In this article, we will identify why there has been a coin shortage, assess measures U.S. retailers can use to mitigate the problem, and then consider how recent trends fit into a retailers’ wider cash acceptance strategy.
Why Is There a Coin Shortage?
The coin shortage has been driven by a combination of:
A lack of circulation, as consumers are not spending coins. This may be due to the perception that coins harbour germs. Notes seem to be circulating better because of big “panic” spikes in ATM demand after the pandemic started, and the stimulus check also helped. However, with coins there is a “sleeper” issue due to no initial surge. Low Fed interest rates contribute to this because the opportunity cost to consumers of holding on to coins is very low. Coin aggregators in supermarkets etc. are not being used.
The U.S. Mint – which produces coins for the Federal Reserve – stopped production during the peak of the pandemic.
We should not underestimate how frustrating these coin shortages are for many merchants. Cash intensive businesses can be low margin and any bottom-line impact from losing a few cents can be devastating. Of course, coin shortages driven by a global pandemic are nobody’s fault, but the issue still needs addressing both at a national level and an individual merchant level.
What Is The Fed Doing?
Deposits of coin to the Fed are currently around half normal levels, but demand has now returned to normal – meaning there is a potential gap in supply and demand. The Fed is now producing coins again – 6 days a week, potentially rising to 7 days in the near future – and we understand it is currently producing 1.65 billion coins per month, higher than its usual maximum levels. However, this is not enough to meet demand and the U.S.’ coin shortage is set to become a large circulation issue.
In response to the shortage, the Fed has started a coin allocation scheme nationally, and is “…trying to be as fair as possible…”. There is also a new coin task force including stakeholders such as armored transport suppliers, merchants, and banks – which aims to come up with strategies and solutions.
Despite these efforts, CMSPI is still finding that many of our clients are struggling to obtain coins – with many having to develop a strategy to urgently address the problem.
What Can Merchants Do?
Merchants are finding innovative ways to cope with the coin shortage: some are focused on recouping coins, while others are finding ways to operate without coins altogether.
We’ve put together a list of 7 key things merchants navigating this coin shortage should consider:
1. Find Ways to Credit Customers
Many large merchants have the ability to offer store gift cards, and they could use these schemes to compensate customers with the amount of missing change. Other merchants are providing QR code vouchers as change rather than coin. Additionally, we understand fuel merchants are crediting change to fuel pumps e.g. putting $1.11 on the pump rather than via change – this is an option for industries where customers pre-pay.
Pros: encourages repeat customers, and it may even increase sales.
Cons: gift card solutions are expensive to implement and doing this might be more expensive than the change itself. May not be feasible for smaller merchants.
2. Steer Customers Towards Cards
This may involve refusing to accept cash altogether, including notes. Many merchants have chosen this path during the pandemic, however, many states and municipalities expressly forbid merchants from going cashless. For merchants operating across the country, going cashless in selective stores could be difficult to coordinate.
This solution isn’t all or nothing and refusing to accept cash could be a partial solution. Merchant could choose to switch off cash acceptance at just self-service checkouts or designate only one or two lanes that are accepting cash – reducing the number of coins not needed at others registers throughout the store.
Pros: Eliminating cash altogether fundamentally solves the issue. Many merchants are doing it so unlikely to lead to reputational damage.
Cons: Card transactions are more expensive to accept for merchants. Additionally, there are a large number of vulnerable unbanked and under-banked customers in some parts of the country who don’t have a bank account and rely on cash, so it could impact sales.
3. Ask Customers to Round to Nearest Dollar/Quarter etc.
In the U.S., the smallest note is the one-dollar bill, so POS’ could be modified to automatically round transaction totals to the nearest dollar to avoid the need for coins.
Pros: For merchants it will likely even out, so no loss or gain.
Cons: Could lead to disgruntled customers who may be unhappy with their purchases being rounded up in cost. In the extreme case that could lead to reputational damage. This could be addressed by rounding each transaction down so it is always in the customers’ favor, but this will lead to merchant losses which will add up over time. In low margin industries such as fuel and grocery, this approach may not be feasible.
4. Ask Customers to Round Up for Charity
If rounding transactions to the nearest dollar is unpopular with customers and rounding them down leads to excessive losses for merchants, there is one alternative: rounding up, but sending the difference to charity.
Pros: Tax write off for merchants, good CSR during uncertain times, unlikely to be unpopular.
Cons: High cost to set up, need to partner with charity.
5. Recirculate Coins Internally
Large merchants may find they could recirculate coins between their stores – by having coin-rich stores send change to coin-poor stores.
Pros: Particularly good at reducing coin shortages if you have cash recyclers.
Cons: It can be very expensive to transfer coins between stores, and it may eliminate the benefits. Also, any benefit is of course dependent on the merchant’s capabilities, particularly whether infrastructure such as coin counters and recyclers are available.
6. Incentivize Coin Deposits
We are aware some merchants – particularly convenience stores and QSRs – are offering customers an added benefit if they pay by coin. For example, a free latte if you give $5 worth of coins. Of course, this is dependent on the redemption value being higher than the coin value.
Pros: Drives loyalty and may completely fill the coin gap
Cons: Could be costly if overly popular
7. Engage With Your Suppliers
Some suppliers are in a better position than others. For example, if your bank is also the bank for a local transit system that recently reopened, you may find they have an opportunity to receive coins, but you may need to push for it. Speak to your suppliers so you fully understand all your options.
How Can Merchants Minimize the Cost of Cash Acceptance?
We have observed the armored transport industry has had a mixed response to the coin shortage, with some suppliers handling it better than others.
Merchants should look to minimize their supply chain costs where possible. There is a concern that total payments acceptance costs will rise: if card transactions are not going through, there will be no fees because card fees are transaction based, but for cash there are several fixed costs (Figure 1). Merchants may have contractual obligations stating they must provide notice before turning off services, even if stores are closed. Getting services turned back on has also been challenging because everyone wants to do it at once – sometimes leading to missed services and a decline in service quality.
Figure 1. Cost of Cash
"All the trends discussed in this article are only leading to one thing: an increase in the overall cost of cash acceptance. Although cash remains much cheaper to accept than cards for most merchants, it has been increasing over time as volumes decrease on a largely fixed cost base. In 2020, we expect a huge peak in fees, with the cost of cash acceptance nearly doubling due to unprecedented volume drops and issues with the supply chain – this could be devastating for merchants."Callum Godwin, Chief Economist
Figure 2. U.S. – Average Cost of Cash Acceptance
Actions for Merchants
Now is the time for merchants to look closely at cash costs.
- Scheduling– make sure armored transport costs are minimized as the volume of cash declines.
- Smart Safes– While these can incur a large CAPEX cost (thousands of dollars per machine), many of these machines used to be at 100% throughput. However, with cash spending decreases during the pandemic, some smart safes are now at 50% of capacity or below.
- Armored Transport Pricing– Be wary of suppliers charging premiums for coin orders during this time.
- Debit acceptance– Many merchants are seeing higher volumes of debit card transactions as a result of the coin shortage issue. This will reduce the debit ATV for many merchants, increasing costs in many cases. This means that, more than ever, merchants need to ensure their debit costs are optimized – for more information on optimizing your debit arrangements, speak to our experts.