The Downsides of the War on Cash

On Industry Focus: Financials, we've spent a lot of time talking about the "War on Cash" and why transitioning to a cashless society creates some pretty compelling investment opportunities. However, there are also some downsides. Host Jason Moser and Fool.com contributor Matt Frankel discuss the possible negative repercussions in this Industry Focus: Financials clip.

To catch full episodes of all The Motley Fool's free podcasts, check out our podcast center. A full transcript follows the video.

This video was recorded on July 8, 2019.

Jason Moser: Okay, let's jump out of the banks here for a second. I want to talk about a listener question. I feel that recently at Fool Fest, we've talked about our big investor conference, I guess the best way to put it here, that we had recently. Fool Fest is a great event we have every year, and somewhere in the neighborhood of 1,000 members descended on our area here this year for us. One of those members, Bob Claude, he and I were speaking one day, talking about our show here. He had a lot of nice things to say about the show. One thing that he was asking us to consider discussing, we talk a lot about the war on cash and this move toward a cashless society, and all of the great things that come from it. Bob's question was, "Hey, you're not talking about the flip side of that necessarily as much as I'd like to hear." And I think there's some valid observations to take away from that. I agree with him. We want to talk a little bit about the drawbacks of going to a cashless society.

Matt, I'll go ahead and let you kick it off here. We do talk all the time about these investments in these companies that are helping spearhead this move toward a cashless society. But there are some side effects there from less cash. I wonder, what's the first thing that comes to your mind there, one of the problems or drawbacks of a cashless society?

Matt Frankel: When I was kicking around this idea before we started recording, there's three big ones I can think of. The first one, from a consumer standpoint, is the vulnerability of your money. Obviously, cash can get stolen out of your wallet. But the flip side of that is all these data breaches, the hacking incidents, banks' electronic portals go down all the time. I had trouble getting into my bank this morning, actually. If that's your only money, if there's no cash and all of your money is electronic, it creates like a big risk, like having all your eggs in one basket. If your bank crashes one day, and all of your money has to do with electronic transactions, that's a problem. So, that's No. 1.

No. 2, also from the consumer perspective, a transition to cash -- we've talked about this on the show before -- disproportionately affects certain groups of the population, particularly lower-income individuals and older individuals who may be reluctant to switch to new technologies or not understand how they work. They call this the underbanked population. It could leave a lot of this group of the population behind and make day-to-day transactions a little more difficult for them.

Third, from a merchant's point of view, paying transaction fees. Right now, let's say you own a small business. Let's say Jason owns a restaurant. I'd go to Moser's Cafe.

Moser: Of course you would. I mean, there is Jason's Deli out there, but listen, that's not mine.

Frankel: It'd be cool if it was.

Moser: I'd probably have a sandwich on that menu named after you, Matt.

Frankel: That'd be awesome. But, let's say he owns Jason's Cafe, not to be confused with Jason's Deli. Let's say half of the customers pay with cards right now and half pay with cash. On average, he's paying about a 3% interchange fee for every card transaction. If 100% of those transactions were now in the form of cards, he's now paying a fee on 100% of his business. That doesn't sound like much, a 3% fee, but when it's replacing all of your cash business, which you're currently paying no fee on, from a merchant, that's a pretty big deal, especially in a low-profit-margin business like a restaurant or a convenience store or something like that. So, there are some downsides for everybody.

Moser: Yeah. To your point there, there are a lot of costs involved with this electronic money system that we're working with today. The thing is, you don't feel or see those costs, necessarily, from the consumer side all that often. But when you put the shoe on the other foot there, as the merchant, you're counting every penny, I would imagine. We've seen small businesses make that attempt to go to no cash accepted, it's cards and electronic payments only. To me, if I'm a small business owner, if I own my own business, I would open myself up to cash and cashless options. I want my customer base to be as big as it possibly can be. You do want to accept everyone. Just, you have to understand that managing a cash drawer, there are downsides that come with that, obviously. You're having to deal with running to the bank every so often, or deal with the threat of someone robbing your shop one day. So, I do see the benefits there of going cashless. But by the same token, it does seem like you're cutting out a valuable customer base.

One thing that Bob and I were talking about, and this comes from the parent's perspective, cash is a great educational tool for kids. I think back to when I was younger, and I think about the lessons that I learned in dealing with money, making money, spending money, managing money. It all centered around cash. I had my own little business where I mowed lawns in the neighborhood every summer. My dad made a deal with me one summer, where if I saved up enough money to pay for half of this new set of golf clubs that I wanted, then he would match the other half and help me get them. So, I went by, I was mowing yards. And listen, these people weren't paying me with Venmo, it was 1978 or 1982 or whatever. I was getting cash. I would take that cash home, and I would give it to my dad. And then when the time came, I had to actually hand him that cash in order to go get those golf clubs. So, there was the feeling of that exchange, there was that transaction. I was giving up something to get something in return. Today, you don't necessarily have that. Kids are clicking a button and getting something immediately. There's not that same sense of loss. That can have an impact, I think. You don't learn, perhaps, the value of a dollar, so to speak, quite as easily as maybe we did before.

As parents, I think piggy banks are wonderful educational tools there, and getting some cash involved with that kid's life so they can understand how money does work. I'm sure every parent out there has dealt with giving their kid five bucks and then finding that $5 sitting on their floor of their room, with all of their dirty clothes. And you're thinking, "Oh my god, does this kid not understand this is actual money here, and if you destroy it, then it's gone?" So, yeah, I think there's an educational purpose there that cash serves. I certainly try to incorporate that into our girls' lives still, but it's just not as easy.

Frankel: Definitely. My three-year-old daughter has a piggy bank in her room and I can't wait for the day in like 10 years when one of her friends comes over and doesn't know what's inside of it.

Moser: [laughs] "Is that candy?" "No, close." Hey, listen, for all of y'all out there, we love to talk about the merits of a cashless society, but I will stand firm, I do believe cash still serves a purpose. I am not rooting for cash to disappear. I just like the convenience and having the options. Good question. Thanks for the topic, Bob. I hope we gave you something to think about there.