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cash-wadThere’s no shortage of studies about the hidden costs of cash. Take this recent HBR report for example. On the face of it, they all make a solid case for society to turn cashless from tomorrow.

However, upon scratching the surface, I’ve never found a single one of these articles penned by merchants who are the biggest victim of these purported hidden costs of cash. On the other hand, every merchant I’ve come across gladly accepts cash. Some of them go out of their way to spurn cards despite posting “Visa / Master Welcome” signs in their premises.

When it comes to payment modes, why’s there such a huge disconnect between views expressed from ivory towers and behavior patterns witnessed on the ground?

Is it because of the allegedly high MSC / MDF fees incurred by merchants for accepting cards? Maybe. But, I think the real reason goes beyond that explicit cost.

The cab industry, which is notorious for shirking cards, provides a good clue for understanding the root cause of this disconnect.

I’ve encountered several cab drivers who wriggle out of their company’s commitment to accept cards with antics like:

  1. Covering the POS machine with a cloth or old sock, signaling that cards won’t be accepted.
  2. Claiming that the printer is not working, therefore cards can’t be accepted.
  3. Pressing the wrong button on the POS machine when I present a card and showing me the inevitable error message on the display as reason for inability to accept card payments owing to “server problems”.

Generally, I don’t bother to get into an argument and move on after paying with cash.

But I decided to probe a little deep when I recently came across a cabbie who readily agreed to accept cards when I made that a precondition of engaging his cab. Midway through the ride, the cabbie swerved into a petrol pump and filled petrol. Instead of paying for the fuel by cash from his pocket, he asked me to swipe my credit card. He assured me that the fuel cost would more or less equal the fare, which I wouldn’t need to pay at the end of the ride.

In essence, the cabbie fulfilled his commitment to accept credit card but palmed off the actual transaction to the gas station.

Struck by this cabbie’s ingenious tactic for evading a card payment, I launched into a diatribe about the hidden costs of cash and asked him why he avoided cards so vehemently. This is what he told me:

When customers paid by cash, the cabbie got the money immediately. However, when they paid by card, the money went to the cab dispatch company from where the cabbie had to collect it. This task took two days and required at least one fareless trip to the company’s office. As a result, accepting cards was not good for his business. (But, as I couldn’t help noting sardonically, it was good for the cab dispatch company’s cash flow).

The cabbie’s response exposed a major hidden cost of accepting card payments, namely the time, effort and money incurred by a merchant to recover money from middlemen who enter the picture in cashless modes of payment. This is over and above the aforementioned MSC / MDF fees.

So cash is not the only mode of payment that comes with hidden costs.

What’s more, the hidden costs of cashless payments go beyond the taxi industry.

credit-cards_2007247bTake a small business accepting card payments on its website via PayPal or a similar Payment Service Provider (PSP). The money first goes into the PSP’s account. In theory, the PSP has to transfer it to the merchant’s bank account on demand or automatically (within 24 hours, as is the case in India). From personal experience and anecdotal evidence, it seldom works like that in actual practice. Not to single out PayPal but the PSP is well known for arbitrarily freezing merchant accounts. The merchant spends a lot of time and energy to appeal to the PSP for releasing the money. Only the anointed few get any response from the PSP. In most cases, the PSP unfreezes the merchant account only after 180 days. During this period, the merchant’s cash flow is adversely impacted. This is a huge hidden cost that doesn’t appear on any quotes or invoices.

What’s worse, hidden costs for cashless modes of payments can sometimes cripple a business. I read somewhere about an event organizer who sold out all tickets for a forthcoming show but couldn’t access the cash to pay artistes and rent because its account was frozen by the PSP. As a result, the company was forced to cancel its show and suffered a severe blow to its reputation from which it couldn’t recover.

Not even the harshest critic of cash would accuse that its hidden costs are so severe as to kill off a business.

Ever since I got my first credit card in the mid 1980s, I’ve preferred cards over cash for several reasons (think rewards for one!). However, the society wasn’t cashless then. More than 25 years later, it still isn’t cashless today. And I doubt if it will become cashless for another 189 years. I know that’s one year less than the figure I’d predicted in The Death Of Cash Is At Least 190 Years Away but that post is one year old now!

Because, thanks to the hidden costs of card, cash in hand will always be worth more than card in bush for many businesses for a long time to come.

Ketharaman Swaminathan On August - 22 - 2014


BFSI, eCommerce, Retail, Uncategorized


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  • Jude

    Cash may still be KIng in India, for many reasons, one of which, has to be the parallel economy. That said, with more advancements (for example NFC), and better regulation, I can visualize several newer and better forms of payments (for all parties involved) perhaps even including bitcoin or something similar.

  • sketharaman

    @Jude: TY for your comment. The “cash is king” phenomenon is hardly unique to India: Per @FortuneMagazine (, 85% of the world’s transactions still happen in cash. While BitCoin is innovative, it might take the parallel economy to new heights that cash can only dream of: This @NYT article written on the eve of a guilty plea by leading BitCoin proponent Charles Shrem ( shows how BitCoin not only helps evade taxes but aids and abets transactions that are criminal in the first instance. I’m sure even the harshest critic of cash wouldn’t claim that cash transactions are illegal as long as they’re reported and taxes paid. Cabbies are reluctant to accept cards even in UK, Germany, Spain, Italy, etc., so the behavior described in this post is not unique to India. In any case, the underlying transaction is not only legitimate but is also recorded (I got a receipt) and hence there’s no reason to believe that it drives parallel economy. Google, ISIS, Square, PayPal and many others have launched NFC and non-NFC based mobile payments several years ago. There are strong rumors that Apple will introduce NFC payments in its forthcoming iPhone6 model. We’ll soon know how Apple fares in a space where others have failed to make much impact.

  • sketharaman

    The hidden CICO cost has become an even bigger barrier towards card acceptance since I wrote this post. Almost all cab companies have stopped accepting cards by now. Many of them have launched prepaid mobile wallets. While the companies are promoting mobile wallets heavily, their drivers are even more vehemently protesting their use by passengers. Apparently it now takes 15 days for cabbies to “cash out” payments made by mobile wallets.

  • sketharaman

    UPDATE DATED 11 MAY 2017:

    Try as They Might, Trendy Retailers Won’t Kill Cash
    Don’t believe the hype. Cash is still king.
    by Polly Mosendz

    This is the first article I’ve read that takes cost of cash head-on and dismisses it as “microscopic” compared to MDR for card payments.

    According to a November 2016 study by the Federal Reserve Bank of San Francisco, physical currency is still the most frequently used payment method, followed by debit cards, which pull funds directly from a checking account. “Each company has its own business model,” said J. Craig Sherman, the National Retail Federation’s spokesman. “But by and large, cash is king, and retailers prefer cash.”

    Credit cards offer convenience and speed, but they also come with fees that range from 1.5 to about 3 percent. “There are certainly costs involved with handling cash, but they are microscopic compared to the costs of accepting plastic,” Sherman said. These bills—armored car pick-up, accounting, and losses due to theft—are largely negotiable, as the business owner can fire one vendor and opt for a cheaper one. “Banks and card companies do not negotiate over their swipe fees,” Sherman added.

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