A few years ago, Vineeta and I went to a cafe in Amsterdam and were intrigued to find that they didn't accept cash. They had a sign behind the counter that explained that card payments were more convenient, more hygienic, and pose less of a security risk than cash. This made perfect sense to me and got me quite excited about the idea of a cashless future. It seemed so modern!
Not long afterwards, I found a nifty little card wallet made from upcycled truck tarpaulins and since then, as my wallet now doesn't have a space for cash, I've hardly carried cash anywhere. So much so that Vineeta now mockingly refers to me as ‘The Queen’ because I’m like royalty who don't carry cash.
Despite my own enthusiasm, there’s been a little part of me that has felt slightly uneasy about the increasingly rapid disappearance of cash in society. I find myself walking past the homeless with nothing that I can give them. I want to make a donation to a street artist or a community event but don’t have any cash to drop in the hat. And then I've been intrigued by the growing number of people who are vocally opposed to the full digitalisation of money. Maybe they are paranoid about a global crypto-currency being used to help the formation of a one world government, but maybe they have some valid concerns. Neverthless, I carry on with my little card wallet, living my cashless life, because it's just so convenient.
Then last month, I was queuing up at a food tent of the Buddhafield festival and there was a notice explaining why they only accept cash. The notice stated that card payments are siphoning money out of the real economy and small businesses into the hands of the wealthy banking sector. The message was simple - do the maths.
So I’ve done the maths
If I have £100 in cash and I spend it in a local shop, the shopkeeper now has £100 pounds which they can pay to their employee. The employee then has £100 that they can spend to take their family for dinner at a local restaurant, that can be paid to someone who works at the restaurant. They then have £100 to buy groceries for their family and the grocer then has £100. We’re of course ignoring the impact of government taxes, but in it’s purest form, cash retains its value within the local economy.
In comparison, if I spent £100 on a card in the same shop, the shop will pay fees in the region of 1.5% to 3.5%, or sometimes even higher when other transaction fees are applied.
If we assume an average fee of 2.5%, when then the shopkeeper goes to pay their employee, they only have £97.50 and the banks and fintech companies now have £2.50. Maybe that seems like no big deal and a price worth paying for the convenience, but it takes just 30 transactions before more than half of the money has been lost to the banks. After 100 transactions, there would be just £8.36 left in the local economy. That’s a loss of value of 92%.
In the spirit of sustainable business and trying to create a more equitable society, this feels somewhat regressive. By moving more and more to debit and credit card payments, we’re effectively taxing communities and donating the money to some of the wealthiest organisations in society. I mentioned in an earlier article that VAT is a tax that affects the poor the most, but card payments effectively add an extra 2.5% “Bankers Tax” on top of the existing 20% Value Added Tax.
Is cash starting to seem more appealing?
There are other benefits to cash too. The European Central Bank states that “Cash is … essential for the inclusion of socially vulnerable citizens, such as the elderly or lower-income groups”, that it ensures freedom and autonomy because you can make transactions without the need of a third party, that “cash transactions respect our fundamental right to … privacy” and that “cash has proven to be secure in terms of cybercrime, fraud and counterfeiting”.
It also states that cash is “legal tender” and that business “cannot refuse cash, unless both they and the customer have agreed on another means of payment in advance”. That got me wondering whether I would accept cash from a client to pay for their website. In practice, for businesses like mine who sell business to business services, the majority of our clients pay by bank transfers that don't incur any bank fees within the UK, so we probably don’t need to switch to envelopes full of cash.
But for many other types of small businesses, card payments can be a huge drain on their finances, particularly in the retail and hospitality sector. Vineeta and I had dinner at an independent restaurant on the Isle of Wight a few months ago and they had a sign at the checkout stating exactly how much money they had paid in card fees in the previous financial year, and asking customers to pay in cash if they were able to.
Then there's the environmental question
Is cash more environmentally friendly than digital money, or vice versa? Cash doesn’t require any energy to make a transaction and it’s highly durable, meaning that once it is manufactured it can stay in circulation for many years. On the other hand, cash has to be physically transported between stores and banks and distributed to ATMs. According to Nicole Jonker, an economist at the Dutch central bank who led research into this topic, a typical debit card transaction has “about the same impact on climate change as 90 minutes of lighting by an 8-watt low-energy light bulb” and it can be slightly higher if paying by credit card due to the increased billing complexity. That sounds like a lot. Despite this, her team concluded that the total environmental impact of a debit card payment is about one-fifth that of a cash payment.
But then if we get really into the weeds on this topic, there is an argument that cash has less of an impact on inflation than digital money simply because it is harder to create more of it. Digital money is after all, just numbers on a computer and banks magically create new money when they make loans. It’s no wonder then that as most new money creation is digital, 96% of all money in the UK economy now exists only in digital form. Cash makes up just 4% of the money supply.
The problem is that creating more money devalues the currency through inflation, makes ordinary people poorer and creates a culture of short term financial planning, since money doesn’t hold value over the long term. Put another way, if you know your money won’t be worth anything in the future, then you’re better off spending money on things you don’t need today instead of trying to save for more worthwhile things over the long term. While it’s hard to quantify the impact, it could be argued that the increased inflationary effect of digital money is corrosive for society and for the planet.
Can we find a balance?
There are clearly pro’s and con’s both to cash and to digital money, so I’m not suggesting that we should attempt to go backward to an entirely cash economy. I do however, think that there’s value in appreciating the unique benefits that cash offers us over digital money before it slips from 4% of the money supply to zero. Perhaps we should resist the narrative that cash is old fashioned and slow down the charge to entirely digital money. This might mean reconsidering whether we scrap cash payments in our businesses and trying to pay for more things in cash where it is an option.
If I’m going to do that, I probably need to start by buying a new wallet.
One of my favourite yet. I have a very poor and triggering relationship as it is with money, and my Mum having her house repossessed by the bank in the 90s. She ran her own taxi business. She now lives in a council flat, luckily she got somewhere. Over the years of Leap I've done many skill trades where finance wasn't involved. However as our team grew it becomes harder almost impossible. It is really interesting on how we could do this easily in business. I tend to pay with cash to small independents. My favourite everlasting wallet is by Elvis and Kresse of course, I love a good wallet, and you know the origins.
Like you, I've not carried cash for some time now, to the extent that I was actually surprised to find myself with change on me to give to a homeless person in London this weekend. It reminded me of reading this in my inbox.
I've had several discussions with small business owners about card versus cash payments in recent months. A couple have been stung by unexpected card processing fees or increases in fees, which has also got me thinking about how I can better support my local businesses.
Today, the main provider of fibre broadband where I live has had an outage all day, and 4G backups don't appear to be working, which has meant several local businesses have only been able to accept cash payments as their card machines have been rendered useless. Fragile.
It seems that every day I find new reasons to believe that a sustainable future is one that is responsive to as many possibilities / preferences as possible, rather than one that banks on one "right way" to do something. Diversity.