Where Do You Stand on the Cash Debate?

Going cashless might seem the logical route for retailers and other establishments that want to take full advantage of the digital economy. The Amazon Go convenience stores in Seattle, Chicago and San Francisco, the Mercedes-Benz Stadium in Atlanta, and a few retailers in Philadelphia are among those to embrace a cashless system.

However, the City of Philadelphia has now stopped the cashless brigade in its tracks, making the case that it excludes people who don’t have credit cards or bank accounts, or those who simply prefer to pay cash. Come July, an ordinance the city passed recently will take effect, with exceptions for some establishments like parking garages.

At first glance, the ban on cashless stores seems to fly in the face of the drive towards a truly digital economy, but both sides of the table have compelling arguments. “On one hand, as global financial institutions are becoming more developed, efficient and advanced, there is less and less need for cash,” says Itay Goldstein, Wharton professor of finance. “On the other hand, you still have populations in poor areas that do not have access to many of these advancements, and as a result, they rely on cash. There is clearly tension.”

With the help of our sister publication, Knowledge@Wharton, we explore the issues around going cashless, and offer some highlighted teen perspectives on the cash vs. digital discussion.

Philadelphia is not alone in banning cashless establishments. A 1978 Massachusetts law requires all establishments in the state to accept cash; New Jersey has a similar bill awaiting the governor’s signature; and New York is considering such a law, according to a Wall Street Journal report.

Philadelphia Democratic City Councilman-at-large William Greenlee co-sponsored the bill last fall with Democratic Councilwoman Maria Quiñones-Sánchez after he learned that at some retail outlets in Center City, consumers needed “some kind of credit card or debit card to get a cup of coffee or a salad.” That didn’t sound right to him. “I know there are people who are [considered] ‘unbanked,’ which means they don’t have any kind of credit,” he says. “The more I started talking to people about it, we realized that it overly affects — not surprisingly — lower-income people, minorities and immigrants who might fall into the category of being unbanked. So, we put in a bill that basically said that regular retail stores have to accept cash.” The bill doesn’t prevent establishments from accepting credit cards or debit cards, but they would also have to accept cash, he added.

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Going cashless has compelling advantages for retailers. If they don’t keep cash at their locations, they don’t need to employ cashiers (as in the case of Amazon Go), spend more on security or risk thefts. Customer transactions could potentially be faster than those involving cash, and the higher throughput could also mean more sales. Opposition to the Philadelphia ordinance has come from the National Retail Federation, the Chamber of Commerce for Greater Philadelphia and the Pennsylvania Restaurant & Lodging Association, according to the Wall Street Journal.

“I can see the business motivation, especially if you know the affected customers are low-income people,” says Mehrsa Baradaran, associate dean for strategy initiatives and associate chair in corporate law at the University of Georgia Law School. Businesses might internally make the case that they “can afford to lose” such customers, she suggested. “This is where people have to stand up and say, ‘Look, there are some of us who don’t have the political power but who still need to operate in cash.’”

For sure, cashless establishments could reap the potential benefits cited above, “but there’s no free lunch here,” says Jay Zagorsky, an economist and senior lecturer of markets, public policy and law at Boston University. Businesses that accept credit cards have to pay merchant fees that could shave off two or three percent of their profits, he pointed out. Middle- and high-income consumers who don’t use cash have a downside, too, because “by charging everything, you tend to spend more. You’re divorced from the moment of payment. You can safely swipe your card and worry about it 30 days later.” Greenlee, Baradaran and Zagorsky discussed the pros and cons of going cashless on the Knowledge@Wharton radio show on SiriusXM.

According to Zagorsky, Center City Philadelphia attracts a large number of tourists, and “not all tourists necessarily have the proper [means for] going cashless.” Even advocates of everything digital find merit in leaving room for cash. He cited a newly opened Boston restaurant called Spyce, which prides itself on its “start to finish” robotic technology. The restaurant takes orders on touch screens and delivers the food with minimal human intervention. However, the touch screens include a button that allows customers to call a manager to accept cash payments, he says.

Moreover, in a cashless environment, technology and systems could fail, leaving consumers stranded. Zagorsky recalled an incident at a gas station when the pump payment system malfunctioned and his bank immediately invalidated his card, suspecting a fraud. Luckily, he had some cash that he was able to use to pay for gas. Otherwise, he would have had no way to reach his destination — an airport some 60 miles away.

