Sweden fact of the day, and the high costs of cash

by on March 10, 2014 at 4:19 am in Uncategorized | Permalink

Stockholm’s homeless population recently began accepting card payments.

The article is more generally about the high costs of cash payments and also storing cash:

 In the US, a study by Tufts University concluded that the cost of using cash amounts to around $200 billion per year – about $637 per person. This is primarily the costs associated with collecting, sorting and transporting all that money, but also includes trivial expenses like ATM fees. Incidentally, the study also found that the average American wastes five and a half hours per year withdrawing cash from ATMs; just one of the many inconvenient aspects of hard currency.

1 Gabriel Puliatti March 10, 2014 at 4:36 am

A respected payments consultant I follow, David Birch, says the following:

As someone remarked, all of the complaints about Bitcoin with respect to crime also apply to cash. Yes, and they might have added the additional point that cash is actually the mass market solution!
One of the things that I learned was that the money-launderers best friend, the 500 euro note, is increasing in popularity as it strives to replace the $100 bill as the criminals’ store-of-value of choice.

2 msgkings March 10, 2014 at 12:43 pm

Except for the no FDIC insurance complaint. If your cash bank gets robbed you don’t lose anything above $250K.

3 Silas Barta March 10, 2014 at 3:20 pm

If your *physical* cash is taken, you get somewhere between “none” and “keep dreaming”.

4 msgkings March 10, 2014 at 3:25 pm

So no worse than BTC. Difference is most folks don’t carry around as much cash as they have/would have in bitcoin wallets.

5 Silas Barta March 10, 2014 at 5:41 pm

Actually, people don’t carry around as much *irreplaceable physical bitcoin wallets* as they do cash, so there is a comparison, but one that favors bitcoin.

6 prior_approval March 10, 2014 at 5:55 am

‘but also includes trivial expenses like ATM fees’

Hell, why not just include the cost of losing cash, incorrect change, etc.?

7 ummm March 10, 2014 at 5:59 am

That’s why Bernanke deserves praise for giving people a disincentive to hoard cash, whether it’s greenbacks or in a savings account. The transition to a cashless society will eliminate a lot of friction and waste.

8 A.B Prosper March 10, 2014 at 3:12 pm

All that time saved can be used at the concentration campnicely. This cashless super efficiency drive will more than likely end up facilitating a truly terrifying tyranny.

Its trivial to use say bionometric technology to ensure any dissent is automatically, no human involved, punished with starvation. And famine is quite common as a weapon either directly as in the Holodomor or in a smaller scale with the Irish Starvation Orders.

Honestly given the dangers we face from efficiency we’d be better off with much less efficient systems and heavier anti efficiency regulation

9 jerseycityjoan March 10, 2014 at 7:33 am

But what about all the overspending that people do with cards?

I would think that the things people buy with cards that they would not with cash has to be far more than the cost of cash.

It seems to me that a lot of use of ATMs isn’t so much the cost of cash as the cost of taking out $20 or $40 time after time instead of $100 at least some of the time.

10 Jay March 10, 2014 at 11:39 am

Probably because it is difficult to quantify or even prove it exists as an issue. If I would buy $5 worth of something with cash and $10 worth of the same thing with a card, who’s to say what the optimal value of that something is? Maybe I’m buying less than optimal with cash just because I don’t want to have to go to the ATM again.

11 jerseycityjoan March 10, 2014 at 11:05 pm

Maybe it’s hard to quantify but surely a decent amount of US credit card debt is due to people using credit cards to buy things they wouldn’t have if they were using cash.

The amount vary widely with the individual, just as the amount each individual “spends” on cash would vary a lot per person.

12 Pshrnk March 10, 2014 at 1:52 pm

Its called STIMULUS.

13 BenK March 10, 2014 at 7:56 am

Central control often sells itself on prospective efficiency. Freedom is not free.

14 Jack PQ March 10, 2014 at 8:06 am

All true but a cash budget has important advantages for people with self-control problems. Surprisingly many people cannot manage credit card debt and cannot properly budget.

15 Finch March 10, 2014 at 1:53 pm

The people I’ve seen live all-cash lives are not the people with self-control problems; they’re the people who fetishize self-control. They’re like the people who brag about not having a TV.

