Digits Aren’t Always Free

On a recent road trip, after yet another cup of tasteless hotel coffee, my wife and I ordered lattes at a trendy roastery. “That’s $10.36,” the cashier told me, turning the payment screen in my direction. When I laid a twenty-dollar bill on the counter, he changed his tune. “If you’re paying cash, it’s $9.96,” he said. Our coffee had suddenly become four percent cheaper.

Credit card surcharges seem to be popping up all over the place, often without notice to customers. The reason is obvious: accepting cards costs merchants money. That coffee shop would probably have paid 2.6% of the transaction amount plus 10 cents — a total of 36 cents — to ring me up on its Square terminal, and the typical per-transaction cost to a small business using Stripe, 2.9% plus 30 cents, might have been even higher. The bank that issues the card takes a share of these fees, and some goes to network operators like Visa and Mastercard. With so many intermediaries, running a cashless business can be expensive.

But accepting cash isn’t a costless alternative. Cash gets stolen. It must be counted and secured. Someone must cart it to the bank. And banks don’t want it, which is why they often charge business customers for depositing coins and currency.

The bottom line: while a cashless sale would have been more efficient for me, the coffee shop, and the U.S. financial system, frictions in the market led me to pay with a twenty-dollar bill instead.

This mundane story is worth pondering. Companies, industry groups, and standards organizations are pushing to standardize digital information concerning everything from home sales to import supply chains. This is touted as a way to cut costs. But if gatekeepers are able to tax the flow of information, as they do with credit cards, the benefits of doing away with paper may be less than expected. Digits aren’t necessarily free.

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2 thoughts on “Digits Aren’t Always Free”

  1. Well, in this case the govt paid for the printing and handling of cash. Wouldn’t a solution be to have universal checking account handled by the government at no cost to anyone involved?

    1. Offering a universal checking account probably wouldn’t be as simple as you suggest. There is a cost to administering checking accounts, and do we really want the government to make good on checks written on insufficient funds? But the government could act to lower intermediaries’ fees on electronic transactions. It’s worth noting that the fees paid by merchants in the EU are much lower than those in the U.S.

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