# Is money being spent globally being reduced by going cashless?

There is a scenario going around the Internet (Google link showing extent of reach) saying the following (with possible slight variations which I haven't spotted yet)...

Why should we pay cash everywhere with banknotes instead of a card?

• I have a \$50 banknote in my pocket. Going to a restaurant and paying for dinner with it. The restaurant owner then uses the bill to pay for the laundry. The laundry owner then uses the bill to pay the barber. The barber will then use the bill for shopping. After an unlimited number of payments, it will still remain a \$50, which has fulfilled its purpose to everyone who used it for payment and the bank has jumped dry from every cash payment transaction made..

• But if I come to a restaurant and pay for digitally - Card, bank fees for my payment transaction charged to the seller are 3%, so around \$1.50 and so will the fee \$1.50 for each further payment transaction or owner re laundry or payments of the owner of the laundry shop, or payments of the barber etc..... Therefore, after 30 transactions, the initial \$50 will remain only \$5 and the remaining \$45 became the property of the bank thanks to all digital transactions and fees.

(Copied from Reddit r/Anarco_Capitalism)

First of all, (grammar and actual average fees aside) the mathematics do not work on this, as 30 transactions with 3% charges per transaction would reduce \$50 to just under \$20 in the economy (if the fees are rounded up). \$19.98 to be exact if my mathematics are correct. This is because the first charge would reduce the \$50 to \$48.50, then \$48.50 - 3% charge = \$47.05, then another would leave \$45.64 and so on...

However, \$30 is still a big chunk lost from \$50 to card transaction fees.

I don't know how much you spend per month on average for food, but my wife and I in the UK spend £300 per month, and using this scenario reduces that £300 to around £120 if my mathematics are correct.

This is surely going to ruin the economy and bust the banks in the end. That is because a strong economy needs money sloshing around the system. So, would this be something the central banks would really entertain?

Is this argument for paper money and coins to remain realistic?

• This might be more of a question for economics.stackexchange.com Commented Nov 25, 2022 at 10:11
• The example is also ignoring taxation, but seeing where the quote is coming from, maybe that's on purpose. Commented Nov 25, 2022 at 16:42
• Given this can only be answered with logic and explanation of basic science, with it being hard to cite studies or research for a specific scenario, this honestly feels a better fit for economics then skeptics. our own rules on not doing personal calculations and need to site a separate source seem like it makes it much harder to answer what could easily be answered on economics. Commented Nov 25, 2022 at 17:17
• Who's making the claim that it's globally?
– pipe
Commented Nov 27, 2022 at 17:52

## 3 Answers

I'm assuming the \$ in the question refers to US Dollars, so have tried to find US sources, although the principles apply in all markets.

## Does 3% of your payment go to fees?

Possibly, although this is at the top end of fees. According to this article from the Motley Fool US card transactions are subject to three types of fee:

• interchange fees (paid to the bank that issued the card)
• assessment fees (paid to the payment network, mostly Visa or MasterCard)
• processing fees (paid to the retailers choice of payment processor)

Each part, particularly the processing fees, can be made up of:

• percentage of transaction value
• fixed cost per transaction
• fixed cost per month

The article gives examples of Visa fees as low as 1.29% + \$0.05, plus an extra 0.30% + \$0.08 for the cheapest listed card processor, well below 3%, but other combinations are higher.

## Does this money disappear?

No. The money isn't simply burnt, it ends up in the pockets of other businesses - the payment processor, the card network, and the issuing bank.

## Does the money continue to circulate in the economy?

This is harder to answer - some would argue that the large banks and payment institutions accumulate wealth into the hands of a few individuals, which then fails to "trickle down". But some, for instance, pays the salaries of bank branch staff and software developers maintaining the payment network, who can use it pay the barber just as in the original example.

## Is the cost of handling cash zero?

No. There are many costs associated with handling cash, including equipment, staff time and training, and security. Some research estimates that:

U.S. retail businesses lose about \$40 billion annually because of the theft of cash alone.