I’m not saying the self-control problem with cards doesn’t exist, ’cause I’m just bringing anecdote and not data, but I’m not sure it does. And I’m particularly reluctant to believe that invoking this method of financial management is worth losing 1-2% on everything you spend. People who couldn’t manage their own finances pre-exisited payment cards.

On a related point, I find it amusing that _merchants_ have convinced _consumers_ to purchase with cash to save the merchants fees that mostly go to support consumer cash back and other rewards at the expense of people who use cash and low-end cards. This is a bizarre outcome.

16 AndrewL March 10, 2014 at 8:12 am

What about the ability to conduct business when the power is out? or when internet/phone is out? or signal that you would like “more” service?

17 Jay March 10, 2014 at 11:41 am

Hint: They had credit cards before the transactions went over phone lines or required power, and all stores carry a backup manual card reader even today.

18 ohwilleke March 10, 2014 at 3:23 pm

Nobody takes credit cards when the phone/internet/power systems are out any more. Getting a payment without a pre-authorization from the credit card company computer system is highly disfavored these days. Retail merchants typically aren’t allowed to take non-swiped transactions. I’ve seen lots of retail businesses refuse to accept credit cards when the credit card system’s computers are down.

19 Axa March 11, 2014 at 2:33 am

Yes, life in the 3rd world sucks.

20 Ray Lopez March 10, 2014 at 8:34 am

As a gold bug, I prefer “fiat currency” to describe the paper dollar, rather than TC’s “hard currency”. As for e-money, an EMP (http://en.wikipedia.org/wiki/Nuclear_electromagnetic_pulse) strike will render all e-money worthless, however unlikely that may be.

21 Jay March 10, 2014 at 11:42 am

The sun could explode and render all currency obsolete, do we count that too?

22 Richard Besserer March 10, 2014 at 10:10 am

“‘Before, everyone said they don’t have cash, or that they cannot pay with their mobile phones because it was a corporate phone. But now they can’t get away,’ magazine vendor Stefan Wikberg said with a smile as he stood outside the underground entrance at Stockholm’s central station. ‘I take cards, SMS payments, cash and they can also pay in dollars and euros.’

“Wikberg, who has worked for Situation Stockholm since 1999, forecasts that sales of the magazine could jump 20 percent as the card-payment program is rolled out further.”

He’s been selling a homeless magazine for 15 years? I wonder what his story is.

23 Marc Roston March 10, 2014 at 10:27 am

This actually seems really low as a total cost. If you consider inconvenience expense of cash as a shadow price for engaging in underground transactions, I would have thought people would willingly incur far higher expense. Really aren’t the only cash transactions left the ones for which people don’t want reporting? It’s like the EZPasses around New York…anyone who doesn’t have one that this point MUST be engaged in illegal activity they don’t want tracked because the cost of not having one is too darn high.

24 anon March 10, 2014 at 10:53 am


Anecdotally, I’m seeing more people using cash. I can only hope it is not from ATMs but from other cash-based transactions.

The growth of an underground economy that operates outside the purview of the state seems like a big plus to me.

25 Nathan W March 10, 2014 at 11:10 am

Not to keep black market activities black, but because I don’t think it’s the business of the CIA, NSA, amazon.ca or anyone else to psychoanalyze the hell out of why I bought a pound of coffee then went straight to a coffee shop and spent an amount of money equivalent to the price of a large coffee. I also don’t think it’s their business to know what time I bought my bus ticket at or what my destination was, unless I am crossing a border.

26 Dick King March 10, 2014 at 12:04 pm

Do tourists have EZPasses?


27 ohwilleke March 10, 2014 at 3:27 pm

There are lots of legitimate cash transactions. They are particularly common when people have bad credit, get tipped income, for group outings since it is easier for everyone to kick in for a communal meal or drinks, or when people fear the banking system not because the transactions are not legitimate but because of immigration status, or for someone is participating in a bank pariah but legally recognized marijuana business that reports its transactions to authorities for other purposes despite not banking. They are also common in general in low dollar value transactions.

28 chuck martel March 10, 2014 at 10:37 am

Don’t merchants that accept credit cards have to pay for this service? And in some cases aren’t cash buyers given a discount because of this? Ergo, if there’s a cost to using cash, there’s an even greater cost to using plastic, since the credit card company isn’t providing the service for free, and if it is, it’s absorbing the cost. Evidently, the goal is a zero-cost society, how would that work?

