Cash: tomorrow's currency or yesterday's paper?
This story originally appeared in The Green Sheet Issue 160201 on February 8, 2016.
An article published in the American Bankers Association Journal in October 1969 foreshadowed a paradigm shift in consumer and merchant behavior. "We are entering a credit card society, one that will have its most direct impact on cash requirements for individual purchases," wrote authors Roger J. Abouchar and Nicholas Magnus of Information Sciences Associates, a consulting firm based in Cherry Hill, N.J. The authors predicted consumer wallets would contain a range of cards "with slightly different orientations but essentially offering much the same breadth of services."
Next came an industry-wide initiative to move merchants from paper receipts to electronic processing technology. Change is never easy but merchant level salespeople won the day, helping merchants upgrade from paper systems to fast, efficient and cost effective POS technology. Over time, ancillary applications such as prepaid, gift and loyalty options added new sources of recurring revenue to core processing technology.
As electronic payments gained widespread adoption, payment card brands systematically targeted cash-based markets, demonstrating how electronic transactions add value at the POS. "I cannot imagine walking into a place that doesn't accept Visa," said Des Docherty, payments industry consultant and former Visa Inc. executive. "And if I did find a cash-only business, I'd wonder if they're doing that to avoid [paying] interchange or taxes."
While card brands compete for wallet share, Docherty noted that Visa, MasterCard Worldwide, Discover Financial Services and American Express Co. are collaboratively helping merchants shift the last mile of the cash economy to frictionless, digital payments. Following are two examples:
"The persistence of cash is surprising given its inconveniences and the risks of carrying it around," Thomas wrote. "Electronic payments, in contrast, are proven to boost economic growth while advancing financial inclusion. For those reasons, countries are working to make payment systems less dependent on cash."
Perry's goals for the startup include taking 20 ideas to proof of concept. "Of those, we'll hand five new services, validated and commercially viable, into the main body of the Visa business," he wrote in a 2015 blog post. "There, they'll be nurtured into fully grown services that can be rolled out to our banks, to retailers and to consumers across Europe."
The right to carry cash
MasterCard Advisors gave the highest readiness scores for going cashless to Canada (91), Sweden (89), Netherlands (88) and the United Kingdom (88). However, not everyone in the payments value chain shares the cashless vision. Some merchants who carry bags of coins and paper money to the bank fear the demise of physical currency. Dissenters see the cashless movement as an affront to basic human rights.
"I believe the ability to use cash is an essential right, important not only for privacy, but for the right to acquire wealth and the pursuit of happiness, as the founding fathers intended," said George Sarantopoulos, Founder and Chief Executive Officer at Access One ATM Inc., a national ATM organization based in Brooklyn, N.Y. "A cashless society is an attack on one of the building blocks of our society; it might be right for Sweden, but it's not right for this country."
Observing that some Scandinavian consumers have to pay for savings accounts because interest rates are negative, he suggested the trend sets a dangerous precedent by conditioning investors to trade positive returns for safety. "The next generation of payment systems may have a wind-down feature or expiration date," he said. "I think people have seen this coming, and that's why innovations like bitcoin have become so popular; consumers want currencies that are frictionless, anonymous and secure."
Sarantopoulos expects cash to prevail as a generic payment system in an app-driven world, though he noted that many transactions that were once cash are now digital. "I see millennials using Seamless for delivery, Uber for car service, Handy for house cleaning," he said. "There's an app for dog walking, babysitting, tutoring; transactions can be sliced and diced like a Ginsu knife."
ATM global expansion
While mobile payments and alternative payment schemes have gained wallet share, U.S. cash usage remains high. A Cardtronics survey of 1,000 adults in 2015 found cash dominated runner-up payment choices in the following use cases:
Global ATM Market and Forecasts to 2020 published in September 2015 by Retail Banking Research, a London-based consulting firm, shows 7 percent growth in global ATM withdrawals and a global installed base of more than 3 million machines. The Middle East, Asia-Pacific and Africa had the highest concentration of ATM withdrawals. China had the highest number of ATM deployments, with 95,000 ATMs in 2014, an 18 percent increase in their installed base. RBR forecasts continued growth in global ATM usage, reflecting sustainable demand for cash.
Millennials and cash
"There is a myth in the marketplace that millennials have abandoned cash in favor of mobile and other digital payments," said Tom Pierce, Chief Marketing Officer at Cardtronics. "It's simply not true. Millennials take an open-minded view of payments, and cash plays a pivotal role in their payment choice mix." Pierce said 45 percent of millennials surveyed use cash more frequently now than in prior years; their demographic represented the greatest increase in cash usage in the survey.
