[Dave Birch] People do say some very odd things about money.

“Currency is free,” notes Jeremy Tobacman, a Wharton professor of business and public policy.

[From Why Banks Want Us To Go Cashless – Business Insider]

This is utterly wrong, and I have no idea why the Professor would say this. Whatever you think of the merits of cash and its cost-benefit trade-offs against various forms of electronic payments, surely you don’t think it is free? The costs of cash might be diffuse and they might be hard to measure, but they most certainly are not zero.

Dr. Benjamin D. Mazzotta is a Postdoctoral Research Fellow for Inclusive Growth at the Center for Emerging Market Enterprises (CEME), part of the Fletcher School of Law and Diplomacy at Tufts University. He works on the Cost of Cash study, which shatters the myth that cash is free of cost, since virtually all economic actors pay direct and indirect financial burdens to participate in the cash payments system.

[From Consumer Engagement – Cash Isn’t Free — But It’s Not Going Away, Either | PYMNTS.com]

It’s hard to measure the costs of cash, true, because there are many different costs and they are spread out across many different people. And there’s the very difficult problem of computing the total social cost after accounting for the private costs. These private costs are very varied. For example…

Slightly less than 2 percent of the U.S. money supply is counterfeit, according to Secret Service data cited by the Arkansas Democrat-Gazette.

[From TD Bank Issues Counterfeit Money Without A Refund: Report [UPDATED]]

TWO PERCENT! That’s quite a loss if you’re a retailer and you take fake money and can’t palm it off on someone else. Speaking of retailers, even their calculations of the costs of cash (used to fight with the banks and card schemes) don’t set it at zero.

Whilst cash accounts for 55.2% of transactions, it only accounts for 11.5% of costs, which may seem counterintuitive given the sheer physicality of cash compared to cards – float it, receive it, store it, move it, count it, move it again, bank it and then start all over again. The truth is simpler, it actually costs less to handle cash than card payments, taking all costs into account.

[From Take the cost out of cash — Counting On Currency]

No. Even if it were true that it cost retailers less then it doesn’t cost society less. The retailers aren’t paying for the ATMs and cash-in-transit trucks, the security guards and armed robberies. They aren’t footing the bill for people who are trapped in a cash economy. This is rational from their point of view, except… I can’t help wondering why it is that, for example, Dutch supermarkets want to go cash free in a couple of years’ time but British supermarkets don’t. What’s the attraction of cash to a supermarket? It sounds like nothing but hassle to me. And should we in any case allow retailers to make choices that are reduce their private costs if they raise the total social cost?

To begin any kind of sensible discussion on this topic we need some numbers to work with. A new study on this topic has just been published by the Swedish Central Bank. They have been looking in detail at the costs, and they find that  

We estimate the social and private costs of consumer-to-business payments in Sweden in 2009. The combined social cost for these payments was 0.68 per cent of GDP. At the point of sale, cash is socially less costly than debit cards for payments below EUR 1.88 (SEK 20) and credit cards below EUR 42.37 (SEK 450).

[From No. 262 The Cost of Consumer Payments in Sweden | Sveriges Riksbank]

The crucial finding from the (detailed) report that they have produced is this:

Using unique survey data we show that consumers’ payment behaviour is not consistent with what is socially optimal.

Now, my general opinion is that none of us want to live in a society where every action we take is constrained to be “socially optimal”. But on the other hand, society should at least erect clear signposts as to what is socially optimal and make people aware of what the consequences of the non-optimal choices are. We must have a reasoned debate on this in the payment space: society has to set a balance as the extent to which I, as an individual, can make socially non-optimal choices and load the costs on to others. A few says ago, Jack Dorsey of Twitter and Square fame tweeted that

“In general, the shift toward a cashless society appears to improve economic welfare.”

He is, of course, correct. So how do we “nudge” (as is the fashion) consumers toward this future? What this means, I think, is that we are going to have to seriously consider ending the hidden cross-subsidies within the banking system and transferring the costs of cash onto the users despite the initial kicking and screaming. What signals other than cost does society have? Other than taboo, this is, and I’ll blog about that soon…

These are personal opinions and should not be misunderstood as representing the opinions of 
Consult Hyperion or any of its clients or suppliers

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