February 07, 2011
Cash acceptance: A risky proposition for merchants
This blog frequently deals with the risks of electronic transactions—debit and credit card payments, mobile payments, international money transfers, etc. These modern instruments often replace cash, a payment method with its own, sometimes overlooked, risks. While new threats against electronic payments continue to emerge, the transition away from cash may drive down other important risks. Robbery, employee theft, and counterfeit currency are key threats facing merchants and others who accept cash for payment.
More robberies (lower tips)
Businesses dealing primarily in cash run increased risks of robbery. The Occupational Safety and Health Administration (OSHA) lists handling cash as a major risk factor in workplace violence, primarily due to the danger of violent robbery. The Centers for Disease Control and Prevention (CDC) recommends moving to cashless transactions when possible to decrease workplace violence, further supporting OSHA's assessment. Taxi driver, retail and convenience store worker, and restaurant delivery worker are all occupations vulnerable to violence because they exchange cash directly with the public. According to the Department of Justice, taxi drivers suffer the highest rate of robbery of any profession, along with a high rate of robbery-motivated assault and homicide. OSHA recommends that cab drivers shift to credit card payments to mitigate these risks. The Center for Problem-Oriented Policing also suggests that convenience stores limit cash in the till and taxis eliminate cash payments to deter robbery.
However, merchants have largely failed to implement these recommendations. The Police Chief Magazine found that while cash control is the most effective strategy in reducing robberies, it is also the least frequently implemented. Regulation seems to be the most effective way to discourage the acceptance of cash payments. In New York City and Philadelphia, for example, local authorities require taxis to accept credit and debit card payments. These cities met with stiff resistance from drivers at first, but the realization of other benefits, including higher tips, has led to broader acceptance of the mandate. Anecdotal evidence suggests that crime may already be decreasing as a result of the shift away from cash to credit and debit card payments in recent decades.
More employee theft
The 2009 National Retail Security Survey finds that employees were responsible for 43 percent of inventory shrinkage, or theft, resulting in an annual cost to retailers of $14.4 billion. Although this survey focuses on inventory losses, it also indicates that employees pose the single greatest threat of losses for retailers. Cash is more vulnerable to employee theft than electronic payment methods because unlike cards, cash does not leave an electronic audit trail. Card payments are also automatically deposited to merchant accounts, while cash must first pass through employee hands, where it can be pilfered.
Merchants that accept cash payments occasionally suffer losses from accepting a counterfeit note. The Federal Reserve Bank of Chicago found that there is a low incidence of counterfeits in U.S. currency: fewer one in 10,000 notes by both volume and value is counterfeit. Actual losses were lower still, as many low-quality notes can be detected with basic anti-counterfeit procedures. However, according to the Secret Service's Annual Report, the agency removed more than $182 million of counterfeit currency from circulation in 2009, more than double the amount recovered in 2008. Although these losses may be small relative to the entire economy, individual businesses can still experience nontrivial losses, like the bar in New York that received $700 in counterfeit bills in one night last year.
Cash acceptance entails risks distinct from those related to electronic payments. While it is unlikely that any merchant can eliminate all cash transactions, key questions have yet to be answered. Are merchants underestimating the risks posed by cash acceptance? How can the industry and regulators move to mitigate the risks posed by cash acceptance? While there are many possible responses, the most effect answer may lie in the adoption of technology emphasizing the use of debit, credit, and prepaid cards.
By Jennifer C. Windh, a payments risk analyst in the Retail Payments Risk Forum at the Atlanta Fed
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