Reprinted from Harvard Business Review
Is the U.S. becoming a cashless society?
As digital payments spread from coastal coffee shops to rural restaurants, business owners, lawmakers, and consumers across America are asking themselves this question. And depending on where you live, the concept of “cashless” is either a heated debate, the wave of the future, or a term you’ve never heard of. Where the debate does exist, it highlights the growing tension between an evolving consumer payments landscape, a desire for increased business efficiency, and a growing concern that un- and underbanked consumers may be marginalized in a cashless economy.
The rise of digital payments, which includes traditional debit and credit cards as well as mobile payments, have contributed to the steady shift in payment practices among consumers. According to the FDIC, cash represented just 30% of all payments in 2017. Furthermore, 68.7% of U.S. households had a credit card in 2017 vs. 63.8% in 2015. Business owners who recognize this trend are responding accordingly, with some opting to go entirely cashless in an effort to increase operating efficiency, reduce wait times for customers, and create a safer work environment by mitigating the risk of theft. Perhaps the most high-profile example of a cashless business are the Amazon Go stores, which use computer vision technology instead of cashiers to record what customers select and then automatically charges their card.
But does this mean we’re on the verge of a cashless revolution? To answer this question, I collaborated with Square, the payments and financial services company. Together, we analyzed millions of payment transactions from their database to determine just how close–or far–the U.S. is from becoming a truly cashless society. Our findings suggest that the cashless trend is clear but nuanced, and highlights a few factors that sellers should consider when contemplating whether to forego cash payments.
First, our analysis shows that more consumers are using their credit and debit cards for smaller purchases. In the past four years, the use of cash for transactions under $20 has dropped from 46% to 37%. Specifically, in 2015, half of consumers at Square businesses used their card for an $8 transaction, like a sandwich. Just four years later, in 2019, the transaction size has been cut nearly in half. Now 50% of consumers use their card for as little as a $4.50 purchase, like a latte.
This behavioral shift can partially be attributed to marketing from credit card companies aimed at increasing usage of cards for small, day-to-day purchases. It used to be that credit cards were strictly for large, special, or emergency purchases. That mindset no longer exists, so people are increasingly comfortable using their credit cards for smaller transactions at places like drug stores, coffee shops, and delis.
Second, this trend isn’t limited to coastal, major metropolitan areas. Outside the top 25 metropolitan markets, the transaction amount at which consumers prefer their cards to cash dropped from $8 to $5.50 over the last four years. Within the top 25 metropolitan markets, the decline isn’t quite as steep; the transaction amount at which consumers used their cards only dropped from $5 to $4 over those four years. As smartphone penetration and digital payments expand, so will cashless capabilities.
Third, for some business owners, a cashless business model is a strategic choice that provides clear benefits. While much of the current narrative regarding a cashless society is focused on the downside, there are advantages for both business owners and consumers. The key is understanding customer payment preferences.
For example, Travas Clifton, owner of ModCup Coffee and a Square seller, has seen the benefits of being cashless first-hand at his three New Jersey cafes. When he learned that 81% of transactions across all locations were made with credit or debit cards, he decided that the remaining 19% of cash transactions were worth potentially risking to gain more time with his family and business.
“An hour and a half [away from my shop to deposit cash] at 9 AM in the coffee business is valuable business time. That means I could be at one of my espresso bars serving people coffee. Instead I am having to hire someone to take my place at the bar. What I’ve realized is that [cash is] the same as a credit card, it’s costing me money to process so I said, scrap it, we’re going cashless” explains Clifton. Turns out, most of his customers were fine with the switch.
But almost 1,000 miles away in St. Louis, Missouri, Laura Leester, owner of Pieces restaurant and game bar, had a very different experience running her cashless business. She decided to open her business with a cashless model, drawn by the increased efficiency and safety, but quickly realized that nearly each day, she interacted with disgruntled customers frustrated they couldn’t pay in cash.
“When I opened my business there were so many balls rolling I didn’t really reflect on how I could be isolating a group of people in my community by not accepting cash,” she says. ”As a responsible business owner and someone who wants to share my goods and services with all socio-economic levels, I felt it was my duty to start accepting cash.”
The cashless reversal trend is not unique to St. Louis or even to small businesses. Sweetgreen, the fast casual salad chain that went cashless in 2016 for efficiency and safety, recently made the decision to start accepting cash again to ensure that everyone could access their restaurants. Similarly, Amazon has altered its Amazon Go concept to accept cash in 2019, at the request of its customers.
That said, in certain cities and states where proposed legislation may ban cashless businesses, selecting payment options may soon be out of the business owner’s hands. This spring, Clifton’s three ModCup locations had to revert to accepting cash after New Jersey passed legislation banning cashless businesses. While he calls it “overreaching and bad for business,” similar legislation has been passed in Philadelphia and proposed in New York City, San Francisco, and Washington D.C. Third-party research commissioned by Square shows that 51% of small business owners support government bans on cashless businesses, that 83% of small business owners in America never plan to go cashless, and 73% believe the U.S. will never be a fully cashless society.
Taken together, these data do signal that a “less cash” society is emerging and that an entirely cashless society is unlikely any time soon–especially when 70% of Americans still report using cash on a weekly basis. But 50%, 60%, or 70% cashless is certainly conceivable, and we are already there in a number of markets around the country. I predict that the tipping point will come as younger, tech-savvy generations integrate their own digital payment habits into their own businesses in the future. This, coupled with concerted efforts to build bridges across the banking and digital divides, will enable a big shift toward cashless.
But for now, in markets where the choice to go cashless is not limited by legislation or regulation, business owners and managers should look at their transaction data to determine which payments strategy will preserve the health of their business while catering to the unique needs of their customers. In today’s competitive and ever-changing restaurant and retail landscape, brick and mortar businesses need to ensure one simple thing: they never miss a sale.