When retailers and other establishments go cashless, low- and middle-income American citizens who don’t have access to a bank account tend to suffer most, says Baradaran. “They pay a lot to use their money. Something like 10% of their income goes to getting prepaid debit cards or money orders.”

Many people also risk penalty fees if they don’t maintain minimum balances in their bank accounts, Baradaran noted. “I’m sure a lot of people make the very rational decision to not have a bank account and risk all those random fees, and go with a check cashing service,” she added. “I would hope that more cities would follow Philadelphia’s lead.”

Greenlee’s ordinance excludes parking garages, car rental firms and hotels, and wholesale clubs based on a membership model. Greenlee says he and Sanchez included those carve-outs to ensure that they have the requisite votes to get the bill passed. “We wanted to try to address whatever concerns might be raised,” he says. “Much of our focus in this bill was on the retail brick-and-mortar establishments. We saw garages and rental car businesses as just a little bit different, and we were willing to carve those out in order to make sure that we had enough council people and the mayor comfortable to support the bill.”

Aneesh

It isn’t clear as yet if Amazon Go stores would be affected, if and when they open in Philadelphia. Although Amazon’s Prime members would qualify for exemptions on the grounds that payment works on a membership model, Amazon has said that its Amazon Go stores would cater to other customers as well. Greenlee is hopeful that a solution could be found. “We think we can work with Amazon on that issue so that they can still come in here if they choose,” he says. “But our priority has to be the people who live here now. We’re supposed to help the ones that need the help the most. If we can work with the other entities to make them comfortable, that’s fine, too.”

Between now and July 1, the Philadelphia Commission on Human Relations, which will be the enforcement agency for the ordinance, and the city’s Commerce Department would try and find ways to “satisfy or placate” Amazon or other companies that might want to set up shop in the city and go cashless, Greenlee says.

Expanding Inclusion

After Greenlee co-sponsored the bill, he was “amazed” at how it touched a chord in many people. “I’ve gotten many calls from people, and folks who know me, stop me and say, ‘You know, that really makes sense.’” He noted that many active credit card users support his bill. “It’s the fairness issue — the equal treatment issue that I think is hitting with people.”

Goldstein says he did not see the Philadelphia ordinance as an overreach. “Regulators step in in many cases when there is concern about discrimination,” he says. “It is clear that at the moment, poor populations don’t have access to credit cards and debit cards. If you have more and more stores in Philadelphia that don’t accept cash, then essentially those populations are going to be banned from these stores, and that is concerning to regulators, to the city administration and so on.”

The rapidly growing fintech industry makes its business case around use of technology in financial services to lower costs and improve efficiency. Fintechs are also useful in expanding financial inclusion by serving unbanked populations, says Goldstein. “The irony is that the whole fintech revolution is meant to include more and more populations, rather than exclude them.”

China and Africa are examples of such inclusion, Goldstein noted, with the widespread and growing use of cashless forms of payment. “People who do not have bank accounts, but have cell phones, can get access to payment systems.”

Goldstein agreed that a cashless economy makes sense only when everything works fine with credit cards and debit cards, and that they are not vulnerable to outages, frauds or hack attacks. “Yes, there is a concern over the stability of the infrastructure of the digital payment system,” he says. “Clearly, cash is a good backup.”

Goldstein hoped that the ban on cashless stores is not a permanent move. “I hope that there will be a way to reverse it sometime in the future when maybe more people have access to digital payments,” he says. “Fintech firms in the U.S. should try to reach out to more and more populations. Then there will be fewer concerns about banning cash.”

Ghanem

Conversation Starters

What does Itay Goldstein mean when he says, "The irony is that the whole fintech revolution is meant to include more and more populations, rather than exclude them.” How is going cashless putting some people at a disadvantage?

Where do you land in the cash debate, with all its moving parts? Clearly, Philadelphia's decision is driven by a need to be more inclusive. But there are a lot of other aspects to this argument, many of which are hinted at by the teen quotes in the article. Do you think a cashless society is a good thing? How might we address the issues faced by people who don't have bank accounts or access to credit cards?

What is your ideal way to make payments? Do you use an app? Do you use cash? Share a personal story about your connection to currency in the comment section of this article.

4 thoughts on “Where Do You Stand on the Cash Debate?