29 Jay March 10, 2014 at 11:45 am

At least in my experience, the stores not offering cash discounts far outnumber those that do. So if you were to count such discounts it would probably be negative for cash since the raise in price for the stores not offering the discount is greater.

30 Marc C March 11, 2014 at 4:53 am

“Evidently, the goal is a zero-cost society, how would that work?”

In the makes by RippleLabs !
Look at Ripple.com or even better start collecting your own future money by donoting computing time for “good” research on cancer, aids, environment, …
Don’t need skills, neither have to be geek, just a PC and an internet connection …

31 Nathan W March 10, 2014 at 11:05 am

I know this sounds half way crazy, but y’alls should be thankful that there are a few heads knocking around ideas like these from time to time …

When a truly Big Brother Orwellian control-oriented nanny state beckons at the other side of the story, I think we can set aside fractional concerns regarding efficiency and accept that the anonymity afforded by cash is a necessary evil.

Grease those wheels baby, but don’t ever let it become possible for Uncle Sam to literally track every penny spent in the economy. It will make it impossible for us to stop them from going too far (too late?).

32 Warren March 10, 2014 at 11:12 am

Getting cash as a gift or paying someone back with cash saves time relative to getting a check and having to cash it. I only skimmed the conclusions of the study and it seemed to only count the costs, not the benefits; making me not believe what they write.

They also say getting rid of cash will make it easier for the government to get money. But I don’t really count that as a good thing in and of itself.

33 Pshrnk March 10, 2014 at 1:59 pm

Cheques? You yanks are so quaint LOL.

34 Warren March 11, 2014 at 10:18 am

Mostly checks from relatives for Christmas/birthdays

35 Donald A. Coffin March 10, 2014 at 12:40 pm

And here’s how one credit union encourages its customers (members) to use digital payments: It charges $0.75 per debit card transaction, yet allows unlimited withdrawals of cash from its own ATMs with no fees…Names are withheld to protect the guilty…

36 ohwilleke March 10, 2014 at 3:19 pm

The question is not just what does cash cost, but who pays it. The monetary cost of using cash to the buyer is negligible. You buy a wallet and pay $8 a year for an ATM card, and $1-$2 now and then when you are away from familiar turf and need to use an out of network ATM card. Banks now and then charge for depositing a large number of coins, but almost never for making a cash deposit. Neither do merchants. There is about $1000 billion in currency in circulation, and about $30 billion in coins in circulation, but about 70% of the U.S. currency outstanding is in circulation abroad (mostly in the form of $100 bills used as a secondary currency without official government sanction in places where local currencies are prone to hyper-inflation or political risk). Why don’t banks charge for using cash? Hint: Not because banks love cash using customers more than profits. They make a profit from receiving cash deposits, holding them within little or not interest on deposit accounts, and dispensing it on demand.

I also sincerely doubt that it really costs $200 billion a year to circulate $333 billion of currency and coins outstanding in the U.S., even if it cycles through the system dozens of times a year over the course of something on the order of 90 billion transactions (as of 2014, the number of cash transactions is roughly equal to the number of non-cash transactions). The notion that the aggregate processing cost of a cash transaction is $2.22 or so is very doubtful. A closer look at the study bears this out. “A new study by Tufts University, The Cost of Cash in the United States, puts that price tag at about $200 billion a year. This figure includes $55 billion in higher costs to businesses, $43 billion for U.S. households and $101 billion in missed tax revenue because of off-the books transactions. For the average American family, the cost of cash is about $1,739 a year.” I’m sorry, but tax evasion losses are not a cost of cash in the United States, this is a cost of weak information reporting and dishonesty by taxpayers. The notion that the taxes would be recovered if payments were made by other means also doesn’t hold water. The IRS simply isn’t that good.

Likewise, I find it very hard to believe that 100 million +/- U.S. households really pay $36 a month to use cash. On what? According to the study, almost all of the $43 billion incurred by households is in time spent handling cash – but dealing with checks and checking account statements, and credit card payments and bills costs money too and most people can’t simply trade the time the spend dealing with cash for hourly incomes. I know of no one who reduces their paid hours per week to handle their currency, and unpaid household chores are a reality of living. The average American no doubt spends gobs of time while not at work sitting on a toilet and bathing, but we don’t expect to be paid for that either and don’t consider this a “cost” that is monetarized.

