I think we can all agree that this past year has been unprecedented on a global scale. The coronavirus pandemic and subsequent economic downturn the world over has shaken us to our core. Additionally, in recent years there has been an increase in hostility toward cash and toward mobile payment systems. This hostility has been exacerbated this past year, largely led by institutions.
A recent paper published on EconStor titled, “Institutional hostility to cash and COVID-19” took a closer look at this phenomenon. The papers authors, Edoardo Beretta of the Institute of Economics in Switzerland and Doris Neuberger of University of Rostock in Germany had this to say in the abstract of their paper, “By ‘hostility to cash’ we refer to the recent trend of incentivizing individuals towards a (privately managed) digital payment system driven by banking and financial sectors and supported by Governments. COVID-19 has on the one hand boosted this movement, with false messages about banknotes spreading the virus as a new instrument of convincement. On the other, the enduring flight to cash shows that this ‘relic’ is even more essential in bad economic times. Restricting or eliminating cash is synonymous of welfare losses due to increased monopoly power of the financial and technology industry, reduced privacy, and threatened financial stability as a public good. As a consequence, financial exclusion and social discrimination would increase, adding to the impact of the COVID-19 crisis on inequality.”
Unbanked and Underbanked
The loss of cash as a viable payment option in large part affects lower income households. In order to have access to alternative payment systems, one generally needs a traditional bank account. However, many Americans are currently unbanked or underbanked. A May 2020 report from the Federal Reserve found that “Although the majority of U.S. adults had a bank account and relied on traditional banks or credit unions to meet their banking needs, gaps in banking access remained. Six percent of adults in 2019 did not have a checking, savings, or money market account (often referred to as the “unbanked”). Half of unbanked adults used some form of alternative financial service during 2019—such as a money order, check cashing service, pawn shop loan, auto title loan, payday loan, paycheck advance, or tax refund advance. In addition, 16 percent of adults were “underbanked”: they had a bank account but also used an alternative financial service product. The remaining 79 percent of adults were fully banked, with a bank account and no use of alternative financial products.”
Additionally the Federal Reserve report found that, “The unbanked and underbanked were more likely to have low income, have less education, or be in a racial or ethnic minority group. Fourteen percent of those with incomes below $40,000 were unbanked, versus 1 percent of those with incomes over that threshold. Additionally, 14 percent of black adults and 10 percent of Hispanic adults were unbanked, versus 6 percent of adults overall.”
Consumer advocates point to these disparities and say that businesses who refuse to accept cash payments put people who don’t have traditional bank accounts or credit cards at a considerable disadvantage. In September 2020, advocacy groups backed legislation that would prohibit brick and mortar businesses from refusing cash.
Cash as the Great Equalizer
This move toward a cashless society may benefit the banking and financial industries, but it doesn’t measure up to reality. In its 2020 Findings from the Diary of Consumer Payment Choice, the Federal Reserve Bank of San Francisco found that consumers used cash 26% of the time when making payments and that 47% of payments under $10 are made using cash.
Given this reality, as paper authors Beretta and Neuberger state in their conclusion, “Any attempt to restrict or eliminate cash, namely a (monetary) public good issued by central banks, results in welfare losses due to the increased monopoly power of the (private) banking and financial system…any partial or complete privatization of money tends to increase financial exclusion and social discrimination, adding to the dramatic impact of the COVID-19 crisis on inequality…In sum, COVID-19 must (and should) not become a war on cash.”