  1. I don’t think stores going cashless is a good thing because it’s true that there are still many people who don’t have bank accounts. However, I do think we need to encourage people to get credit/debit cards and get banks to lower the standards of creating a bank account. Going cashless is the trend in many countries. It is convenient for both stores and customers. When I went to China last year, nearly every single store accepts Alipay or WeChat Pay, both accessible as an app on a smartphone. You can connect your bank account to those apps and pay for anything (in stores that accept those payments) as simple as a QR code. When my mom and I went on shopping trips, we just need our phones! There are more than 700 million active users on Alipay and about 900 million active users on WeChat Pay worldwide.

    1. Xinyu, I appreciate your anecdotal experiences of using Alipay and WeChat Pay in China and believe they provide insight on the nature of the financial technology revolution occurring across the world. I also agree that going cashless is the trend not only in developed countries but especially in developing countries, but it needs to happen in a way that promotes inclusion not exclusion.

      However, while I agree with your reasoning and analysis and even your personal experiences as I have witnessed similar mobile payment apps being prominently used in India, I disagree with the conclusion in your first statement that going cashless is a bad thing. I believe that going cashless is on net a good thing. You recognize that going cashless is the trend across the globe and I believe that is because the potential of cashless payment is tremendous, but it must be promoted in an inclusionary way.

      As Itay Goldstein points out, “The irony is that the whole fintech revolution is meant to include more and more populations, rather than exclude them.” But generally speaking, the fintech revolution has been extremely successful at including people into the economy. There are thousands of microfinance institutions (MFIs) like the ones you mention (Alipay and WeChat Pay) that exist across the world that exemplify the success of fintech. Whereas established banking institutions have not been able to invest in emerging economies because of lack of infrastructure and profitable clients, MFIs have remarkably penetrated rural economies for their accessibility and ease of use. This is for two main reasons: first, even the villagers of the most rural towns have access to cheap cellphones and mobile apps; and second, carrying large amounts physical cash around in many African and Asian countries where hyperinflation has ravaged the value of currency is simply not practical. As a result, the cashless trend has taken a strong footing in developing nations across the world, acting as a tool of inclusion rather than exclusion.

      But, as Goldstein mentions, there is an irony here. Whereas in many places across the globe, using cash for transactions serves as a barrier, there are also places where cash is the most accessible method of exchange. Places with stronger currencies and reliance on large financial institutions that have various hoops to jump through to create bank accounts are prime examples of this, and those who are not able to jump through the hoops fall when they’re not allowed to use cash for transactions. However, this is indicative of a larger issue that affects places like Chicago, San Francisco, and Philadelphia rather than a problem with the cashless trend itself. Wealth inequality within large metropolitan districts creates another avenue to financial exclusion that is a lot different than the exclusion rural villagers across the world face. It is not that institutions cannot access these people, rather that they don’t want to. The citizens who are unable to open bank accounts because of random fees, minimum balances, and fear of incurring penalties are viewed as risky clients by banks, and consequentially little effort is made to adopt them into the cashless system.

      Ultimately, just because I believe the cashless trend is a positive development, does not mean that there are no obstacles to overcome. As we can see from the article, there are still demographics that are harmed by this development and that necessitates intervention that prevents exclusion. The goal of fintech is to create positive change and include more people into the interconnected financial system, and if it’s not doing that it should be regulated to do so. In the case of totally cashless stores like Amazon Go in Philadelphia, it is possible for these stores to promote the cashless trend without being a hundred percent cashless. Having an option of paying in cash for those that only have cash is key to preventing exclusion. Yet that is still a temporary bandage; a true solution would be addressing the incentive systems that prevent those same people from being included in the financial system so they can reap the benefits of the cashless trend. Thus, while I disagree with your final assessment of the cashless trend, I do agree that we need to do everything we can to facilitate the inevitable transition from cash to cashless in a way that does not undermine the goals of cashless payment in the first place.

  2. Nice to see your comment again Xinyu! Under the current circumstances, I agree that going cashless is not necessarily beneficial for the entirety of the population. However, if we were to change the circumstances and allow more individuals to get access to bank accounts, then going cashless would be extremely beneficial.

    The example of China you gave is great, because they are using technology for all payments are they integrating them into communication applications that people use on a daily basis so they are able to reach a wide base of users. Similarly Facebook is trying use their large user base to develop their own crypto currency known as Libra and use their digital wallet system Calibra to allow their users to make transactions online.

