It’s the most highly debated payments issue of the decade, but COVID-19 brought a sense of urgency to the discussion. The question at hand: Are American consumers ready for a cashless economy? If so, what are the implications for business owners? Let’s take a look at the pros and cons of a cashless society and discuss how to prepare your small to mid-size business for the next era of payment processing.
The Definition of a Cashless Economy
The meaning of “cashless economy” is simple––it’s an economy that functions without traditional cash payments. The reality is that consumers were gravitating away from cash payments before coronavirus hit, but the pandemic has substantially expedited the shift. The exodus towards exclusively accepting mobile and EMV payments has been fast, and not without backlash.
Forrester’s State of Retail Payments Study found that, since January, no-touch payments have increased for 69 percent of retailers. And 94 percent of retailers that have implemented contactless payments expect the increase to continue over the next 18 months.
Although the government is taking steps to sanitize cash that’s touched a lot of hands, the CDC is also encouraging retail businesses to utilize contactless payments. However, not everyone is going cashless. The Federal Reserve Bank of San Francisco found that nearly two-thirds of people haven’t made a single in-person payment since coronavirus hit the U.S., but those that have are still using cash. This is because many people stop trusting banks in times of economic crisis, and consumers withdrew more cash than usual at the onset of the virus to help them weather the storm.
Advantages of a Cashless Economy
Despite the fact that coronavirus sent a handful of customers running to their banks to withdraw cash, there are many benefits to a cashless economy.
More hygienic
The purpose of a cashless economy is to make transactions safer, more convenient, and more affordable. Cashless transactions are also more hygienic, and there’s been a surge in businesses going cashless since the onset of the virus. Los Angeles Times reports that in LA County, only 8% of businesses didn’t use cash in early March, but this number jumped up to 31% in late April, tapering off to around 25% in mid-June.
Lower labor costs
Another advantage of a cashless economy is that it can help SMBs save in labor costs. Counting, handling, and transporting money can take up a significant portion of employees’ time on the clock. By taking cash out of the equation, employees have more time to focus on other tasks, such as cleaning, preparing pick-up orders, or directly serving customers.
Reduced risk for robbery and theft
A cashless economy helps reduce the risk of in-store robbery or stick-up situation. This is especially important at present, when rioting and looting is impacting businesses across the U.S. When you run a cashless store, however, there’s nothing in the till for bandits to steal. There’s no risk when transporting money. There’s also less risk of internal theft because there’s a paper trail for every cent you make.
Disadvantages of a Cashless Economy
It’s become obvious that a cashless society is imminent for American business. Only 1% of Sweden’s GDP circulates as cash as is, and China and the U.K. are following suit. So why are American cities, including: Massachusetts, New Jersey, Philadelphia, San Francisco, New York City and potentially even Washington D.C. banning all cashless stores? (In New York, businesses that ban cash transactions face a fine of $1,000 for the first violation and $1,500 each time after.)
The answer to this question is complex and systemic.
Cashless payments are inaccessible to certain consumers
Here’s why cashless transactions are a polarizing issue: 6.5%, or 8.4 million, American households don’t have a checking or a savings account. Most of these households are from underserved communities, which means that members of these households wouldn’t be able to buy basics at their local store without a credit card.
Because of this, cashless stores are being deemed a push towards the gentrification of the communities in which they’re located––preventing customers with poor credit from making purchases in certain areas.
Are you starting to see why people are suddenly so passionate about the payments issue?
The need to pay processing fees
This isn’t the only reason why cashless stores might not be right for everyone. Payment processing fees can add up and, as the average card transaction gets smaller, many customers take hindrance with the idea of paying additional swipe fees for their transactions. This means you’re faced two inopportune options: 1) upsetting your customer by declining their small transaction or 2) paying the bank an average 2.5 % swipe fee per sale.
No-touch transactions also come with unexpected add-on costs. NRF reports, “No-touch debit card transactions are also costing retailers more because the transactions often have to be processed over networks run by Visa and MasterCard when a PIN isn’t used.”
NRF continues, “Retailers could save $2 billion a year if more banks that issue the cards turned on PIN-less capability and the transactions could be routed over the lower-cost ATM networks available when a PIN is used.”
By encouraging your customers to use their PIN number in contactless transactions, you may be able to save a significant amount in credit card processing fees as consumers gravitate towards no-touch payment options.
Data security issues
Another disadvantage of a cashless society is that digital transactions can expose your customers’ data to hackers. Data breaches increased 273% in the first fiscal quarter of 2020. To prevent hacking as you shift towards digital transactions, you may need to invest in additional encryption, antivirus, or malware software.
What are the implications of the rise of cashless economies/societies on SMBs?
If you don’t accept cash at all, the cold hard truth is that you’re going to alienate some of your loyal customers. According to a 2020 payments study by the Federal Reserve Bank of San Francisco, customers still use cash for 26% of all transactions. And it’s not just underbanked households that use cash––teens, those with credit issues, senior citizens, etc. might not have plastic. You’ll make more sales if your business accepts both cash and contactless payments.
