From GrubHub to small bookstores, greenbacks are off the table — literally. Prolonged transaction times, the potential for currency to transmit germs and the need for physical proximity have triggered a backlash against cash as a payment method.
As U.S. consumers’ use of physical currency drops to an all-time low, it raises the question: Is coronavirus the impetus to finally drive the United States into the digital payment future?
“People default to what’s familiar, unless there’s something to jolt you out of it,” Jodie Kelley, CEO of the Electronic Transactions Association, recently told CNBC. “Contactless payments have come up as a new option for consumers who are much more conscious of what they touch.”
Given that the ETA is an advocate for contactless payments, Kelley’s stance is to be expected. But that doesn’t mean she’s wrong. In fact, 82% of respondents to a recent Mastercard survey said that contactless is a “cleaner way to pay” because it offers faster checkouts, more control over physical proximity and no contact with shared public devices.
For retail and hospitality firms looking to lure skittish customers back, the good news is, contactless systems have become less expensive and more functional. You may even be able to upgrade your existing point-of-sale devices.
Before we get into the details about going contactless, let’s look at scientific thinking around the likelihood of contracting a virus from currency.
First, the World Health Organization’s statement that “contaminated cash” was spreading the virus was widely reported. The WHO later issued a statement saying that it had been misquoted and advising that people wash their hands after touching money, particularly if they are handling food.
Coronavirus can’t penetrate the skin on your hands. However, like influenza, it can be transferred from hands to mouth, nose or eyes. We also don’t know how long the virus can live on money, though a study done by the National Institute of Health found that it can survive up to four hours on copper and up to 24 hours on cardboard.
Paper money and coins are notoriously filthy, which explains why many consumers were already wary. And in fact, use of cash was on the decline prior to the pandemic. What’s new is the pace of change.
A number of retailers, including Sweetgreen, Drybar, Starbucks in its Seattle stores, Dos Toros, Casper Mattress, Cava, Bonobos, Indochino, Everlane and Reformation, went cashless at their brick-and-mortar locations in the mid-2010s, citing safety, efficiency and hygiene.
The logic: Employees would no longer have to make change and keep enough fives and pennies in the drawer. There are fewer security concerns, less likelihood of cross-contamination for food-service businesses and no need to pay armored cars to get cash to the bank.
Recently, Sweetgreen ran a stopwatch and found that cashless transactions could be completed 15% faster than those involving paper money. BBQ Bus Smokehouse, a restaurant and food truck in Washington D.C., estimates savings of $2,100 a year by eliminating cash, primarily from payroll as employees no longer need to stay late reconciling cash drawers.
|Pros and Cons of Cash in Business|
|Cash Pros||Cash Cons|
|No credit card fees||Banking fees|
|No risk of chargebacks||Customers are likely to spend less|
|Accessible to lower-income, elderly and other potentially vulnerable populations||Less efficient and more time-consuming to process|
|More secure from a cyber-crime perspective||Less secure from a physical crime perspective
(embezzlement, employee theft and robbery)
|No ancillary technologies needed||Unhygienic|
|No risk of sales grinding to a halt if the network goes down||More difficult accounting, which leads to higher payroll costs|
|Inconvenience for customers if other methods are prohibited|
|Armored truck and bank coordination|
However, before COVID-19, we saw significant backlash against the move toward cashless — with many stores even reversing their policies as criticism grew.
“A cashless economy is not an inclusive economy,” Tazra Mitchell, policy director at the research and advocacy group DC Fiscal Policy Institute, told NPR in February. In what has been termed the “gentrification of payments,” Mitchell and other advocates say the move to cashless discriminates against Americans who are low income, homeless, undocumented or simply lack the desire to obtain a credit or debit card.
The Pew Research Center found that 29% of adults made no purchases with cash during a typical week. But among the 71% who do carry paper money, those making less than $30,000 per year were about four times as likely as higher-income Americans to say they make all or almost all of their purchases using cash.
A study by the Federal Reserve shows that 6% of Americans are “unbanked,” meaning they don’t have a checking, savings or money market account. An additional 16% are “underbanked,” such that while they have accounts, they’re less likely to qualify for conventional credit. Again, these are mostly lower-income citizens.
