Cash is king. And policymakers can’t exactly tell if that’s a good thing or not.
Although the drivers are in dispute, the data are not. In 2018, the Federal Reserve reported something that most merchants know too well: that paper money continues to beat out digital spending in U.S. commerce, capturing 30 percent of all transactions and more than 50 percent of sales under $10. Indeed, as of Jan. 8, 2020, there were $1.75 trillion in Federal Reserve notes in circulation, driven in part by a preference even among credit card reward members for cash over cards.
Figure 1. Payments Type, Share of All Transactions
Source: Shaun O’Brien, Understanding Consumer Cash Use: Preliminary Findings from the 2016 Diary of Consumer Payment Choice, Federal Reserve Bank of San Francisco, Fednotes, November 28, 2017.
The persistence of cash has led to interesting, and in some ways varying side currents worth keeping an eye on. The prevalence of cash has made local policymakers sensitive to its use, especially among the poor. New York legislators, for example, approved legislation prohibiting stores, restaurants and other retail outlets from refusing to accept hard currency in an attempt to thwart increasingly cashless businesses. And, in a move beyond steps taken by peers in cities like Philadelphia, New York has also banned ride-sharing apps and meal delivery services from going to digital payments, largely in the name of assisting those who may not have access to modern payments technology due to the cost or poor internet connectivity.
It’s a fascinating development, especially when taking into consideration global trends. From Kenya to China, mobile payments — and more fundamentally, the digital money riding on the technology — are viewed as drivers of modernization, merchant efficiency, and financial inclusion. The argument for adopters goes that digitization allows for not only cheaper payments, but also easier and less expensive ways to operate the business, go mobile, receive, save and move money. Remittances are enabled internationally, and it can be easier for all actors, domestic and foreign, to gain clearance for purposes of opening bank accounts. Even underwriting and credit can in principle be expanded with greater insight into payment streams of users. Meanwhile, some critics argue cash isn’t always the panacea traditionalists tout. It’s not extremely safe — people carrying cash can become targets of crime, for example — and it’s not very efficient in large quantities or for use over large distances.
Figure 2. U.S. Currency in Circulation
Source: The Federal Reserve Currency and Coin Services, at https://www.federalreserve.gov/paymentsystems/coin_data.htm, April 29, 2019.
The policy choices seem at first blush to be strikingly different. As more than one observer has remarked, the U.S. seems to be clinging to analog payments infrastructure while the rest of the world is zooming into the future. But the story isn’t quite that simple. Digital access is not universal in the U.S., and by instituting restrictions on merchants, the U.S. is able to preserve a higher degree of transactional equity and opportunity than similarly situated countries.
Indeed, our modern payments problem, analogous in some ways to our crumbling bridges and roads, is one that presents a classic case — and need — for government action. The to-do list is a long one: The wireless infrastructure needs a dramatic upgrade; investments in cables, cell towers and telecommunications networks are needed in poor communities and rural digital deserts; public services like food stamps should be available on mobile devices as well as optional digital identities for the underbanked; and “smart city” projects anticipating future financial services based on cloud computing, big data and artificial intelligence are in short supply.
This all suggests that the focus of public policy should ultimately be enabling rather than disabling.
Payment technologies like cash — or tulips, credit cards or digital dollars — are going to reflect customer demand. If they’re useful and low cost, they will be used. If they’re risky, a hassle or expensive — and if there are better alternatives — they won’t. Government should enable consumers to have a set of up-to-date options, which includes enabling everyday people to upgrade their financial lives when the right opportunity arises, and not merely lock in or subsidize legacy infrastructures and actors disinterested in their customers.
Figure 3. Noncash Transactions, in Billions
Source: Federal Reserve System, The Federal Reserve Payments Study 2016, December 2016, p. 12, at https://www.federalreserve.gov/newsevents/press/other/2016-payments-study-20161222.pdf.
I’m optimistic that as the risks and rewards of digitization payments become more broadly understood, we’ll see such a framework come to the fore. But we’re not there yet, and it’s nearly certain that the road to realizing one won’t be a straight one.
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Chris Brummer is Agnes N. Williams Research Professor of Law and Faculty Director of Georgetown's Institute of…