What practical steps to take to make sure you can thrive in a cashless society?
Who knew a cashless society could be so contentious? To ensure your business can withstand the sudden shift towards contactless payments, start by ensuring your customers know about any changes to your available payment options before they pull up to place an order.
TapShack Craft Liquid Company, a drive-up kombucha shop in San Diego, California, stopped accepting cash payments in April, instead encouraging customers to pay by Venmo, Apple Pay, or debit card. To prevent alienating their loyal customers, however, they placed a prominent sign in front of all of their establishments with the new payment options and streamed images of their new storefront on social media. They also began offering kombucha growler home delivery for loyal customers to facilitate sales during lockdown.
While Target rolled out contactless payments at the beginning of the year, there’s a strategic caveat that enables Target to take part in the cashless economy without losing a significant portion of sales to banking institutions. Target has added their own REDcard to the wallet feature, enabling guests to save 5% off all purchases by using Target’s in-house payment network.
Target’s corporate website reports that guests can also use Wallet to save with Cartwheel deals at checkout: “Guests can also use Wallet to access Weekly Ad coupons and to store and redeem their Target GiftCards. (No wonder we’ve already had nearly 150 million Wallet scans at checkout!)”
Closing Insights
Cashless economies are the way of the future. But implementing more cashless and contactless payment solutions for your business can also mean paying increased transaction fees. Why should you be penalized for how your customers choose to process payments? To bring your retail stores into the next era without losing revenue in transaction fees, partner with a solution provider that helps you save on credit card processing.
Payment Depot brings users a wholesale fee structure for credit card processing. We don’t take a percentage out of each transaction. This is incredibly beneficial for small to mid-size retail businesses, as customers turn to debit, credit, and contactless payment options to make small purchases during the pandemic. The average card transaction amount is going down, so why should you pay out a large percentage of each transaction to your banking institution?
Payment Depot uses a membership pricing model that only takes out small, predictable transaction fee and charges a monthly membership fee instead of a percentage-based markup. This fee structure pays dividends for retailers: Payment Depot saves retailers up to $400 a month on credit card processing. So, you don’t have to lose out on sales as the retail industry evolves towards a cashless economy.
Quick FAQs about Cashless Economy
Q: What is a cashless economy?
A cashless economy is one where financial transactions are conducted without the use of physical cash. Instead, transactions are carried out using digital means such as credit and debit cards, mobile wallets, and electronic payment systems. This shift towards a cashless society is accelerated by technological advancements and the increasing preference for convenience and security in financial transactions.
Q: Are American consumers ready for a cashless economy?
The readiness of American consumers for a cashless economy is mixed. While a significant portion of the population is embracing digital payments, a substantial number still rely on cash, particularly in underserved communities. Factors like trust in banking systems and access to digital payment methods play a crucial role in this transition.
Q: What are the benefits of a cashless society for businesses?
For businesses, going cashless can lead to reduced labor costs associated with handling cash, decreased risk of theft, and streamlined financial operations. Additionally, it can enhance customer convenience and improve transaction speed. However, businesses must weigh these benefits against potential costs, such as transaction fees and the need to invest in secure digital payment infrastructure.
Q: How has COVID-19 impacted the shift towards cashless payments?
The COVID-19 pandemic has significantly accelerated the shift towards cashless payments. Health concerns over handling cash and government encouragement of contactless transactions have led to a rise in digital payments. Many retailers have adapted by implementing or expanding their contactless payment options to meet consumer demand.
Q: What are the challenges of a cashless economy for small businesses?
Small businesses may face challenges such as transaction fees, potential alienation of cash-preferred customers, and the need for investment in digital payment solutions. Additionally, businesses must ensure data security to protect customer information from potential cyber threats.
Q: Why are some cities in the U.S. banning cashless stores?
Cities like New York, San Francisco, and Philadelphia have imposed bans on cashless stores to ensure inclusivity. Such bans are aimed at protecting consumers who do not have access to digital payment methods or prefer using cash, particularly those from low-income or underserved communities.
Q: What are the security concerns associated with cashless transactions?
Digital transactions can expose customers’ data to potential hacking and cyber-attacks. Businesses transitioning to a cashless model need to invest in robust security measures, including encryption and anti-malware software, to safeguard sensitive financial information.
Q: How can small businesses mitigate the costs of cashless transactions?
Small businesses can mitigate transaction costs by encouraging the use of PINs in contactless transactions and choosing payment processors with favorable fee structures, such as membership-based pricing. This approach can help reduce the financial burden of transaction fees as consumer preference shifts toward digital payments.
Q: What strategies can businesses use to transition towards a cashless economy without losing customers?
Businesses can effectively transition by clearly communicating payment option changes, offering multiple digital payment methods, and providing incentives for using certain payment options. Additionally, businesses should ensure a seamless and secure payment experience to retain customer trust and satisfaction.
