Are You Paying with Cash or Card?
Technology is becoming a more integral part of life, changing the way people do the most seemingly mundane tasks. During a weekly grocery trip, store patrons save the hassle of finding the exact change they need in coins with the simple swipe of a credit card or the tap of a digital wallet, such as Apple Pay and Google Wallet. When a large group goes out for lunch, they no longer need to spend an unnecessary amount of time figuring out how to split a check with cash only to miscalculate how much each person gets back in change. The group can instead use peer-to-peer payment platforms like Venmo and Zelle which take the money out of their direct deposit accounts for them. This type of payment prevents customers from splitting twenty-dollar bills into inconvenient, sometimes impossible denominations. Digital payments remedy a multitude of physical cash’s limitations, giving individual consumers more of a reason to conduct their financial activity online.
Monetary transactions shifted to a more digital form at the turn of the twenty-first century and have accelerated as a result of COVID-19 when the pandemic warranted minimal physical interaction with others. Consumers did not have much choice but to engage in these types of payments before they ultimately fell victim to mass panic buying and global supply chain issues. Large corporations quickly seized the opportunity to maximize their profits online not too long after lockdown commenced by using their size and ample resources to invest in the optimization of their online shopping platforms. Walmart’s second quarter report for the 2021 fiscal year highlighted that their United States e-commerce sales skyrocketed, growing by 97% compared to their 2020 second quarter report (Walmart, 2020). Target reported that their digital sales in that same quarter grew 195%, contributing to the company’s largest recorded sales increase since its opening in 1902 (Target, 2020). Consequently, these Fortune 500 brick-and-mortar companies developed greater market shares alongside the world’s domineering e-commerce platform, Amazon. Though Amazon holds a larger share of the space, Walmart’s and Target’s e-commerce sales are growing faster, potentially allowing them to have a more competitive edge against Amazon as reigning e-commerce platforms within the next five years (Petro, 2021). The pandemic allowed large department stores to experiment with online store methods that would work best depending on their respective business models, resulting in a prospective outpacing of Amazon sales in the foreseeable future. In light of astonishing sales growth attributed to the prevalence of online transactions, the rise of digital transactions evidently benefited large corporations, strengthening their credibility as both online and physical retailers.
Society is facing the first huge change in the new millennia, as digital transactions became a dominant mode of payment both online and in stores using cards or mobile wallets. However, there persists unequal access to the resources and equipment required to sustain an economy solely based on cashless transactions. Smaller businesses, for example, may not have the capacity to purchase capital that would allow them to accept these forms of payments. On the other side of the cash register, many Americans in marginalized communities do not have a bank account, inhibiting them from using digital transactions. Because of these disparities, the United States is neither technologically nor economically prepared to face the consequences of transitioning into a cashless society.
The first issue with changing to a cashless society arises when the scale goes further down the line to smaller businesses. Unlike larger corporations, small businesses are less able to absorb the costs of dealing with online stores, such as card transaction fees. All businesses must incur a payment processing fee when a customer uses a card. Square is a financial technology company that provides businesses with compatible hardware to conduct card and mobile payments. In addition to the costs of hardware, Square charges businesses 2.6% plus $0.10 for every card and digital wallet used (Fabregas, 2022). This additional cost implies that the businesses must raise their product prices or cut costs elsewhere in order to make up for the losses accumulated by accommodating these payments. Cutting costs includes laying off employees, possibly leaving many small businesses understaffed and incapable of meeting business demands. Rather than absorbing the charges for a Square transaction, businesses can impose the expense on the customer, whether it be through raising their product prices or charging customers the transaction fee directly. The extra expense may deter customers and incentivize them to shop at other establishments, decreasing demand for their products. Small businesses who are unable to fulfill their demand will ultimately create less revenue. Thus, generating a downward spiral that will drain small businesses of their staff and profits.
In addition to processing fees, another glaring concern businesses face when handling digital transactions is credit card fraud. The variations of fraud have multiplied as credit cards became more ubiquitous over the last twenty years, with one of the most prevalent methods being friendly fraud. This type of fraud occurs when a customer requests a refund, or “chargeback”, from a business after purchasing and using a product, claiming to the card company that they did not make the purchase. Card companies often side with the consumer, obligating the business to pay the consumer back. Chargebacks include the cost of the product and card processing fees (DeMatteo, 2021). One chargeback request could enact a detrimental monetary penalty on the producer equivalent to two or threefold the amount they spent on materials and labor. Friendly fraud went rampant in 2020, as many stores added flexibility to their return policies, resulting in approximately $25.3 billion dollars’ worth of fraudulent returns (Inman 2021). The rise of credit card fraud cases challenges businesses’ abilities to successfully engage in online economic activity.
Card processing fees and credit card fraud are unavoidable experiences inherent to running a business of any size. While larger corporations experience the pitfalls of digital transactions, especially on a grander scale, they also have the money and resources to protect themselves from additional charges. They have more of an opportunity to reach economies of scale, an idea that is achieved once a business grows enough to simultaneously lower costs of production and maximize revenue. Once a business accomplishes economies of scale, they can use the profits to purchase tools that will further reinforce their economic territory, such as an allocated budget to offset card processing fees and a legal team to protect them from fraudulent activity. Conversely, small businesses are more likely to struggle with achieving economies of scale, meaning they must encounter the same charges that larger corporations need to without the profit margins to buy themselves protection. The American economy cannot progress equitably without large-scale cybersecurity measures that will better protect small businesses from the flaws of digital transactions.
