Filed Under: Cash and cash replacement, Payments

Is card fraud really a barrier to cashlessness?

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A while back, my old chum Ed Conway from Sky TV (better known for his excellent foreword to that noted tome Identity is the New Money, of course) ran a nice story about the British cash paradox. It turns out that since the #Brexit vote, the amount of cash “in circulation” has soared (it’s gone up by nearly two billion quid since B-day, as I call it). While the use of cash for transactions has continued to fall, the amount of cash just generally hanging around has continued to rise.

The growth rate of cash in circulation has more than doubled since January, when it was running at 4% a year, with a sudden acceleration in the weeks following the EU poll.

From More People Keeping Cash Outside Banks

Ed asks whether the cash has been hoarded, stashed or exported. I wrote about this following the Bank of England’s analysis of the situation last year, noting that 

The interesting question that the Quarterly Bulletin article by Tom Fish and Roy Whymark stimulates is straightforward: “if the majority of Bank of England notes are not being used for everyday transactions in the domestic economy, what are they being used for?”

From Where is the aggregate demand for cash coming from? | Consult Hyperion

Since the Bank of England’s own estimate is that about a quarter of the cash out there is used for “transactional purposes” and since the size of the black economy can be reasonably estimated, the answer seems to be that they are mainly used for tax evasion (primarily by SMEs), money laundering, drug dealing and corruption (Transparency International reckon that only 0.75% of global dodgy dealings are intercepted by the UK). We see the same phenomenon in America, where the amount of cash out there continues to rise but the use of that cash continues to fall.

The use of cash has fallen more than 50% in the last four years and is projected to continue to fall as consumers look for faster and secure means of paying options. With a high degree of smartphone penetration in the US market, mobile and digital payments are rapidly gaining a market share in digital payments.

From Americans Are Using Less Cash but Mobile Payments Are Not The Ones Replacing It | Let’s Talk Payments

So we can see that in the US, as in the UK and many other countries, the rise of contactless and mobile payments means that the use of cash for retail transactions is falling steadily. (Contactless transactions have now reached £2 billion per month in the UK.) It is interesting, however, that in the US there seems to be much more resistance to cashlessness than in Australia or Denmark. Or the Netherlands…

For example, paying rent or a telephone bill in cash only sparks scolding looks. But obstacles are present even when making smaller purchases such as groceries (where cash-only lines are the longest) or when paying for parking – impossible without a card.

From Consumers are bearing the cost of cash

Cash-only lines are the longest. Are you watching, Waitrose? But I digress. What accounts for the American cash gap? Well, first of all a lot of US dollars are under drug dealers mattresses in South America, not in the US at all, so that distorts the figures for cash “in circulation” but that doesn’t explain everything. In his new book “The Curse of Cash”, former IMF chief economist Kenneth Rogoff says (page 111) that in America “people pay by cash for small transactions to avoid credit card theft”. Is this true? I realise that in America they still use magnetic stripes (which is why America accounts for half of all the card fraud in the world although it is only a fifth of the volume) does that really encourage people to pay with cash? I always use cards in the US — since I don’t care if the card details get stolen as it the banks’ problem and not mine — and I get really annoyed when I go to a coffee shop or something and it doesn’t take cards.

 No Chip

But perhaps our American correspondents could enlighten us on this. Is card fraud really a barrier to cashlessness?

7 thoughts on “Is card fraud really a barrier to cashlessness?”

  1. bchwc@schwartzster.com' Ben says:

    I often pay in cash for small transactions because I am aware of the relatively hefty swipe fee the merchant has to pay; many merchants in the U.S. require a minimum purchase of 5 or 10 dollars to swipe a credit card because of the fee. It certainly isn’t due to fear of fraud.

    1. Dave Birch says:

      This seems like a more realistic explanation to me.

    2. My wife an ex merchant shares this exact same sentiment if less than ten pay cash is her norm. Me I always carry a bit and find that sometimes it is the fastest way to pay.

  2. glodge@celent.com' Gareth Lodge says:

    Dave – as always, an interesting read! I don’t believe it’s a barrier either – it’s far more fundamental I think.
    I wrote a blog recently (http://bankingblog.celent.com/2016/08/03/cash-is-dead-no-it-isnt-pt-1/) dismissing a survey claim that the US will be entirely cashless within a lifetime. I know – and me, an electronic payments person too!

    One factor they hadn’t considered is that there is a significant number in the US who are un- or under- banked – the FDIC put this at just under 30% of the population. talkpoverty.org and others suggest that c.14% of families are below the poverty line ($24.5k annual income for a family of 4).
    These will use cash for budgeting purposes and because they don’t have access to electronic payment types necessarily. This remains one of the largest barriers to a truly cashless society. Our cashless vision is not impossible but there are significant social aspects to consider too.

  3. david@broadlycurious.com' David True says:

    That is my reason as well.. I don’t worry about fraud since I have no liability.

  4. topolski@alumni.duke.edu' Jamie Topolski says:

    People who read and comment on Payments blogs aren’t a good proxy for the average American. The statement quoted within your article, that “mobile and digital payments are rapidly gaining a market share in digital payments” is circuitous and even if corrected (e.g. by deleting “in digital payment”), is completely incorrect for the U.S. market. Contactless and mobile payments have not yet made any significant impact in the U.S. (although I expect that they eventually will). Debit cards are used more often than credit cards (although credit cards are used for higher-ticket items). Many people use debit cards rather than credit cards as a form of self-enforced budgeting (you can only spend the money that is in your checking account). The same is true for reloadable prepaid cards. I suspect that some people use cash as a budgeting tool too (withdraw $X = your budget for the week) but I don’t have any data on this.

    1. Dave Birch says:

      “The statement quoted within your article, that “mobile and digital payments are rapidly gaining a market share in digital payments” is circuitous and even if corrected (e.g. by deleting “in digital payment”),”

      “retail payments”

      “Contactless and mobile payments have not yet made any significant impact in the U.S. (although I expect that they eventually will).”

      Proximity mobile payments will roughly triple in the US this year, although I think in-app is much more important: Starbucks, Uber, AirBnB, Walmart, Venomo etc.

      “Debit cards are used more often than credit cards (although credit cards are used for higher-ticket items).”

      Yes I know. But Rogoff specificalyl said “credit cards” because like most people who understand the system (eg, me) he never uses a debit card.

      “Many people use debit cards rather than credit cards as a form of self-enforced budgeting (you can only spend the money that is in your checking account).”

      I know. But I don’t – I don’t get air miles with my debit card!

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