Two Faces to a Cashless Future

By Ethan Epstein

At a busy Starbucks in downtown Washington, D.C., on a recent weekday morning, scores of beleaguered office workers queue up for their fix. As the line progresses, one trend becomes apparent (besides the popularity of soy milk): Very few people are plonking down cash for their caffeine. Indeed, only one out of about a dozen of the professionally attired customers reaches into his wallet and proffers cash for his coffee.

Had he been there, Kenneth Rogoff would have been happy at what he saw—the Harvard economist is, in the words of Bloomberg News, trying to “kill cash.” Rogoff thinks that culling most paper U.S. dollars in circulation would make it harder for criminals to operate, reduce tax evasion and furnish the government with a greater ability to juice the economy by introducing negative interest rates. He wants the feds to slowly phase out $100, $50 and finally $20 bills.

And while Rogoff is arguably the most prominent voice in this debate (his 2016 book The Curse of Cash was widely discussed), he’s actually something of a moderate. Narayana Kocherlakota, no less than the former president of the Federal Reserve Bank of Minneapolis and currently an economist at the University of Rochester, would go even further: He argues that governments should “abolish currency” altogether.

But as some see it, this vision of a cashless society may already be coming to fruition without direct government intervention. Indeed, whether because of the increasing number of merchants who welcome credit cards and digital payments (and the increasing number of businesses who accept only card payments and eschew greenbacks altogether, like the upmarket salad chain Sweetgreen), the cumbersome nature of having to always carry cash, the increasing sophistication of mobile payment apps or the generally rising numbers of people who think of money of something virtual rather than physical, it seems, at least anecdotally, that folks simply aren’t using as much cash as they used to. The media certainly agree—trend stories about America’s increasing cashlessness are now a fixture of even the non-financial press.

‘Less-cash, not cash-less’

Jeff Plagge, a 38-year veteran of the banking industry who is currently president and CEO of Iowa’s Northwest Financial Corp., observes that there’s a real shift at work. The cashless society may be “overhyped,” says Plagge, a former ABA chairman, “but the trend line is real . . .I see a less-cash society rather than a cash-free society.” Gallup research backs him up: Only about a quarter of Americans report conducting most of their transactions in cash, down from 36 percent five years ago.

Nor is this trend merely domestic, or even limited to the developed world. The European Central Bank is ending production of €500 notes, which it claims are used primarily to facilitate criminal activity. Sweden is moving aggressively to phase out cash, estimating that by 2020, only 0.5 percent of transactions by value in that Nordic nation will be cash-based. (In the United States, roughly 14 percent of transactions by value are still cash-denominated.) And India recently banned notes representing some 86 percent of the country’s cash in circulation—a dramatic attempt to combat widespread tax evasion in a country that was heavily reliant on paper bills.

If cash use does indeed fall, banks will enjoy some benefits—and potentially suffer pitfalls as well. For one, it’s expensive to keep cash. Jim Reuter, the CEO of Lakewood, Colo.-based FirstBank, Colorado’s second largest bank, points out that if banks held less cash, they’d see a “significant [reduction] in the cost of handling [it].” “Lots of people are employed to monitor currency,” Reuter points out. With less cash on hand, those costs would be greatly reduced.

So would the risk of bank robberies, notes Plagge. That’s no small benefit: The western part of Iowa has been suffering from a significant uptick in bank heists, he points out. (That’s been part of a nationwide trend: In 2015, the last year for which data are available, bank robberies rose 3.5 percent.) And various compliance costs would fall as well. Banks could expect big savings on recordkeeping as fewer large cash transactions trigger federal reporting requirements.

Yet there are potential downsides as well. “With less cash, you’ll see fewer teller transactions,” Plagge notes. That might sound, again, like a good thing—think of the reduced labor costs—but could also have perverse effects. Consider: If people find themselves going to bank branches less and less, banks could end up saddled with an expensive physical infrastructure that’s increasingly obsolete. And it also risks turning banking into a commodity: If customer service-focused banks have fewer opportunities to interact with their clients, how can they stand out from the competition? A functional mobile app is important, but physical interaction is usually a much more effective way to build a long-term relationship. Increased use of digital services could also demand higher bank spending on cybersecurity, though bankers are already spending a lot on bulking up their defenses, regardless of what happens with cash.