There are legal considerations as well. While there’s no federal law stating that a business or individual must accept cash, things get more complicated on the state and local level.
|Cities and States with Rules on Cashless Businesses|
|On the books|
|Massachusetts||Passed a law in 1978 that made it illegal to discriminate against a cash buyer.|
|New Jersey||Banned cashless businesses in March 2019.|
|San Francisco||Cashless ban passed in May 2019 and went into effect in August 2019.|
|Philadelphia||Passed a bill in March 2019 that bans stores from going fully cashless. The law went into effect in July 2019.|
|Connecticut||Cashless ban passed in March 2019 and went into effect in October 2019.|
|Rhode Island||Banned cashless businesses in May 2019.|
|Oregon||Cashless ban proposal presented in February 2020. If passed, it would take effect in July 2021.|
|Washington D.C.||Bill prohibiting cashless business introduced in February 2020.|
|Delaware||Bill prohibiting cashless business introduced in March 2020.|
|New York City||Legislation passed in January 2020 that would ban New York City’s restaurants and other retail establishments from rejecting cash payments. Will likely become law at the end of 2020.|
Despite these laws, COVID-19 is having an undeniable impact on use of cash: It’s difficult to make change from a distance of six feet. And who wants to touch something that was just in someone else’s hand?
Not even the U.S. Federal Reserve, which has quarantined dollars repatriated from Asia. Lululemon announced it would not take cash for 30 days after reopening, where permitted by state and local law. Anthropologie too stated that it will accept cash only where legally required. Dick’s Sporting Goods is encouraging shoppers to avoid cash but designated a register for those payments if necessary.
In a letter to customers, Starbucks CEO Kevin Johnson announced a “shift towards more cashless experiences, knowing that the handling of cash creates consumer concerns about the spread of the virus.” Other restaurants are following suit.
Congress is considering a bill that would eliminate the need to sign for a point-of-sale transfer that is initiated by a swipe, dip or tap transaction.
We’re also seeing pushback against state and local regulations. In an op-ed, Kristen Regine, a professor of marketing at the Johnson & Wales University College of Business, argued for Rhode Island to reverse its cashless ban. In her piece, Regine argues that “cash is no longer king” and that leaders must be forward-thinking in terms of payment innovation and what’s in the best interest of public health.
CFOs need to ensure their businesses are prepared to meet consumers’ evolving payment preferences. For the foreseeable future, that means effectively fulfilling the “hygiene value proposition” by enabling customers to make purchases with the least physical contact possible.
This starts with a cash alternative. However, traditional credit and debit card transactions, where one swipes, clicks, inputs pins and signs — or passes the card to a cashier — are now problematic as well. While retailers are taking measures to sanitize their register stations, many customers are still hesitant to touch pens and keypads. This is where contactless technology, including QR codes and near-field communications (NFC), comes into play.
Australia, China, India, South Korea, Sweden, Finland and the U.K. have all made strides toward mobile payment and contactless credit card adoption. For instance, in China, more than 80% of consumers used mobile payments last year, according to management consultancy Bain. In the U.S. market, meanwhile, major mobile payments apps have adoption rates of less than 10%. An estimated 3% of cards in force in the United States were contactless in 2018.
Compare that with roughly 64% in the U.K. and 96% in South Korea.
Why has the U.S. lagged behind the rest of the world in adopting contactless payments? Mostly it’s the sheer size, and significant fragmentation, of U.S. retail banking. Additionally, in a change-weary market still adjusting to the shift from swiping to chip inserts, a common misconception is that contactless technology is less secure than traditional cards.
Then there’s the drag imposed by a legacy payment infrastructure, which Mastercard CMO Raja Rajamannar points out makes switching to next-generation technology an expensive, and therefore slower, process.
Still, the push to adopt contactless technology was in motion before the coronavirus outbreak. In its 2018 Q4 earnings call, Visa estimated that there would be 300 million contactless cards issued in the United States by the end of 2020. In a similar vein, Mastercard president and CEO Ajay Banga said on a 2018 Q4 earnings call that the company had received commitments to roll out contactless cards within the next two years from issuers representing approximately two-thirds of its total U.S. consumer volume.
