an agreement to share their services to ensure that smaller communities can maintain their access to cash. This agreement follows an estimated 10 per cent decrease in the number of ATMs available to UK cardholders in 2020.
Last year, Merchant Machine warned that if current trends continue, the UK could become an entirely cashless society as early as 2026.
The BRC has called for an intervention on anti-competitive practices in card payments in order to protect British businesses.
This includes legislation to stop card fees rising and the removal of interchange fees.
Hannah Regan, the BRC's payments policy advisor, said: "With the public in and out of lockdown and cash usage discouraged last year, over 90 per cent of retail spending used debit or credit card.
"With card usage soaring, already hard-pressed retailers had to pay huge sums to accept these payments. We need urgent intervention from the Payments Systems Regulator and the Treasury to stop card schemes from abusing their dominant market position."
