To What Extent Is Cash Actually Declining?
The decline of cash in the U.S. has been nowhere near as significant as other markets. Figure 1 shows how cash usage in the U.S. from 2012 to 2022 is predicted to maintain its share of the payments industry, compared with substantial falls in cash usage in Japan, Spain and the UK over the same period. The data suggests that nearly 35% of consumer spending in the US is still by cash, higher than the UK, France and Canada.
Despite a concerted effort by the cards industry, CMSPI does not expect the decline of cash to accelerate in the near future. There is a large subset of low income consumers still dependent on cash. Meanwhile, the recent development of PINless debit at the point of sale (POS) may be starting to gain traction, but there are significant barriers in the way. Additionally, we believe the influence of the global card networks is limiting the extent to which innovative solutions such as digital wallets are able to penetrate retail payments.
In fact, cash is in rude health and we do not anticipate it disappearing anytime soon. Therefore, merchants should consider their current cash handling processes closely to mitigate against rising costs.
Cash Market Share
The True Cost of Cash For Merchants
There are a number of factors that any cost of cash analysis should consider, including labor, shrinkage, armored transport (AT), cash processing and banking. Which factors are included, and the weight afforded each, varies significantly between cost studies. Examples of these studies include the Bank of Canada’s 2008-09 study, The Fletcher School’s 2013 review, The Kansas City Fed’s 2012 report and Economists Incorporated’s 2014 paper. Although a 2018 report from IHL Group suggested the cost of cash, on average, was more than 9% of the transaction value, there is no clear consensus among these reports on the cost of cash.
In contrast, the European Commission ran a study as part of its regulation of interchange fees in 2015, and concluded the cost of cash was 0.2% on average. This is broadly consistent with CMSPI data, however, this depends on numerous factors, including merchant size and industry. For example, merchants with large-format sites, including department stores, may benefit from economies of scale and enjoy a lower cost of cash.
Fixed and ambiguous costs, such as internal labor, should not be factored into any overarching consideration of costs. If staff are no longer handling cash, it is not clear whether they can be easily redeployed elsewhere. Managers are also often salaried so ceasing their cash handling activities may not generate savings for merchants, likewise note validation technology will be required whether it is one note, or a million notes, being handled. Many of these costs would only be removed if merchants stopped accepting cash entirely, which is not feasible.
The true measure of merchant cash costs are related to direct external costs only, such as AT, cash office technology fees, cash processing and banking, and labor for walking cash to the bank.
Increase in the Cost of Cash
Evidence from CMSPI’s client base supports the view that despite stable volumes, the cost of cash has increased over time (Figure 2). There are a number of factors underpinning this. Consolidation in the armored transport (AT) and cash processing industries is generating upward pressure on pricing, while merchants are directly and indirectly affected by the rising costs of inputs such as labor and fuel. Meanwhile, interest rates are expected to continue to increase.
Cost of Cash vs. Cost of Card
The cost of cards in the U.S. is significantly higher than in most other developed economies. This is largely due to soft interchange regulation and the failure to regulate network fees. Interchange was regulated by the Durbin amendment in 2011, but the net effect was that only $4 billion was removed from the near $100 billion annual merchant service charge bill in the U.S. (Figure 3).
Cost of Cash vs Cost of Card
So, is the cost of cards higher than the cost of cash? This very much depends what is included in any analysis of the cost of cash, as discussed. Using CMSPI estimates of the merchant cost of cash, we can determine the cost of cash is nowhere near as large as the cost of either debit or credit cards (Figure 5).
The main reason for such a disparity between cash and card is due to the presence of a multilateral card interchange fee. The size of these fees has diverted attention away from cash for many merchants. The U.S. AT industry has an annual revenue of $3.2 billion, which is very low compared with the card merchant service charge (MSC) cost (Figure 4). Although the cash acceptance bill may not be as significant, it is still a large expense for merchants and is often easier to reduce.
Industry Comparison – Card vs Armored Transport
The Cost Threshold
As we can see in Figure 5, the cost of cash is rising (relative to cash spending) while the cost of accepting debit cards has remained broadly the same in the post-Durbin environment. That being said, it is unlikely that the cost of cash will pass the cost of cards in the U.S. any time soon. This is in contrast to Europe, where interchange regulation has deliberately placed the cost of cash at a similar level to the cost of cards.
Cost of Cash Progression
There are a number of areas where merchants can minimize the effects of the rising cost of cash.
1. Schedule Optimization – There is the compelling method of adjusting AT pickup and delivery scheduling to ensure reduced volumes result in reduced costs. That said, many merchants are already at the point of making the minimum possible frequency of collections, whereby any further reductions may impact cash flow or liquidity. The cash industry has seen further developments in cash office technology such as smart safes and cash recyclers, but it can be expensive and one way or another, the fixed monthly fee structure conflicts with declining transaction volumes.
2. Supplier Pricing Optimization – The AT and cash processing industries are both seeing productivity improvements and increases in excess capacity, but this is not always reflected in lower pricing.
3. Review Internal Processes – As well as ensuring the cash supply chain is optimal, merchants should also regularly review their internal processes as those costs can often be reduced without compromising security.
The cost of cash acceptance for merchants is set to increase organically as volumes decline on a largely fixed-cost base. Although the cost of cash is unlikely to exceed the cost of cards any time soon, cash costs can often be significantly reduced and, therefore, need careful consideration by merchants. There are mitigation strategies, including scheduling optimization, reviewing supplier pricing, and internal cash handling, which could be savings merchants significant six and seven-figure amounts every year.