The persistence of paper

Of course, all of this remains conjectural and contingent on one big thing: cash use actually falling. Chris J. Waller, an economist at the Federal Reserve Bank of St. Louis, argues that, despite what one sees at a Starbucks line, that isn’t really happening—at least not yet. Citing Federal Reserve data, Waller says that the amount of U.S. currency in the economy is actually still increasing—in fact, cash’s growth is tracking pretty closely to broader income gains in the U.S. economy.

About a quarter of U.S. households are considered unbanked or underbanked, and “they’re using cash,” Waller reports. And even some people with bank accounts still like to use cash frequently—it’s helpful for budgeting, for example. That’s why, as Reuter points out, “we saw an increase in cash use during the financial crisis” as Americans tightened their belts.

It’s possible, of course, that as older consumers who used cash through most of their lives give way to younger generations raised on the idea of using their phones as a wallet, cash will start to truly disappear. Reuter recently conducted an impromptu survey of his bank’s management trainees, most of whom just graduated from college, and found that half of them were carrying less than $15 in cash.

But perhaps not, at least not in the near future, because there are geographic and legal quirks as well. Indeed, unlike Iowa’s Northwest Bank, FirstBank is actually handling more cash now than it had in previous years.

Why? Colorado’s lifting of state prohibitions on marijuana sales and consumption. Because marijuana remains illegal under federal law, few pot purveyors can use federally insured banks and credit unions or access the payments system and thus fall back on cash. “We don’t bank marijuana sellers,” Reuter explains, “but we do a lot of business with those who do work with the marijuana industry, like HVAC companies.” And when they make their deposits, they tend to be in cash. With eight states now having legalized the drug for recreational use—including California, the nation’s most populous—Rogoff’s vision of diminishing cash use could end going up in smoke.

That will gladden the hearts of cash advocates, who view paper money as an indispensable guarantor of choice, privacy, freedom and financial inclusion. As Chris Waller points out, “cash guarantees a right to privacy.” There are certain purchases that people don’t want to leave a record of—it is for this reason, Jim Reuter suggests, that “liquor stores handle cash a lot.”

Elaine Ou, an engineer at a San Francisco technology company, meanwhile, has called the cashless society a “creepy fantasy.” In a recent Bloomberg View column, she raised another objection to phasing out paper notes: “Banks, being private institutions, have the right to refuse transactions at their discretion. We can’t expect every payment to be given due process. This means that politically unpopular organizations could easily be deprived of economic access. Past attempts to curb money laundering have already inadvertently cut off financial services for legitimate individuals, businesses, and charities. The removal of paper currency would undoubtedly leave similar collateral damage.”

And since the poor tend to make far more of their payments in cash, they could stand to be the most affected by rapid move toward a cashless society. The consultant Guillaume Lepecq makes another point, one about cash’s versatility: “Cash has repeatedly demonstrated its importance in times of crisis,” he writes in U.S. News and World Report. “When natural disasters knock out an electrical grid for days or even weeks, cash is a saving grace for residents to obtain critical supplies.”

Benefits from fewer Benjamins

The Washington, D.C., economist Ike Brannon counters that the benefits of reducing cash use outweigh the costs. He strikes a Rogoff-ian note: “Of course, we all have certain transactions that are perfectly legal but we’d rather not have any record of occurring,” says the former U.S. Treasury Department official, “but sacrificing that seems like a small cost to me of a change that would dramatically reduce tax evasion.”

At a time when the U.S. federal government faces total debt topping $14 trillion, this is a compelling point—especially given that an exhaustive 2008 study from academics at Stanford, San Jose State University and the University of Texas found that cash-only businesses “systematically underpay income, employment and sales taxes through income underreporting. The results show that participation in a . . . cash economy facilitates tax evasion and that cash business owners seek out sympathetic tax preparers.” Rogoff has also pointed out that under his preferred scenario, small bills would still be there for Americans who prize privacy in purchasing.

If there’s one thing bankers can agree on, it’s not that we are necessarily moving to a cash-free economy, but that we are already living in an essentially paper check-free economy. Cash may still be king, but as the decline of paper checks has shown, payments royalty can be felled at any time.

Ethan Epstein is associate editor at the Weekly Standard and a frequent contributor to Politico magazine.

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