This cost of cash perspective was co-authored by The Fletcher School, Tufts University academics: Bhaskar Chakravorti, Senior Associate Dean for International Business and Finance, and Benjamin Mazzotta, Postdoctoral Research Fellow for Inclusive Growth
Since the 1950s, cash has faced serious competition for point-of-sale payments. Today, the digital transformation has accelerated that competition, just as film and vinyl lost market share to digital media. America’s transition in payments has been slower than in Sweden, where cash lost half its market share to payment cards in twenty years. Yet it has also been faster than cash-heavy markets such as Greece, Italy, Mexico and Spain. Why? Is there “trapped value” in the stickiness of cash? Does it provide intrinsic benefits that no substitute can offer?
On closer inspection, there are hidden costs to continued cash use. Households face nickel and dime costs throughout the cash lifecycle in the form of fees and time spent accessing cash. For businesses, theft presents the largest source of costs. Main Street businesses will simply bear the risk, rather than hiring armored car service. And although the U.S. government spends money producing and distributing cash, by far the greater impact of cash is on missing tax revenues—known as the Tax Gap.
Taken together, these costs constitute huge allocations of resources. The Tax Gap dwarfs the discretionary spending of most executive branch departments. The cost of cash to the various stakeholders, consumers, businesses, and the government amounts to at least $200 billion in the United States. After defense, discretionary spending of the next ten United States executive branch departments averages $44 billion. So even if only 11% of the tax gap is due to cash transactions, that is still sufficient to fund a cabinet-level department of the United States Government.
Our research demonstrates the regressive impact of household cash-related costs. Unbanked individuals are four times as likely to pay fees to access their money and pay $4 more per month in fees for cash access. The “unbanked” (those without bank accounts) are 4 times more likely to pay fees to access their own money. Youth (under 25) carry substantially less cash than seniors (over 65) at every income level. These findings broadly corroborate excellent research by the FDIC on financial services for the unbanked and by the Pew Charitable Trusts on payday lending and sensible checking accounts. Entry-level payment instruments could be priced at low flat rates and backed by paid-in funds rather than credit.
Some governments have taken aggressive action to curb cash payments in the private sector. Recovering even a fraction of the foregone tax revenues could be a fiscal game-changer. Spain and Italy have forbidden cash payments above thresholds of EUR 2500 and EUR 1000. Mexico uses a tax on cash deposits to sweeten the value proposition for cards and electronic funds transfers. And in Korea, a similar tax incentive scheme encourages real-time tax reporting of cash transactions at the point of sale. Outright bans on cash transactions might be a bridge too far for ordinary Americans, but the fiscal impact of tax evasion should not be understated.