And, in a move similar to the U.K.’s adoption of contactless technology throughout its transit system, the New York MTA adopted a “tap-and-go” approach that allows commuters to pay by tapping a credit card, debit card, mobile phone or Fitbit.
Yet despite these moves, there was never an impetus for U.S. consumers to abandon the comfort of their legacy payment methods. Now, it looks as if coronavirus could be the accelerant behind the growth of contactless, catapulting it from a nice-to-have to a must-have for any business that accepts in-person payments.
Predictors suggest you need to move sooner rather than later. The Mastercard report shows that 46 percent of respondents globally — and 52 percent of those under 35 — have swapped out their top-of-wallet cards for one that offers contactless. Another survey by payments provider Paysafe taken between April 8 and 15 shows 63% of Americans using contactless payments more than ever before. A recent report on consumer behavior estimates that U.S. contactless card payments will increase eight-fold between 2020 and 2024 and that mobile payments will also continue to rise rapidly.
Need some numbers to make the case for a point-of-sale upgrade or development of a mobile app?
Mobile Wallets: Payments made with mobile wallets will grow by almost 50% in 2020, according to data gathered by investment adviser BuyShares, mainly because of COVID-19. The value of U.S. mobile wallet transactions in 2020 was $116 billion before the pandemic, says Statista. Now, the transaction value is expected to hit $357.5 billion, just in the United States.
Apps: PayPal, with its Venmo app, added 20.2 million new accounts in Q1 2020 (about half of these were a one-time gain from the integration of coupon app Honey). But 10 million is still a Q1 record for the firm, contrasting with 9.3 million last Q1. PayPal came close to lapping its organic Q1 2020 gain in April, with an increase of 7.4 million users — up 135% yoy — and customers are continuing to join at a rate of 250,000 daily.
Contactless Cards: Mastercard saw a 40% spike in contactless tap-and-pay transactions in the first quarter of 2020, which CEO Banga attributed to shoppers “looking for a quick way to get in and out of stores without exchanging cash, touching terminals or anything else.”
Contactless Point-of-Sale Systems: Square announced in its Q1 earnings that sellers’ card-not-present gross payment volume achieved positive year-over-year growth as the company began to adapt to pandemic store operations in mid-March. Its POS contactless tech, which used to account for about one-third of gross payment volume, moved to “well over 50%” since April.
Square expects more merchant signups as brick-and-mortar stores come back online.
Will this shift be a temporary side-effect of coronavirus? Evidence points to no. As discussed, banks are on board. But more important, once consumers try contactless, they like it. The Mastercard survey found that 74% of respondents will continue to use contactless payments post-pandemic.
And, there’s buy-in from the top echelon: Heavyweights like Visa, JPMorgan Chase and Mastercard have invested heavily in the technology. Visa has more than 190 million contactless cards currently in circulation and predicts that number will rise to 300 million this year. Eighty of the top 100 U.S. merchants now accept contactless. And, to address fraud concerns, the PCI Security Standards group began releasing stringent guidelines to secure these emerging payment channels late last year.
|6 POS Systems|
|Fees*||Compatible Payments||Target Market|
|Micros||Quote-based pricing||Mobile and contactless card payments, chip cards and magstripe cards||Entertainment, tourism, travel and hospitality|
|Square||2.6% + $.10 per transaction. No monthly fees for the PoS but $60/month for Square Retail or Square Restaurant||Mobile and contactless card payments, chip cards and magstripe cards||Popular general POS, particularly for lower-transaction businesses|
|PayPal Here||2.7% per transaction||Mobile and contactless card payments, chip cards and magstripe cards||Best mobile POS to accept payments on the go|
|Lightspeed||Monthly subscription starts at $69. Transaction fee starts at 2.6% + $.10 per transaction||Mobile and contactless card payments, chip cards and magstripe card.||Aimed at retail|
|Toast||Starts at $75 per terminal/month. Transaction fees starting at 2.49% + $.15||Mobile and contactless card payments, chip cards and magstripe cards||Aimed at restaurants and bars|
|ShopKeep||Quote-based pricing||Mobile and contactless card payments, chip cards and magstripe cards||Aimed at specialty shops|
*Fees can vary based on the business
Many large retailers have begun advertising their contactless capabilities to reassure consumers looking to return to brick-and-mortar stores. It’s clear that demand will trickle down to smaller retail and hospitality firms.
