Tuesday, April 19, 2016

Cashless Payments: Benefits for the Poor?

I just returned from a conference of the ABA Business Law society in Montreal, where I was joined by several pals (Erin Fonte, Jillian Friedman, and Denis Rice) to present on the topic of The Emerging Cashless Society.  Movement away from paper money (or coins) to electronic payments is a global phenomenon.  While other countries may be leading the United States in moving away from cash, the United States is not far behind.

This phenomenon is primarily a product of private ordering.  People choose to transact business with credit cards, mobile payments, or other technologies such Pay-Pal or Dwolla rather than using currency. ( I like to use my Android Pay feature when I am at Whole Foods or Trader Joe’s.  In fact, when the fellow ahead of me uses cash, I cannot help wondering if the young clerk is really thinking, “what are these green papers and why do they convey value”?)  We like the convenience, as well as some of the additional services like fraud protection, dispute resolution, and airline miles that we get with other payment media, which cash cannot deliver.   

Governments are also pushing in this direction.  Cash presents both opportunities and problems.  Problems emerge because of its anonymity and untraceable character, which permit peer-to-peer transactions without an intermediary. Criminal enterprises prefer the certainty and finality of a cash exchange (i.e., the counterparty cannot stop payment on the check or effect a charge-back when the illicit goods are defective), as well as anonymity that cash facilitates.   That anonymity also creates a possibility for tax avoidance, even among otherwise lawful enterprises, as amounts received or paid are known only to the parties exchanging cash.  Without transmission through a network that requires an intermediary to assist in the transaction (such as a bank or payment processor), cash keeps some information private.

A private sphere presents a threat to government, particularly when that sphere can be populated with those hatching schemes that might threaten the wellbeing of others.  But the scope of that private sphere can be very important to people who are engaged in legal activities that have nothing to do with money laundering or tax avoidance.  This is a growing area of tension in our society.

Cash also plays a role in monetary policy that can become an important means of government finance. By printing paper money and using it to buy other assets (such as debt), goods and services, government effectively gets an interest free loan of potentially unlimited duration.  The “federal reserve note” in your pocket bears no interest and has no maturity date.  This feature of money, known as seigniorage, amounts to billions of dollars each year, giving that more than $1 trillion of currency is in circulation.  Although electronic forms of money could also deliver this benefit, some economists have opined that in a cashless society, the money supply likely shrinks as there would be less demand for paper money to be stashed away.
Government may also impose an implicit tax in the form of  inflation, which affects  all who hold cash, whether in paper form or in demand deposits.  That large stash of cash that Walter White buried in the desert in Breaking Bad loses value over time. Unlike a demand deposit, which can be readily transferred or reinvested in other accounts or assets with a compensating interest rate, it can be harder to invest that stash of cash, particularly if you have problems with money laundering rules like Mr. White did.

But restricted investment opportunities also affect the poor, who may also lack access to banking services (or face high transaction costs) and must hold and conduct their transactions in cash.  The amounts of cash they have are often not sufficient to participate in investments that might compensate for inflation risk.  Moreover, the cash payments  that they expect from wages, pensions, or government benefits are also subject to the erosion, as these amounts adjust only periodically, while  the corrosive effect of inflation is continuous.  (Of course, this affects all wage earners, not just the poor.)

Although debtors may  benefit from inflation if the interest rate is lower than the inflation rate, the poor who have debt are often put into high risk pools with higher interest rates.  In contrast, note that this week, the WSJ reported that some government debt is actually delivering a negative real interest rate due to the fact that the nominal interest rate is actually less than some measures of inflation. Government may benefit from this policy, but the common man may not (unless he, too, has long-term debt at favorable rates).

Private charities, including the Gates Foundation, have been active in working on improved financial services for the poor.  But these services are the product of innovations in payment processing, credit, and risk assessment, which are generally driven by a motivation for profit.  The ability to make payments electronically with lower transaction costs than cash and the ability to access lower-cost forms of credit will improve their wellbeing.  Innovations driven by the incentive for profit offer the possibility of benefitting the common man in significant ways.  But beware of government efforts to stoke the fires of inflation, which can undo these positive effects. 



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