Would a Shift from Cards to Cash Really Help Retailers?

The Dodd-Frank Wall Street Reform and Consumer Protection Act, passed in response to the 2008 financial crisis, is celebrating its 10^th anniversary. The bill included the infamous “Durbin Amendment,” an 11^th hour power grab imposing price caps on fees merchants pay to process debit transactions. Since then merchants have tirelessly campaigned for even stricter federal price controls. Yet for all their opposition to the fees charged to process cards, the cash alternative remains significantly more expensive. This suggests that businesses enjoy the benefits and ease of card transactions but simply do not want to pay full price.

Interchange fees for credit cards vary between 1.4 percent and 3.4 percent, but average roughly 2.2 percent. For debit cards the regulated interchange fee averages 22 cents plus a small surcharge for debit and prepaid cards to help offset fraud. In exchange, merchants enjoy significant benefits: Consumers using cards tend to spend more (“ticket lift”); card transactions are faster and safer; and accepting cards allows retailers to expand their customer base through online sales — something that has proved critical for doing business during the pandemic.

Nonetheless, retailers with high volume and low profit margins aggressively make the case that payment card fees are far too high. But the seldom-asked question in these debates is: Compared to what? What are the costs to retail merchants when their customers use cash? Surprisingly, they are higher than the costs of interchange fees.

One study found roughly 30 percent of all retail transactions are cash, and the costs of processing these transactions is $96 billion. The average cost of cash for all sectors was 9.1 percent of the total value of cash transactions. Grocers are on the low end at 5 percent, while bars and restaurants are on the high end with a 15 percent cost of cash. These costs include managing cash drawers, dealing with banks and deposits, reconciling cash flows, and cash shrinkage from loss, theft, and fraud.

Cost of Cash Across Sectors

Clearly, the cost of cash is significant and should be included in any assessment of the Durbin amendment. While several studies have demonstrated the costs of the amendment with respect to the disappearance of free checking, higher banking fees, and adverse impacts on small retailers and small-ticket sales, its impact with respect to the cost of cash must also be considered.

One consequence of Durbin price regulations is that hundreds of thousands of consumers, voluntarily or involuntarily, became unbanked due to higher banking fees. These primarily low-income households have shifted to cash payments. Given the costs of cash, this hurts the very retailers that the Durbin amendment purported to help. 

Average Transaction Costs

Indeed, looking at the data, using cash increases merchants’ transaction costs from just over 2 percent for accepting cards to just over 9 percent costs for accepting cash. One study evaluating the costs of cash and check payments found that “debit is typically less costly for retailers than either paper instrument is.”

It evident that merchants value the benefits of electronic transactions; they simply do not want to pay full price. Instead, they prefer Congress and regulators to set prices more to their liking. While many view redistribution by Congress as going from the better off to the less fortunate, most redistribution is actually horizontal, with special-interest groups using political clout to divert resources to themselves. The Durbin Amendment is a classic example; retailers marshalled their considerable political resources to push through nothing more than a wealth transfer from banks and electronic payment networks, and consumers to themselves. Increased regulation will only continue to expand the spoils.

Wayne Brough, PhD. is president of the Innovation Defense Foundation, a non-profit organization focused exclusively on fighting regulatory barriers to technology and innovation.