Fortunately, many existing EMV-capable PoS terminals include contactless capabilities or the option to upgrade through the vendor. For merchants, contactless payments can provide a competitive technological advantage.
Let’s say we have a restaurant that serves both lunch and dinner seven days a week. The typical menu item costs $15. The restaurant serves 100 patrons for lunch and 100 for dinner, on average.
While credit card processing fees vary by card, processing method, average transaction amount and gross transaction volume of your business, the average is roughly 2% for Visa, Mastercard, and Discover transactions. In an all-credit model, our restaurant would pay about $1,680 a month in fees if all customers are utilizing these cards. AmEx is higher.
Not ideal for a business owner with tight margins, right?
However, what tends to be overlooked is that cash has its own associated fees. On average, employees in a restaurant spend around three hours daily balancing the register to count cash, verify numbers and account for discrepancies and process currency for deposit. Let’s say the employees handling cash are managers and paid $10 per hour. That’s $30 daily in payroll to manage the cash drawer, or $840 a month.
Most businesses accept both credit cards and cash. If half of the transactions in a month ($42,000) are paid by credit card, that amounts to $840 in fees. The other half is cash. However, the time spent balancing isn’t likely to go down by much, because employees still need to tally and reconcile cash and credit card transactions to total sales. So associated costs still stand at $840 per month, bringing our grand total, once again, to $1,680.
As most small-business owners know, cash-only is the inexpensive way to go. However, that isn’t a viable path for most, especially now, since it alienates valuable card-carrying customers.
Our take is that “mostly cashless” is the future. From an overhead perspective, costs are likely to be equal to, if not less than, a hybrid payment model given speedier transaction times and other ancillary security and efficiency benefits.
International experiments bear that out — but also reveal some potential problems.
In 2016, South Korea announced its intent to phase out currency, with its central bank calling for a “cashless society” by the end of 2020. The decision was about saving the 6.17 billion won ($5.4 million) it cost the Bank of Korea (BOK) to replace damaged banknotes and coins in 2018 alone.
A startling statistic: The cost of producing the low-value 10 won coin ($0.009) is estimated to be quadruple its face value.
In addition to those savings, consumers simply spend more when using plastic. Researcher Kim Seong Hoon of the Korea Economic Research Institute said in an interview with the Financial Times that abandoning paper currency could drive a net 1.2 percent increase in economic growth annually.
South Korea began the move towards cashless through its “coinless society project.” The BOK introduced a trial program where customers who paid cash would receive their change on popular prepaid mobile cards for use in convenience and department stores, as well as transit. Additionally, tax deductions were provided for using certain non-cash payment systems. Companies refusing to take electronic payments were subject to penalties.
Two years into the effort, in 2018, the BOK conducted a survey and found cash accounting for only 20% of all payments. The amount of cash the average Korean household had on hand was down an average of 33% from 2016, with younger people leading the move to cashless.
By 2019, data showed that 96% of transactions in South Korea were cashless.
Lessons learned: As in the United States, elderly and vulnerable citizens are the most negatively affected; most stores will still accept cash, though it’s rarely seen. The consensus is that by making the switch gradually, older people will eventually become accustomed. There’s less agreement on how to handle those who are lower income and cannot access credit or debit cards or mobile payments other than prepaid cards. There are also calls for a legal framework to protect privacy. And, the Korea Economic Research Institute suggests that the cashless system could become a tool for macroeconomic policy implementation.
Current legislative restrictions and concerns over discrimination will make it difficult for U.S. businesses to go fully cashless anytime soon. Instead, a hybrid model with a strong preference towards contactless payments seems more likely.
However, concerns over the coronavirus have certainly accelerated adoption among U.S. consumers of contactless cards, mobile wallets and apps. Digital payment methods may finally have the momentum to stick a fork in cash. Are you ready?
Megan O’Brien is Brainyard’s business & finance editor, covering the latest trends in strategy for CFOs. She has written extensively on executive topics as a former content creator for Deloitte’s C-suite programs. Got thoughts on this story? Reach Megan here.