On the other side lies the consumer. Millions of Americans do not regularly use credit and debit cards. Figures from the Federal Reserve in 2020 presented that 13% of Americans were “underbanked” and 5% were “unbanked” (2022). The Federal Reserve defined “underbanked” as a type of individual whose banking services and funds were insufficient for regular use of their account while “unbanked” represented individuals who did not have a bank account. In other words, approximately 1 out of 5 people in the United States will be left behind as a result of the shift to a cashless economy. Sirin Kale, a journalist at The Guardian, spotlights a story about Tina, a then 47-year-old, low-income earner with a disability, who withdrew her financial government support in cash. Upon checking out at a grocery store, the cashier declined her payment, claiming that pandemic laws forbade the establishment from accepting cash. Consequently, Tina returned home by bus on her crutches in tears without any groceries. Though this story took place in the United Kingdom, the principles of excluding marginalized communities still holds true in the United States. A disproportionate number of underbanked and unbanked individuals came from underprivileged groups: low-income households, people with low educational attainment, or racial minorities.
Underprivileged groups face higher barriers of entry into the digital banking space. Most modern banks require their clients to pay monthly maintenance fees for their checking accounts if their balance is below a minimum threshold. A survey conducted in 2019 by the Federal Deposit Insurance Corporation, FDIC, revealed that the main reason why unbanked households do not have a bank account is because they are unable to pay for maintenance fees (2021). These marginalized groups would need to engage in a counter-intuitive process of paying more in exchange for keeping a smaller amount of money in the bank, leading them to lose out on essential funds necessary for their basic needs. The money a low-income household would spend on holding a bank account could instead promote their upward mobility — advancement into a higher socioeconomic status. In other words, the opportunity cost of a $10 monthly maintenance fee, or $120 annually, could be shopping for healthier grocery items or paying for utility bills. Similarly, these groups face difficulty while seeking eligibility for credit cards, as applicants with unstable income sources and lack of banking histories are more likely to be declined. The previously cited 2019 survey by the FDIC also highlights that 35.6% of households with a family income lower than $15,000 have a credit card while households making at least $75,000 were sitting at 89.2%. Despite the overarching push for a cashless society, multiple mechanisms are in play, pulling select communities away from engaging in it. If these marginalized groups are struggling to obtain the most fundamental modes of digital transactions, they cannot be expected to participate and thrive in a cashless society.
One way to pave a more equal road towards this monetary model is by creating accessible resources to make digital transactions an equitable process. With the escalating omnipresence of cashless transactions should come solutions for marginalized communities. Neobanks are novel powerhouses in the financial technology sphere that prioritize transparency and accessibility through online-first banks which do not have physical locations (Walden, 2021). A substantial amount of neobanks do not charge monthly maintenance fees which would alleviate the top reason why many underbanked and unbanked Americans were not open to creating new accounts. Some neobanks also intended to uplift certain marginalized communities. Donald Hawkins, founder and CEO of First Boulevard (now called Kinly), shares that the neobank promotes financial literacy in the African American community by providing personalized financial recommendations and educational videos alongside monthly fee-free bank accounts (Tierney, 2021). Neobanking is a new industry, emerging within the last ten years, so not enough time has passed to determine their viability as a sustainable method of digital transactions. In their current form, they are not economically competitive enough to single handedly solve this financial inequality. However, they are also a sizable first step towards equity in the space, as it would take time for mainstream banking institutions to instill policies aimed to include marginalized communities. If neobanks take a greater share of the banking market and make the industry more competitive in the next one to two decades, they could be one of the main propellers of a cashless United States, potentially motivating larger banks to hasten their processes to serve marginalized communities.
Aside from neobanks’ mission to level out the industry’s playing field, supporters advocate for neobanks and other modes of digital payments because they believe these transactions lead to lower robbery rates. Reports from the Federal Bureau of Investigation (FBI) illustrate a consistent decrease in robbery rates from 119.3 per 100,000 people in 2010 to 81.6 per 100,000 people in 2019, coinciding with the rise in online transactions. American businesses and consumers are less likely to be haggled by robbers in stores and homes. However, this does not allude to an elimination of wrongdoings, rather a surge in more sophisticated crime. Phishing, a common cybercrime, hoaxes unsuspecting bank account holders by sending them a message — usually through email or text — asking them for private information, allowing the criminal to log into the customer’s bank account. SlashNext, a leading anti-phishing company, demonstrated a gloomy outlook, stating that there were over 255 million phishing attacks in the United States during the first six months of 2022, a staggering 61% increase compared to the entirety of 2021 (2022). As Americans grapple with these new transactional models, many will become victims of cybercrime which gives criminals access to one’s financial accounts as well as more sensitive information, including one’s address and social security numbers.
Attempts to unify the United States economy through nationwide digital transactions will only split the country further apart. The trend towards a cashless society will isolate marginalized communities and budding businesses from engaging in mainstream economic activity unless solutions form to aid them in the upcoming monetary transition. Until then, the United States’ inequitable access to necessary financial and technological resources deems it ill-equipped to tackle the economic implications caused by a cashless society.
