E-commerce sales significantly exceeded storefront traffic this Black Friday, and the subsequent Cyber Monday set record for the largest U.S. online shopping day ever. Driven by pandemic-related concerns, consumers changed not only their shopping patterns but also payment methods, shifting away from cash. Among the millions who tried contactless payments, grocery deliveries and curbside pickups for the first time during the pandemic, the majority said they will not return to their pre-pandemic shopping habits. This makes many wonder if COVID-19 will accelerate the U.S. transition to a cashless society, like that in Sweden or China. Several important considerations can inform the discussion.
First, while U.S. consumers have slowly reduced the use of cash over the last decade, the magnitude of reduction in the last few months is staggering. A Federal Reserve study indicates that prior to the pandemic, cash accounted for a quarter of all U.S.transactions and was the dominate payment form for small purchases. A supplemental survey conducted during the pandemic shows that approximately 30% of consumers have avoided using cash, and their alternatives are debit and credit cards.
The recent increase of non-cash transactions is driven mainly by health concerns. Besides the growth of online purchasing, touchless payment methods, such as tapping to pay with contactless cards (those with a wave-like symbol) or mobile devices (smartphones or watches), are popular because they eliminate the need to physically touch retail sale terminals. Limited contact payment methods still require consumers to dip chip cards into the readers or sign at checkout terminals, but generally involve less contact than cash payments. Beyond health concerns, many consumers applaud the faster transaction speed and the time saved on cash or coin counting.
Second, the traceability of digital transactions makes account management straightforward for businesses and government agencies. Because there is a digital record for every transaction, the absence of a trace issue for cash payments and by extension, opportunities for tax evasion, are significantly curtailed. This is good news for tax administration, as both credit cards and smartphones leave electronic marks that can be verified. In light of a $441 billion tax gap per year (the difference between what taxpayers owed and actually paid on time) this is positive for tax compliant individuals.
Although some view the accessibility of digital records as privacy invasion, non-cash instruments do enable faster distribution of government relief payments. The CARES Act authorized the treasury department to send economic impact payments of up to $1,200 directly to taxpayers. The IRS started direct deposits to taxpayer bank accounts two weeks after the passage of the law (and accounted for 75% of recipients at the end of May), and it took longer for taxpayers unwilling or unable to receive direct deposits to get paper checks (23%) or prepaid debt cards (2%).
Finally, critics of cashless payments often cite its disproportional burden on low income and minority communities as a reason for opposition. Recent statistics show that 6% of Americans do not use banks; 16% are underbanked, which means that they use alternative financial services such as check cashing, payday loans or title loans instead of traditional financial institutions. Cash remains the primary payment method for these households.
However, the argument against non-cash payment methods out of concern that such households may be harmed should be refocused. Specifically, the discussion should center on removing the underlying roadblocks faced by these communities.
The issue was multifaceted even before the pandemic, as the unbanked population not only includes those who want a bank account but cannot get one, but also those who simply do not want to be associated with a bank. An FDIC study shows that although the inability to meet bank minimum balance requirements remain a key challenge for the unbanked population, lack of trust and the preference to stay off-grid due to privacy concerns are top issues for this group. More than half of the unbanked population have had a bank account; however, close to 70% say they are not interested in having one again.
The pandemic complicates the issue in at least two dimensions. First, the pandemic may lead to an increase of unbanked households, potentially due to unemployment and the late or unpaid expenses that may result. In addition, if the goal is to increase bank account ownership among the unbanked, the pandemic underscores that any policy response not only needs to address financial inclusion, but also digital inclusion. Improving digital literacy such as data security and privacy maintenance is as important as enhancing financial literacy.
Concerns about identity theft or cyberattacks are justified and extend beyond the unbanked population. Many organizations experienced a surge in cybercrime since the beginning of the pandemic, and the FBI recently refreshed its warning about increased cyberattacks during the holiday season. Although cyberattacks evolve constantly, common safeguards for individuals and businesses include implementing multifactor authentication, mandatory VPN, employee cybersecurity awareness training, and information security gap audits, to name a few.
Despite the surge of non-cash payments, the shift away from cash and to all non-cash transactions will be a long process. Cash may no longer be king, but it still commands a critical position for consumers beyond its role in daily transactions. Some argue that since technology glitches and payment system malfunctions may make funds temporarily inaccessible, it is useful to have “emergency cash” handy. Others believe digital accounts make it easier to overspend and harder to develop responsible budgeting habits. The recent debate on whether to eliminate the penny shows that, although there are limited economic reasons to keep pennies in circulation, cash has sentimental value to many.
COVID-19 has expedited the adoption of non-cash forms of payment in the United States. Different payment methods do not constitute a zero sum game between the unbanked who lack access to financial services and the entrepreneurs who innovate the payment system. Neither should the debate center on disallowing merchants from accepting certain forms of payment. The increase in non-cash payments reflects the development of our society, and we should focus on addressing the underlying challenges that exclude some communities from being part of that progress.
