The Real Barriers To a Cashless Society

In response to the recent article in Retail Banking Strategies reviewing the Federal Reserve study on the use of cash for payments, Dave Birch provides a perspective on why cash may still be king.

The recent Retail Banking Strategies article, “6 Reasons Why Cash is Still The King of Payments” reviews the recent Federal Reserve report from the Diary of Consumer Payment Choice (DCPC). It’s a great post and you should go and read it, but I wanted to draw attention to the headline conclusions of that report:

The study found that consumers choose to use cash more frequently than any other payment instrument, including debit or credit cards for the following reasons:

  1. Cash plays a dominant role for small-value transactions
  2. Cash is the leading payment instrument for specific types of purchases
  3. Cash is the key alternative when other options are not available
  4. Cash is the leading payment alternative for Gen Y
  5. Cash is a primary payment option for lower income segments
  6. Cash can’t be hacked

I am curious about the extent to which of these reasons represents a serious barrier to electronic payments and the rate of change of the strength of that barrier since, for many of our clients, this will impact their electronic payment strategy. So, I thought I would comment on each of them in turn and see how my impressions are received.

Cash Plays a Dominant Role for Small-Value Transactions

This undeniably true and one of the reasons why the overhead of cash handling is becoming a problem for a great many kinds of businesses. I was surprised to see that the average cash transaction is $21 (I’d assumed it would be smaller by now). I would never dream of making a transaction that large with cash.

No-signature stripe in the US and contactless EMV everywhere else are eating into cash transactions at the low end, and when mobile gets its act together, I expect the fall to accelerate (because, as the cost of cash handling falls on fewer transactions, the overheads will go up).

Cash Is The Leading Payment Instrument For Specific Types of Purchases

I’d assumed that this meant drugs, corrupt politicians and prostitution, but it turns out that the Feds were referring to things like person-to-person, gifts, entertainment and so on. Gift cards (and especially mobile e-gift) and the expanding panoply of P2P services will attack these kinds of transfers. Note that the poor use cash for a wider range of purposes than the rich (more on this shortly).

Cash Is The Key Alternative When Other Options Are Not Available

Well, I would have thought that anything is a key alternative when “other options are not available”. I took this to mean when electronic alternatives fail. But look at what this retail manager says:

“And losing power and/or communications does NOT stop us from accepting cards. It will, however, prevent our CASH registers from operating in a secure and auditable fashion.” – (Paper Or Plastic: How Americans Buy Stuff, In 1 Graph : Planet Money : NPR)

I think within these words we see the key to the cash conundrum. The key is the phrase “secure and auditable”, of which cash is neither. Sure, if I’m trying to evade tax and hide a transaction, I have a strong preference for cash and its implicit cross-subisidy from the honest to the dishonest. But we should not be structuring national payments policy around the optimal implementations for organized (ie, unelected) and disorganized (ie, elected) crime.

Cash Is The Leading Payment Alternative For Gen Y

I find this odd, since I have current and detailed knowledge of the transaction patterns of a couple of Generation Whatever exemplars and I interact with them entirely through PingIt and mobile banking. They have both had debit cards since they were 13 and, since no.2 son lost a £5 note while out cycling one day, wouldn’t dream of using cash to buy anything other than the most trivial purchase, or where retailer policy forces them to.

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Cash Is a Primary Payment Option For Lower Income Segments

This is a serious issue and, I think, the meat of the point I want to make to comment on the Retail Banking Strategy article.

“In contrast, the poor — tens of millions of people in the U.S. and billions of people worldwide — often have no option but cash, and pay dearly because of it.” – (How Cash Keeps Poor People Poor, Digital Money Is Future | Business |

This point, to me, is the most significant because it underpins the moral case against cash that is distinct from the technical and business cases that we (ie, the industry) spend most of our time calculating and recalculating.

“To completely dispel the myth that anonymous financial transactions are a tool of the little guy, our rigorous economic research—led by a former senior IMF economist—conclusively demonstrates that unrecorded financial transactions significantly exacerbate income inequality: making the rich richer and the poor poorer.” – (Why Bitcoin And Other Cryptocurrencies Will Inevitably Become Tools Of The Rich, Powerful, and Criminal – Business Insider)

The fact that cash is the primary payment option for lower income segments is a comment on the failure of the payment industry, not a redoubt against the electronic payment invasion. Nothing in the Federal Reserve report represents a real barrier when it comes innovation around the alternatives to cash.

Cash Can’t Be Hacked

In the UK, the government is in the process of redesigning coins (at colossal and pointless expense to industry) because of the high number of counterfeit coins in circulation. The old £50 has just been withdrawn and a new one with more anti-counterfeiting technology on board has been introduced. Cash can’t be hacked? It is every day, as well as being lost, stolen and hidden.

So, the fact that cash is still used so extensively may be due to external inefficiencies as opposed to conscious consumer choice. Aren’t electronic payments a better alternative for the reasons described above?

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