Shift away from cash comes with drawbacks

PHILADELPHIA — Tom Ivory, the founder of the Baker Street Bread Co. in Philadelphia’s Chestnut Hill section, fought a valiant effort for years to rein in bank fees by imposing a minimum credit card purchase of $10. But more customers wanted to go cashless, and Mr. Ivory eventually relented and accepted plastic for any transaction, no matter how small.

About 78% of the purchases at the cafe and store are now paid through credit cards or other electronic transfer — up from 10% just five years ago.

“You have to keep up with technology,” Mr. Ivory said. “To operate as just a cash business today is a suicide mission. You’re just not going to succeed.”

The coronavirus pandemic has accelerated the trend toward a cashless economy, financial experts say, buoyed by the growth of e-commerce and the fear of handling paper money contaminated with COVID-19.

The Centers for Disease Control and Prevention, in official guidance to retail workers in response to the pandemic, encouraged the use of touchless payment options, when available. Cash withdrawals from ATMs plunged 25% nationwide during the early weeks of the pandemic, according to industry figures.

But not everyone is sanguine about the rise of electronic payments, which include not only credit and debit cards, but also nonbank financial services and mobile apps such as PayPal or Venmo.

The modern electronic banking system collects about 3.4% in bank fees on every credit card transaction, a significant expense for a small business. The electronic transactions provide Mr. Ivory’s bakery with some convenience and security, but, in his view, they mostly generate profits for the banking sector.

“Big Finance is the key driver moving us to a cashless society,” he said. “You’ll notice banks have been slowly closing branches and ATMs, and they’re doing so in an effort to nudge us more toward their digital platforms. This saves them labor, it saves them a lot of real estate costs, and it improves their bottom line.”

The banking industry has provided a powerful incentive for customers to use credit cards that reward them with cash-back bonuses or loyalty points. That means the retail price markup that merchants charge to recover the bank fees is borne unequally by customers who pay with cash, who tend to be the lowest-income “unbanked” households, according to a 2010 discussion paper published by the Federal Reserve Bank of Boston.