"Cash is here to stay," said Dimitri Akhrin, President at Integrated Reporting is Simple LLC, a sales automation software company doing business as IRIS CRM and headquartered in Brooklyn, N.Y. "There's no alternative that's free at the moment. Until there's a currency that's propagated across the payee and payor universe with a supporting infrastructure, alternative payment methods will not replace cash any more than alternative fuel methods will replace oil."
Not so equitable sharing
Preemptive actions by state and federal authorities against businesses and individuals suspected of money laundering have reportedly increased since the Sept. 11, 2001, terror attacks. One example is the increased use of the Comprehensive Crime Control Act of 1984, which introduced guidelines for a national asset forfeiture program.
The law's Equitable Sharing Program enabled state and federal authorities to share a portion of net proceeds from asset forfeiture funds. The Washington Post reported that police have seized approximately $2.5 billion in cash from private citizens over the past 15 years during routine traffic stops. Few of the victims were charged with a crime; many spent years in court trying to get their money back.
Matthew Lee was on his way to a job interview in California when police in Humboldt County, Nev., confiscated $2,500 from him during a traffic stop. Lee, who had no prior criminal record and fought to reclaim the money, which his father had lent to him, eventually received $1,130.56 after court and attorney fees. Journalists following Lee's story noted the same deputy sheriff had confiscated $50,000 in casino winnings from a motorist and $13,800 from another, prompting a series of legal actions. Similar incidents involving cash forfeitures under the Equitable Sharing Program have been reported; the Department of Justice discontinued the program Dec. 28, 2015.
Operation Choke Point
The United States Department of Justice launched Operation Choke Point in 2013, a widespread investigation of U.S. banks, processors, payday lenders and merchants in high-risk categories suspected of fraud and money laundering. Seeking to combat consumer fraud and discourage U.S. banks and processors from doing business with high-risk companies, the department preemptively shut down accounts and seized large deposits before all facts became known.
Brian Lynn, a former U.S. Marine, is CEO of a 26-location payday lender based in Jacksonville, Fla., and doing business as Speedy Cash and LendingBear. Lynn received termination notices in 2014 from Bank of America and SunTrust Bank. "[We] had only a few weeks to set up new accounts," he said. "In our business, cash is our inventory, and it's very important for our stores to have proximity to the local branch of the bank."
Lynn, who had a stellar record with both banks, said neither institution provided an explanation for their decision to terminate the relationship. He approached at least 20 financial institutions before finding regional banks in Jacksonville and Savannah, Ga., to service his accounts.
The Electronic Transactions Association, a trade association representing more than 500 companies worldwide, commissioned two studies on government oversight of the payments industry. Economic Effects of Imposing Third Party Liability on Payment Processors by Jeffrey A. Eisenach, Ph.D. of NERA Economic Consulting was published in July 2014. The paper recommends replacing one-size-fits-all government oversight with self-regulation and voluntary industry guidelines to enable processors to effectively evaluate high-risk merchants.
The second report, The FTC's Potential Impact on the Merchant Acquiring Industry, published July 2014 by First Annapolis Consulting Inc. explores the "quantitative and qualitative impacts of the Federal Trade Commission's actions against card-based payment processors and merchant acquirers."
To stave off ill-advised government actions, the ETA appealed to the DOJ and the House Committee on Financial Services in support of a bill introduced by the House of Representatives that would replace Operation Choke Point with a measured approach to consumer protection.
"We are concerned that the current effort to regulate the payment processing industry through the blunt instrument of litigation has failed to weigh the costs and overstated the benefits of the current approach," wrote Jason Oxman, the organization's CEO, in a July 2015 letter to the DOJ. "Given the importance of credit cards to the economy, this is an issue of tremendous importance not just to ETA but to the nation." These efforts, combined with a July 2015 meetings on Capitol Hill, led to a series of reforms but offered little relief to Operation Choke Point victims, many of whom lost life savings and businesses due to government overreach.
The migration from paper and coin has been more evolutionary than revolutionary, Docherty noted. As the market matures, card brands systematically convert cash businesses such as laundromats, taxi cabs and quick serve restaurants to electronic and digital payment methods. Today's business owners understand they will lose customers if they don't accept cards. "At one time, a cab driver could say, 'I'll pull you over to an ATM where you can get cash,' and that was acceptable behavior," Docherty said. "That doesn't happen anymore."
He further noted that the decreasing cost of card readers and mobile technology combined with emerging forms of artificial intelligence and data analytics makes it possible to know who is interacting at the POS. "People forget how much the landscape has changed," he said. "The friction in the market is being removed, bit by bit, with electronic forms of barter, mobile payment and mobile apps replacing what would have been cash."
At what point might it become too expensive to have cash in certain markets? As payments industry leaders theorize about a tipping point, cash remains the undisputed global incumbent, coexisting in an expanding universe of alternative payment methods.