## But none of that goes to the greedy banks, right?

Wrong. Retailers do not want to hold their entire balance of trade in cash, so need to deposit in a business bank account. Business bank accounts often charge fees for cash deposits (see e.g. this comparison), and those that don't may not be practical for a cash-based business (online only, or no branches in convenient locations).

• I think this really shows why the Q should be in Economics. These "cash isn't so great" points seem cherrypicked. I've long understood business vastly prefer cash, even giving discounts for cash when they can. I've also heard of banks trying to change for "business accounts", but backing down when confronted. People in Economics are much better equipped to know the way things work in practice than us doing a few searches and personal knowledge. Commented Nov 25, 2022 at 20:44
• There are also other costs of cash - notably collection, i.e. paying a secure cash van to pick up the cash in the tills every couple of days. Also money lost due to fraudulent bank notes which are rejected. I work in this industry, and the total costs of cash are pretty much equal to the total fees on credit and debit card systems. Commented Nov 25, 2022 at 21:23
• @OwenReynolds "Cherry picking" refers to selectively drawing attention only to facts that support one's position, and pretending that those facts are representative of the facts in general. That's the opposite of this answer; this answer is responding to cherry picking in the original passage and pointing out other facts that go against that narrative. Commented Nov 26, 2022 at 5:25
• @OwenReynolds The claim being addressed is not "on balance, cash is better for small businesses than card payments"; it is, roughly, "with cash, the retailer keeps 100% of the money paid, with cards they lose 3%". I think it's enough to show that there are some costs to handling cash, which, like the card fees, are paid from one party to another as part of the wider economy. Commented Nov 26, 2022 at 10:55
• @OwenReynolds You misread my comment, I think. I said that in my opinion the question is not about comparing the costs of the two options; it's about the false claim that one form of payment is free, and the other is somehow removing money from the economy. All I set out to demonstrate is that "there's no such thing as a free lunch", so the basic premise is bogus. Saying that in a particular market, for a particular business, cash ends up being more profitable, is a completely different claim, which is not made in the question, so not addressed in my answer. Commented Nov 26, 2022 at 17:23

If you consider realistic fees for card payments and cash payments and include the cost for the time spent on handling the various payment options, and a large proportion of card payments are contactless, then debit card payments are the cheapest option.

In March 2019, the Deutsche Bundesbank (German federal bank) published study for the costs of cash payments, based on a study period in 2017. To estimate the cost for various payment alternatives, they considered four main components:

• Fees, such as card fees or cash deposit fees;
• Costs for time per transaction, such as the salary of the cashier during the time the transaction takes; and
• Costs for additional work needed, such as counting cash at the end of a shift, going through receipts, training costs; and
• hardware costs such as the price of a POS terminal.

IMSoPs answer additionally mentions the cost of theft of cash. This does not appear to be taken into account in the Deutsche Bundesbank study (neither direct cash theft by staff, nor the cost of violent attacks on ATMs).

From the summary:

pro Transaktion kostet eine Zahlung mit Bargeld rund 24 Cent, eine Debitkartenzahlung etwa 34 Cent. Kreditkartenzahlungen liegen bei knapp einem Euro.

Per transaction, a payment with cash costs around 24 cent, a payment with debit card around 34 cent. A credit card payment costs around one euro.

Although the absolute cost per transaction was higher for card payments, the average money spent per transaction was also higher, so they simulated the situation in which all transactions are replaced by the average transaction of €13.48. Here, a card payment costs on average €0.22, slightly less than a cash payment of €0.24. However, this is before considering contactless payments.

An important aspect that must be considered is the duration of the transaction. If a transaction goes faster, a store might do with less checkouts (lower staff costs) or can handle more customers in the same timeframe. Time spent counting cash or preparing it for pickup by the bank (or worse, bringing it to the bank) is time spent not doing something else.

Zweitens, eine Kartenzahlung dauert im Schnitt rund 29 beziehungsweise 39 Sekunden, je nachdem ob die Zahlung mit PIN oder Unterschrift erfolgt. Bargeldzahlungen kommen im Schnitt auf knapp 22 Sekunden.