    Clearly, there is a fundamental problem that is leading to a high percentage o unbanked and underbanked individuals. A 2017 survey from the Federal Deposit Insurance Corporation (FDIC) indicated that 6.5 percent of households were unbanked and 18.7% of household were underbanked. Unbanked is defined as not having a checking or saving account, and underbanked is defined as having a bank account but opting to use services like pawn shops or payday loans. There is no infrastructure in place currently to incentivize individuals to open bank accounts and opt to use banking services. For example, India’s government was able to incentivize and make bank accounts more accessible to people. Before 2009, about 50% of Indians had no form of identity. They launched a service in 2009 called Aadhar that allowed 95% of the population to have digital proof of identity. Then in 2016, a service called India Stack was launched for people to open bank accounts, store personal information such as tax filings and medical records, and also open a brokerage account. Since Aadhar was launched, over 270 million bank accounts were opened many businessmen such as Masayoshi San, Mukesh Ambani, and Warren Buffet are investing in payment services like JioMoney and Paytm because they see the potential of such services in India.

    Source: https://www.fdic.gov/householdsurvey/
    Source: https://www.forbes.com/sites/oliviergarret/2017/06/28/india-is-likely-to-become-the-first-digital-cashless-society/#35a8829f3c80

    If India can incentivize a much larger population that is significantly more economically challenged to open bank accounts and use mobile payment services, I believe that the United States can create systems to encourage those who are no using banking services to start using them for daily transactions and investments. Recently, companies like Square, Paypal, and Google have been designed digital wallets to allow people to transfer money seamlessly. I believe the United States government should take advantage of these rising solutions, and develop a program that could increase the use of bank accounts. Under the circumstances, it is not fair to go cashless because almost 25% of the population does not actively use a bank account and that could have adverse effects on the economy. The government should partner with the private sector are start using the power of technology to reduce the costs of printing currency and make transactions traceable and seamless.

    If the circumstances were right, going cashless would give brick-and-mortar restaurants, stores, and services more security and they would save time. There would be no worries about going to deposit the cash at the bank, because the owner is scared that the store might get robbed. Going digital also means that all payments will be tracked online, and if proof is ever need it is undeniably available online.

    One of the biggest issues of using cash, is that the some of the change you get will be in coins. Pennies and nickels cost more to produce than they are worth. It costs 1.5 cents to make a penny and 6.32 cents to make a nickel. If cash is continued to be used for 30% of all transactions, then we will be wasting money on producing loose coins that have minimal worth and are not able to generate a profit for the U.S.

    Source: https://www.cbsnews.com/news/it-cost-1-5-cents-to-make-a-penny-last-year/
    Source: https://www.usatoday.com/story/money/personalfinance/2018/12/23/cashless-society-not-quite-yet-why-cash-king-banks-still-exist/2373780002/

  3. Here in India, the idea of a cashless economy was strongly debated over in November 2016, when the government announced its plans of demonetisation of the Rs. 500 and Rs. 1000 notes, both being the largest denomination currency notes, at that time. Demonetisation is the process through which coins or notes are withdrawn as legal tender; and maybe replaced. The government cited two major incentives among others for the implementation of this policy: removal of black money from the economy and a step towards development towards a cashless economy. My experience with regards to moving towards a cashless society therefore, is different, since it was through a government policy rather than a gradual and more natural change as seen in most other maturing economies.

    To gain access to the new legal tender, every working citizen was compelled to create bank accounts, paving the way for a cashless economy. Almost 3 years down the line, while the overall success of the policy may be debatable, it certainly has given rise to an increase in online transactions. Several new companies have also taken advantage of the quickly changing dynamics in the economy, and received large valuations. Yet, the switch towards the cashless economy has been far from smooth. It is absolutely essential that the population has adequate knowledge about how cashless transactions work. Needless to say, the middle and lower classes of the country, who were not familiar with the system certainly did experience teething problems – overspending became common, and people of all ages unknowingly racked up debt. We ourselves educated our helpers at home, who did not understand how banks or the banking system worked. This, along with other economic reforms also motivated me to teach underprivileged children in my locality about financial literacy, with a special emphasis on the workings of a cashless economy, which India is quickly headed towards in the future. 

    While this transition may have been easier for the urban youth – I learnt on a village trip that the uneducated, underprivileged and older citizens in rural areas are still struggling to completely understand exactly how the banking system works. So coming back to the question: should economies go cashless: YES – BUT it must be a gradual process as an economy matures, rather than a single policy. Of course, governments implementing policies to promote a cashless economy can catalyse this process; but it should not be at the expense of any segment of the society being left behind. 

    Personally, I believe education is the key to a cashless economy – if citizens understand the banking system, and feel comfortable making cashless transactions – the economy will transform by itself.

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