The study claims that $45-$50 billion of the cost of cash to businesses involves retail theft of cash (1% of retail sales) and that $500 million of cash is stolen from households each year. But, this is overstated. Retail theft is of about $37 billion a year http://hayesinternational.com/news/annual-retail-theft-survey/, but about 35% of that is in kind theft of inventory, and more than half of employee theft is of merchandise, so less than $15 billion of retail theft is in the form of cash or fraud (e.g. inflating hours worked to get a bigger paycheck or embezzlement by office employees). The average retail employee theft is less than $260 per employee per year, of which less than $130 is cash, which on the order of 1-2% of payroll, if one makes the inflated assumptions of the particular study that I cite which notes that only about $51 million per year of employee theft (merchandise, fraud, cash, etc.) is discovered and produces an apprehension and when it happens something close to a fully recovery. The study assumes that about 18% of employees are stealing each year (half stealing cash) when just 2.5% are caught. Maybe, but I wouldn’t take even that to the bank, and that figure is still much lower than the one the $200 billion study is quoting.

Cash certainly carries a risk of theft. But, even the average bank robbery nets only about $5000 and the average loss from stolen cash is on the order of $100 plus or minus a factor of two or so – the average burglary where cash is stolen leads to a $500 loss, but not all of that loss in those burglaries is stolen cash. Another source states that only about $3 million of currency is stolen per year (about 0.001% of the currency circulating in the U.S. each year). And, cash payments almost never lead to bad debt since the use of counterfeit currency resulting in a loss is vanishingly rare, or to interest charges owed by the purchaser. There are 6.5 counterfeit bank notes in circulation per million legitimate notes (about $260 million per year of counterfeit money is put into circulation, less than 0.1% of the currency circulating in the U.S. at any one time). And, lots of people take counterfeit currency and pass it on unknowingly and hence don’t suffer a loss from it. Only the person left holding the bag when the counterfeit currency is discovered takes the loss. Losses from theft of currency and counterfeiting per year combined are about 2% of losses from credit card fraud.

It turns out that the real cost of cash is closer to $25 billion a year and cheaper by far than credit cards and competitive with checks fo small transactions.

There is a government cost to its role in the cash production and distribution process, but its seigniorage income (the revenue it earns from selling currency to banks less the cost of printing and engraving it) exceeds this cost so currency printing is still a net plus for the taxpayer on the government side of the equation.

Also, while all payment systems have costs, it is not at all obvious that it is cheaper than the alternatives. Visa, Mastercard and Amex process $7,000 billion a year in transactions (about 60 billion transactions per year). The percentage of transaction fee for merchants is on the order of $140 billion, plus per transaction fees ($6-$12 billion), monthly merchant account fees (for probably on the order of 20 million+ merchant accounts), credit card processing machinery (several hundred dollars each), training for tellers, fraud losses of $11 billion per year (about 0.13% of transactions), and bad debt losses (much more than theft losses and probably in excess of $100 billion per year before netted against interest and late fees) that have to be born by someone. Consumers, in addition pay annual fees, late fees and interest. The average U.S. household is carrying $15,000 of credit card debt at interest rates of about 1% a month or more. This is far more expensive and involves real money, not unpaid time that would have been unpaid in any case.

Many banks offer free checking, but often consumers have to pay for the stationary that checks are written on, overdraft fees, and for those who lack free checking, a per month account fee and/or a per check processing fee. Banks also have to pay back office people to process about 25 billion checks per year, and lots of merchants suffer bad check losses that aren’t recovered.

37 JRPtwo March 11, 2014 at 9:34 pm

About the only thing I’ve used from microeconomics class, a couple decades ago I calculated an optimal cash withdrawal amount using the simple the economic order quantity inventory model and assumptions of risk of loss, interest rate, value of time and fees, and rate of spending. I was surprised how high the optimal withdrawal was, but it’s avoided a lot of time at the ATM. See https://en.wikipedia.org/wiki/Economic_order_quantity

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