This means that a card-payment takes on average 29 seconds with PIN and 39 seconds with signature. A cash payment takes on average 22 seconds. During the study period in 2017, faster contactless payments were not yet sufficiently widespread in Germany to get a statistically significant result. However, the study quotes another study from the euro payment study group, which showed that cash paymenst take on average 24 seconds, PIN payments 23 seconds, card + sign payments 28 seconds, and contactless payments 11 seconds — less than half of any other payment method.

Based on these results, Deutsche Bundesbank performed a simulation of the costs on the assumption that contactless payments take half the time compared to PIN payments:

Source: Deutsche Bundesbank

Reminder: these statistics are simulated, because in 2017 there was insufficient data on the real duration of contactless payments in Germany. The authors note that a follow-up study is needed. I don't know if this has been carried out.

The study does mention at all mobile payments, which were probably obscure or non-existing in Germany in 2017 (from personal experience, they are uncommon still in 2022).

• I'm a bit confused by the graph - why isn't there a simulation for "no pin and no signature"? Germany allows that for transactions under 50 euros. Commented Nov 25, 2022 at 19:29
• In Munich mobile contactless payments are not uncommon. Majority that I've observed pays with contactless cards or cash, but there's a growing portion paying with phones or other smart devices (watches). No one gave me a weird look for paying with my phone, and cashiers often point out where exactly to tap my phone (usually due to smaller antennas it can be pickier).
– ave
Commented Nov 25, 2022 at 20:37
• @ave How old is that information? Statistics are from 2017, and my experience from Rheinland-Pfalz of that era is a bit different: Until Corona, contactless payments were not very well known, and cashiers would often be confused to see that the POS terminals are accepting them. Additionally, many banks weren't issuing contactless cards back then. Commented Nov 26, 2022 at 10:24
• @AndrejaKo this is the current standing, my own observations. I visited Germany before covid and indeed that was the state. I moved here earlier this year and IME contactless card acceptance and mobile payment issuance has gone much higher.
– ave
Commented Nov 26, 2022 at 14:27
• @JonathanReez I think "contactless" and "no PIN / no signature" are used interchangeably here. Usually contactless payments are without authentication and "insert card" payments are with authentication. Also note that the coronavirus pandemic has accelerated acceptance of card payments in Germany (in 2017, most bakeries in Germany were cash-only, which was the case for 100% of bakeries in the study; today most bakeries accept cards, but small takeaways often still don't), and the limit for contactless was also increased (from €25 to €50, I think, but lower for some banks or customers). Commented Nov 27, 2022 at 10:45

There is a grain of truth in the statement: transaction fees are harmful to the economy and in an ideal world we'd have zero fees for sending money between any two people/companies in the world. This is why in 2015 the EU adapted a regulation that set a strict limit on payment card fees. The full text of the regulation provides a detailed rationale:

• (9) To enable the internal market to function effectively, the use of electronic payments should be promoted and facilitated to the benefit of merchants and consumers. Cards and other electronic payments can be used in a more versatile manner, including possibilities to pay online in order to take advantage of the internal market and e-commerce, whilst electronic payments also provide merchants with potentially secure payments. Card-based payment transactions instead of payments in cash could therefore be beneficial for merchants and consumers, provided that the fees for the use of the payment card schemes are set at an economically efficient level, whilst contributing to fair competition, innovation and market entry of new operators.

• (10) Interchange fees are usually applied between the card-acquiring payment service providers and the card-issuing payment service providers belonging to a certain payment card scheme. Interchange fees are a main part of the fees charged to merchants by acquiring payment service providers for every card-based payment transaction. Merchants in turn incorporate those card costs, like all their other costs, in the general prices of goods and services. Competition between payment card schemes to convince payment service providers to issue their cards leads to higher rather than lower interchange fees on the market, in contrast with the usual price disciplining effect of competition in a market economy. In addition to a consistent application of the competition rules to interchange fees, regulating such fees would improve the functioning of the internal market and contribute to reducing transaction costs for consumers.

Of course, as explained in @gerrit's answer, cash has transaction costs too and so does every other type of payments, so it's incorrect to make a blanket statement like "pay with cash to help the economy".

• Comments are not for extended discussion; this conversation has been moved to chat.
– tim
Commented Nov 29, 2022 at 8:06