Cash costs money, no joke

This is the beginning of a series of articles that presents a different perspective on how we use cash and the costs involved in keeping physical money.

Cash is more expensive than you thought — Part 1

We've come a long way from transacting through rai discs (ginormous stone discs used as money) and ingots. The modern physical representation of money tends to come in the form of paper and coins (or polymer banknotes depending on your country). The medium of exchange has evolved, however people’s mindset of having a physical representation has not. The article will focus on Singapore as a developed economy with still strong ties to old fashioned money and how that is now changing

ATMs — Technology for bridging bits to atoms

Let’s start at the ATM. This is the starting point of how most people retrieve their cash and convert digital money into physical money.

ATMs tend to dispense a fixed denomination. In Singapore, ATMs are slowly being limited to SGD50 denominations (you are able to get a decent lunch for less than SGD5, but we’ll get to that later)

Now with cash in our wallets, we commute to work. I will list public transportation of buses and taxis as the main examples.

Point A to B — Cash only

For taxis, you jump in, state your destination and upon reaching you will pay the fare. This is all well and good, except the driver does not have change for the $50 note you hand to him.

  • Are you willing to tip the driver $20 for $30 ride?
  • Or is the driver willing to do charity and let you head off to work?

The answer to both questions are “extremely unlikely”

The usual scenario would be for you to head to the nearest shop and make a small purchase to break your note. This is regardless of whether you want the item or not.

As of now let’s take a mental note of all the inefficiencies:

  • Spending on something you do not need and will likely cause tooth decay (my polite purchase of choice tend to be orange tic tacs)
  • Time spent looking for a shop
  • Trust extended by the driver to make sure you will not run away

Hard day’s work to bring home the bread

So work has ended, it’s a good day, no over time. You get to leave the office, but before that you decide to pick up a few items at the supermarket.

Supermarkets love to have prices that reflect $X.99 Everything seems to end with 99 cents. Their logic is saving cents can lead to huge savings in the long run. As an individual consumer, I highly doubt it, it’s the giant retail store that makes the most in the end (we simply do not have the volume). Largely because of this psychological trick to attract consumers to buy more, it adds another layer of costs.

Once again at the checkout, there is increased time required for the transaction and counting out of the change. If there is a lack of coins, time could be spent trying to unwrap roll of freshly minted coins

Some countries that do not have enough cash give out candy instead of small change (this was a common practice when I was travelling in India)

Once again there are hidden costs

  • Value of time is neglected when we go about our day to day grocery shopping
  • Operational cost of supermarket to process the cash (which will definitely be transferred to consumers)

Too Tired to cook, let’s dine out…

With the convenience of hawkers within walking distance of most estates, dining out is a common option. Apart from costs involved in weight gain and possible coronary infarction from the delicious oily cuisine, there are other hidden costs that are passed onto consumers unknowingly.

Across the reported 200 hawkers and 107 food courts, we estimate a total spend of around SGD$100 million in annual volume processed by the vendors in cash. There are some new food centres with a private top up kiosk and payment system but they are hardly scalable and definitely not a sensible long-term solution.

Without knowing any better, we are once again here consumed with inefficiencies:

  • Once again, having to have change in small denominations to pay for SGD3–10 meals (not complaining about the prices though!)
  • Having to queue to order your food and then having to queue separately to pay
  • Vendors having to collect cash, store cash and then physically transport cash to the bank or the suppliers to pay for supplies
  • Vendors having to track purchases against money received, and then money banked — difficult to avoid leakage and in some unfortunate circumstances loss or theft

Once again, there are significant frictions and transaction costs in exchanging notes and coins similar to earlier cases.

With all the exciting technology surrounding, is there not a better way? What is stopping us from implementing affordable payment receivers and developing a solution designed to make the life of a hawker or food court merchant easier and cheaper? The truth is we can. This is something we are working on so you should get in touch if you are interested.

What’s next? — Unpeeling the layers of costs

You now begin to realize the hidden costs involved at each stage of handling cash. Once these tangible and intangible costs are taken into account, there becomes a compelling argument for all stakeholders, including businesses, banks, regulators and the government, to support the drive to go cashless.

For the future articles, we will dive in depth into the challenges of switching from cash, impact to business productivity, fraud and money laundering, what the future of cashless with look like and at the same time, we would like to present case studies of cash alternatives that work in other countries such as Japan, Hong Kong and Sweden.

This piece was written in collaboration with Ravi Patel