Vice President and Cash Management Executive, Capital One Commercial Banking
This article first appeared in Payments Journal on June 22, 2018.
Retailers and restaurants are cautiously moving toward fully cashless operations. Cards and apps are replacing bills and coin. While futurists and science fiction writers have been predicting a cashless future for generations, consumer-driven businesses are following the lead of a much more influential group of thinkers—their customers.
A new Capital One survey shows that one in four Americans rarely carries cash—and this percentage rises to one in three among Millennials. Forty percent of those who do carry cash—typically just $25—do so for emergencies rather than for purchases. For dining out, paying for gas and buying groceries, cashless is king. In fact, a New York Times reporter recently went three months without making a cash payment. His experience may be extreme, but it highlights an increasingly common phenomenon: it’s no longer exceptional to use cards and smartphones to make everyday purchases.
The end of the road for cash
The arguments for phasing out cash are persuasive. Cash is risky and messy. It must be secured, counted and deposited—an increasingly difficult proposition. Merchants often pay fees for cash deposits and for handling coin, and armored services charge for pick-ups. The bottom line: cash costs money.
Cash also costs time. Reconciling cash drawers at the end of a shift and preparing cash for deposit takes valuable time from other business activities. Cash transactions are also slower, hampering the speed of establishments that depend on volume. And, of course, cash is an easy target for theft—whether it’s a snatch and grab or an employee dipping into the till.
A few early adopters, mostly restaurants, have moved entirely to cashless payments. They include the New York and Chicago-based Dos Toros Taqueria, and Sweetgreen, the popular nationwide salad-making chain.
Businesses weigh the alternatives
For all the disadvantages of cash, some merchants have hesitated to go completely cashless for a number of reasons—including transaction fees. Each time customers pay with a credit card, the card’s issuing bank withholds roughly three percent of the transaction amount. Yet customers using cards tend to spend more for certain purchases, especially dining and take-out. According to a consumer payment study conducted by Visa, a customer paying with plastic typically spends 25 percent more at a pizza shop, 33 percent more at a deli or diner and 40 percent more at a family restaurant. In addition, businesses taking a high volume of card payments usually have more leverage negotiating lower transaction fees.
Merchants also worry that accepting more card payments increases the risk of fraud, but point-of-sale fraud is much less of an issue since the adoption of the EMV chip. Data collected by Visa shows that cases of counterfeit fraud dropped by 70% between December 2015 and September 2017.
Most of all, merchants are concerned about alienating customers. Some feel that they should never turn away business and, if they say no to cash, they will lose the customer as well as the transaction. The validity of this stance depends largely on the type of business and its target audience.
In addition, so-called unbanked customers have no access to credit or debit cards, effectively excluding them from cashless businesses. The most recent FDIC report estimates that approximately 9 million households in the U.S. were unbanked in 2015.
Determining when to make the transition
Despite the concerns, clearly the momentum to go cashless is growing. Giants like Starbucks and Amazon are already experimenting with cashless stores. Economics, demographics and technology are pushing commerce in this direction. So, for individual businesses, the real challenge is not deciding whether to make the transition, but when and how.
Are customers ready?
A good first step is assessing customers’ existing use of cash versus card. Tracking the volume and value of transactions currently paid with cash as a percentage of total sales over a 30-day period should provide a baseline. This analysis will provide a rough idea of the practicality of going cashless.
Businesses should also use this opportunity to find patterns in their cash payments. Are there particular customer groups that tend use cash exclusively? Do cash transactions spike at certain times of day? Is there a dollar amount above which customers use cards rather than cash? These insights and others may suggest specific strategies to acclimate customers to cashless payments.
Finally, businesses should talk to their customers to discover why some use cash for their purchases and ask if they are averse to going cashless. Merchants may be surprised to discover that, with advance notice, cash customers may not be as reluctant to switch to cards as previously imagined.
Do the numbers add up?
Even if a critical mass of customers support switching to cashless payments, merchants should balance the costs associated with cash against the expense of greater card transactions. Businesses should reach out to several merchant services providers to negotiate fees. The ideal time to make the transition is when the incremental cost of going cashless can be readily absorbed.
Ensuring a smooth transition
Switching to cashless payments, however, is not something a business should attempt overnight. A graduated program will allow time to educate customers while giving staff an opportunity to adjust to new processes.
Become a card-only ambassador
Communication is fundamental to an effective switch. Use social media channels to broadcast the change and stress the benefits for customers. More importantly, publicize the upcoming change at point of sale through store signage and conversations with customers. The personal touch will go a long way to boost customer acceptance.
Take it easy
Your internal deadline for the transition can lag as much as a month behind your publicly announced cut-off. During this period, keep cash on hand for customers who either forgot or didn’t get the message. This accommodation will give you an opportunity to grant exceptions on a case-by-case basis and create goodwill.
On the cusp of a new age of payments
Cash, check or card. For decades they were the only payment options. While checks and cash continue to decline, cards and other electronic payment methods have begun to appear in new formats. Google Wallet and Apple Pay are card-based payment apps, and a growing number of companies like Uber, Starbucks and Domino’s Pizza have introduced apps that combine card-based payments with loyalty programs. Looking ahead, there is the opportunity for cards to merge with personal payment platforms like Zelle.
Given the pace of change and its extraordinary implications, merchants need an experienced treasury management partner who can help them manage the transition to cashless payments and make sense of the growing array of cashless alternatives. Merchants should look for a partner bank that has a digital-first mindset and the ability to factor future technology into the advice it provides today. They should seek partners with a data-centric culture, who can help them assemble and analyze all the relevant information required to assess the financial impact of going cashless. Most of all, it should be an institution that sees its role as consultative, recognizing and respecting the distinct requirements of individual businesses and who can help implement payment practices that support the long-term goals of the business.