No money, more problems: the debate over a cashless economy

When’s the last time you made a purchase using cash?

If you’re among the 29% of Americans who don’t use cash for any purchases during a typical week, you likely can’t remember.

The digital era has drastically changed the options we have for making transactions. In fact, nearly half of all millennials prefer to pay with a mobile device than with cash. And millennials’ willingness to adopt new technologies has been found to have an indirect effect on other consumer groups. As an example, the use of mobile wallets is expected to skyrocket in the coming years and could generate $282 billion in sales in the US by 2021.

As technologies continue to give consumers new ways to pay, some businesses across the US have chosen to go cashless to be more efficient.

In an interview with Bloomberg, Richard Crone, chief executive officer at Crone Consulting LLC, said around 10% of all brick-and-mortar stores will be cashless in five years, up from less than 1% now.

That change is fueling the momentum toward an entirely cashless economy.

But not everyone is convinced that’s for the best.

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Is “going cashless” discrimination?

As more businesses embrace new technologies and become cash-free, some state and municipal governments are taking action to slow or altogether stop the shift toward a cashless economy.

Earlier this year, New Jersey and Philadelphia lawmakers enacted legislation prohibiting cashless retail businesses. Massachusetts has had a law in effect since 1978 that requires stores to accept cash. And Washington DC, San Francisco, and New York City are considering similar legislation.

Those who have supported the laws contend that cashless businesses are a form of discrimination against individuals who don’t have a bank account or credit card.

The statement for the New Jersey legislation reads: “The bill prohibits discrimination against consumers paying for goods or services with cash. Specifically, the bill makes it an unlawful practice under the consumer fraud act for a person to sell or offer for sale any goods or services at retail if the person requires the buyer to pay with credit or prohibits the buyer from paying with cash.”

In Philadelphia, where the poverty rate sits at around 26%, the legislation received unanimous support from the city council. The law takes effect July 1, 2019, and will prohibit most retail locations from refusing cash or charging cash-paying consumers more. Businesses that don’t comply could face fines of $2,000.

Philadelphia council member Bill Greenlee, a co-sponsor of the bill, told The New York Times that the law is intended to ensure payment fairness for all residents.

“It just seemed to me unfair that I could walk into a coffee shop right across from City Hall, and I had a credit card and could get a cup of coffee. And the person behind me, who had United States currency, could not,” he explained.

According to the Federal Reserve, there is no federal law requiring businesses to “accept currency or coins as payment for goods and services.”

The unbanked

So just how many Americans don’t have access to bank accounts or credit cards?

A national survey by the Federal Deposit Insurance Corporation found that around 8.4 million US households, or 6.5% of the country, were “unbanked” in 2017, meaning they didn’t have a checking or savings account. Another 24.2 million households, or close to 19% of the country, were classified as “underbanked.” That term refers to individuals who have a bank account but also use other financial services like money orders and payday loans.

There are several reasons why someone might not have a bank account. While more than half of unbanked households said they don’t have a bank account because they don’t have enough money to keep one, about one-third cited their distrust of banks as a reason. Others noted privacy concerns, high and unpredictable fees, and issues with credit, ID or former bank accounts.

Though a growing percentage of the US population isn’t using cash regularly, it remains a primary payment method for low-income Americans. Research from Pew found that lower-income Americans (those earning less than $30,000) are roughly four times more likely than individuals with an annual income of more than $75,000 to use cash for all or most of their purchases (29% versus 7%).

Speaking to a New York City Council committee, Casey Adams, a director with the New York City Department of Consumer Affairs, acknowledged that eliminating cashless establishments might help mitigate some discrimination, but wouldn’t rectify why so many individuals are unbanked or underbanked. In New York City the percentage of unbanked and underbanked households sits at 12% and 25% respectively.

“The financial challenges go further and deeper than an inability to use cash to purchase goods and services at retail,” Adams told city officials. “Prohibiting these businesses from transitioning to cashless payments might treat one symptom of financial inclusion, but it would not remedy the cause – lack of access to payment options other than cash.”

The benefits of cashless

Many retailers and business organizations have argued that legislation banning cashless establishments stifles innovation and business growth.

What’s more, businesses that have already made the shift say there are numerous advantages that governments are overlooking.

Aside from being able to serve a long line of people faster, digital payments cut down on time and costs associated with storing and transporting cash. According to data from Visa, small and medium-sized businesses spend 57% less to process electronic payments compared to cash, checks, and money orders.

“At our cashless locations, our team members were able to do 5–15% more transactions an hour, which means guests were in and out several minutes faster in a cashless store than one that accepts cash,” reads a post from Sweetgreen, a salad chain that went cashless in 2016. “And while it took some adjustments to consumer behaviors, most guests have adapted to paying with card or app and understand why we’re moving this way. So it’s looking like cash maybe isn’t king after all.”

Research also shows that people spend more when they use electronic methods of payment versus cash. Plus, digital payments can help collect more data to better track sales and gain insights into consumer buying habits. Of course, businesses having access to those insights can be a drawback for some consumers, which is part of what has spurred the advent of cashless currencies that offer more privacy.

Instances of theft also drop when cash is eliminated. Leo Kremer, co-founder of Dos Toros, a fast-casual restaurant chain, told a New York City Council committee that before going cashless last year, his business was robbed on a couple of occasions. He said there haven’t been any similar incidents since doing away with cash: “We believe it is safer for our team to not deal with cash.”

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How to bridge the divide?

At the moment, only a small number of retail businesses have gone cashless, but there’s no doubt that the trend is catching on.

However, the change doesn’t need to come at the expense of alienating members of society without access to bank accounts and credit cards.

“Let’s pull those members of our community forward into the modern financial system rather than pulling the business community backward,” said Kremer.

One of the simplest alternatives for those who don’t have bank accounts and want to visit cashless stores is to use prepaid debit and credit cards, which are widely available.

Digital payment services are also coming out with new offerings that benefit those without a bank account. Take Square’s Cash mobile payment app as an example. It lets users send and receive peer-to-peer payments, arrange to have funds directly deposited, and spend balances using a Visa debit card. The Cash app stores money electronically and doesn’t need to link to a bank account.

“Despite very real exclusion concerns being discussed currently, digital payment offerings have brought millions of previously unbanked and underbanked individuals across the globe into the formal financial system,” Madeleine Hillyer wrote on behalf of the World Economic Forum in an article for Forbes. “Nearly all countries have experienced increased inclusion over the past decade due to the development of new technologies that allow for innovative low-cost financial products and services.”

The debate over whether cashless establishments are discriminatory or the way of the future isn’t going to be resolved overnight. Though cash isn’t going away anytime soon, there’s no question that digital payments will only become a more predominant part of the world’s economies in the years to come.

As Adams pointed out, the debate surrounding the issue raises a larger question about how to ensure a greater portion of the US population has access to financial services. That, not cashless businesses, is the real challenge to having an inclusive economy.



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