Cash: Stop beating it up and promote its cost-effectiveness instead

One of the first casualties of the COVID pandemic appeared to be cash. Early fears of widespread viral transmission via cash and other surfaces were flamed by media outlets everywhere. Consumers were urged to spurn cash in favor of credit and debit for public safety reasons.

The card brands were thrilled to dust off their old talking points about the merchant expense and inconvenience of handling cash. At the same time, pundits proclaimed that the precipitous drop in ATM transactions was further proof that cash was on the way out.

Finally, a shortage of coins in circulation, primarily the result of nationwide quarantines, caused merchants to reevaluate their payment strategies. In response, a number of merchants decided to go "cashless" believing that credit and debit were much cheaper and safer alternatives for them. On the ropes and reeling, cash appeared headed for a knockout, but then a funny thing happened on the way to cash's funeral.

Lawsuits and legislation mushroom while chargebacks soar

The result of indignation on the part of cash users, and a concern for the unbanked, both lawsuits and legislation against cash purchase discrimination have proliferated in the COVID-era.

Congress and a number of states are in the process of drafting laws against most "cashless" commerce. These laws aim to ensure that customers retain the ability to pay for all purchases at brick-and-mortar retail establishments. Legislators contend that physical cash is legal tender, acceptable for the payment of all debts and purchases. Once enacted, businesses will be required to accommodate cash customers, stemming the tide of "cashless."

As consumer purchases migrated online in response to state and local lockdowns, industry groups have reported a spike in chargebacks of over 20%. Many of these chargebacks are the result of recurring charges set up by members of clubs, gyms and other establishments. With these businesses closed as a result of the pandemic, customers in large numbers began disputing these monthly or quarterly charges.

Other chargebacks were issued due to customer complaints of non-receipt of merchandise ordered online. Some of this "friendly fraud" was malicious, while others were a result of customers forgetting purchases or from confusing vendor identification on statements. Either way, industry statistics show that "friendly fraud" losses to merchants could reach $1 billion this year, not including the time required for merchants to gather information to fight these chargebacks.

Chargeback reserves and fees balloon

In response to the growing number of chargebacks, many acquirers have increased merchant cash reserve requirements. This is simply merchant cash set aside to cover potential future chargeback losses or in response to perceived merchant financial weakness. Either merchants can pony up the cash or else settlement dollars are simply set aside by the processor. Often, chargeback reserve requirements are set or increased arbitrarily, with no input from acquirers. Either way, increased chargeback reserves are a heavy blow to merchants already reeling from the negative impacts of COVID on their cash flow.

Despite the large increase in debit and credit purchase volume, the vast majority of merchants still pay 2-5% for credit and debit purchases. Merchants claim that they continue to struggle to route debit transactions away from the more expensive Visa and Mastercard networks. This challenge has been exacerbated by the large increases in online and digital wallet purchases during the pandemic.

For vendors of expensive luxury products, card fees may be simply a cost of doing business. For the vast majority of low-margin businesses, card fees eat up large chunks of profits.

As merchants have begun to "do the math" on the costs of going cashless, we are now beginning to see a backlash. Card fees, chargebacks and reserves are all being scrutinized closely as businesses struggle with the negative financial impacts of the pandemic. Lo and behold, rather than a death knell for cash, COVID and the merchant cost of plastic may actually spur an unexpected renaissance in the global use of cash.