Article

Legal tender? Time to reexamine the cost of cash

Cash has a cost for sure, but the real question is what price is a world without cash? The cost of ditching it could be a lot higher than many people realize.

June 30, 2015

by Andy Brown, Product Marketing Manager, Alaric Systems Ltd.

Legal tender will lose its meaning in Denmark shortly as the government plans to allow certain merchants to refuse cash from customers and demand they pay by electronic means.

It's a watershed for the country as it heads on the path towards becoming a cashless economy. Critically it has the support of businesses.

The Danish Chamber of Commerce backs the plans, which could see cash banned from some shops and restaurants next year. It's even got the support of the UN Capital Development Fund's Better Than Cash Alliance, which is working to accelerate the shift towards electronic payments globally.

According to the Danes, cash should be phased out because it's expensive, it takes time for staff to handle and it's a security concern.

There are certainly safer ways to pay these days, though payment security remains a battle for the industry. It's also becoming evident that contactless card payments make things a lot simpler and faster at the checkout.

But is cash really that expensive, as the anti-cash lobby keeps suggesting?

There has been a considerable volume of research on the topic in recent years, notably from Tufts University's Institute for Business in the Global Context. It has counted the cost of cash around the world, looking at the U.S., Mexico, India and Egypt.

In the United States, the total cost of cash is estimated at $200 billion, covering individuals, businesses and government. 

In India, the cost of cash to the country is estimated at $3.5 billion. At a 12 percent cash-to-GDP ratio, it's a particular problem in India, as this figure is almost four times as much as Brazil (3.9 percent), Mexico (5.3 percent) and South Africa (3.7 percent).

The Research Center for Financial Services at Steinbeis University found that each German citizen pays around 150 euros ($167) per year to keep using cash, or around 12.5 billion euros ($13.9 billion) a year for the whole country. In the U.K., a PayPal report estimated the burden at 2.5 billion pounds ($3.9 billion).

The science behind all these numbers may vary slightly, but the overall message is the same — cash is expensive.

It's not just the cost of cash, but the cost of not using electronic payment methods that is important to consider as well. For instance, a Visa study found that moving to electronic payments drove a 0.8 percent increase in GDP in emerging markets between 2008 and 2012. And many studies show that the unbanked who do not have access to electronic payments who suffer the most. In the U.S. they are four times as likely to pay fees to access their money.

So with all this cost of cash talk, what's actually happening on the ground? Certainly we're seeing cash as a proportion of payments falling as consumers seek a greater mix of payment methods. Contactless cards are encroaching into small value payments, too.

The figures vary greatly depending on the methodology used, but it's generally accepted that cash comes with a cost. There are security, transport, staffing and opportunity costs for businesses. Banks need to factor in the costs of running cash dispensers, though superior ATM technology is increasingly making this less of a problem. For governments, cash is a leaky bucket when it comes to tax revenues and the black economy.

in fact the volume of cash in circulation is showing no signs of falling and banks and independent deployers are actually rolling out more ATMs than ever before. As many studies show, cash is a hard habit to break for many and it won't be abandoned any time soon.

In addition, a cashless society as envisaged by some would come with many drawbacks. How would you pay if there is a power outage and the point of sale terminals don't work? What if the Wi-Fi/3G fails and you can't use your Apple Pay? The Danish experiment may yield us some answers.

For the conspiracy theorists, even Bitcoin, touted as the new cash, suffers from the same inherent problems of technology. If you can't access your Bitcoin wallet it's no good to you.

So cash has a cost for sure, but the real question is what price is a world without cash? The cost of ditching cash could be a lot higher than many people realize.

The Tufts University study argues that "the central inconvenience of money is its very physical manifestation." This could also be its great strength.

This article was reprinted from Industry News.

photo istock