Mae Watson Grote | Founder and CEO | The Financial Clinic
Recently, I had the opportunity to nerd out on a tour of the gold vaults at the Federal Reserve Bank of New York. The gold reserves were amazing to see up close, but the most fascinating part of the tour were the security and bond windows: Intricate iron bank teller windows where the general public once purchased Treasury securities directly from the central bank. I was taken aback by the mental image of New Yorkers entering the imposing Italian Renaissance fortress for the purpose of day-to-day financial transactions. Not surprisingly, these decorative windows went the way of the museum tour when the telegraph enabled more efficient transactions.
Technological progress is inevitable, especially when it comes to financial transactions in which the very purpose of the exchange is a search for more value. If you stand in the way of modernization, you’ll either get run over or be left in its wake.
Nevertheless, the move toward a cashless economy is an alarming trend that threatens to penalize poor people. A two-tiered cashless system system that leaves millions of Americans in its wake is inherently inequitable. It’s also unprofitable.
I voiced the “pro-cash” side of the Cashless Debate at Money20/20 USA, a financial service industry event held in Las Vegas last week. My central argument is that as we move toward a cashless economy, we must plan for an economy that is financially inclusive.
Equal access to financial services is a social justice imperative because working poor people lose out. Here are a few real-world examples of vulnerable and low- and middle-income people excluded by a cashless economy:
- Luis is a new American citizen who doesn’t have a social security number yet. He pays his taxes with an Individual Tax Identification Number (ITIN), so he can’t open a bank account or establish a credit history, and must therefore operate in a cash economy.
- Pauline is a widow who is one year out from bankruptcy, which she filed because of her husband’s medical bills. She feels that the most vigilant way for her to manage her finances is by converting her just-above-minimum-wage paycheck into cash, paying the rent, and moving everything else into an envelope system.
- Katie is a mom trying to get an office cleaning business off the ground. She lives in a banking desert and saves money by accessing a local check casher, especially when the opportunity cost is factored in as staying in the neighborhood is good for business development. The visit to the check casher is also a chance for her to make an investment in her social network: the cashier is Katie’s down-the-hall neighbor, and back-up babysitter.
- Martin’s grandkids bought him a smartphone for his retirement, and they even downloaded his bank’s mobile app for him to use. But over time it became a lot more difficult for him to read the screen and he needs help adjusting the settings. Until his grandkids visit again, he prefers to use his local bank branch and track his expenses in cash.
Luis and Katie both rely on cash because they can’t access the economy in any other way. Arguably, Pauline and Martin may be “opting out,” but their choices are inequitable because the user interface isn’t there yet, and for even more people like them, the right product or service hasn’t been built for them yet (the explosion in fintech’s growth has been driven by “convenience” products that largely serve higher-income customers). Communities of color, low-to-moderate income households (LMI), and undocumented families that have limited access to financial systems all suffer from de facto discrimination.
A two-tiered cashless system would marginalize millions of Americans like Pauline, Luis, Katie, and Martin. Whether because of poor credit, a lack of banking services, or a myriad of other legal, technological, and infrastructural barriers, a cashless system effectively precludes their access to essential goods and services. What began on the internet is now taking place in a shop or restaurant near you. Pause for a moment to think of how uniquely modern it is: the very thing that for thousands of years has allowed us to organize the exchange of goods and services on a global scale — physical money you can hold in your hands — is no longer enough to buy the same things.
Inclusivity is in capitalism’s best interest. In the “2017 Market Size Study,” the Financial Health Network reports that underserved consumers spent $173 billion in fees and interest payments to use $1.94 trillion in financial services. The financial services marketplace is thriving, and it’s in the industry’s self-interest to build affordable and financially healthy services for cash-based communities.
I imagine a solution that’s less a revolution and more of an evolution. First, the financial services industry has to earn our trust. From redlining to bank deserts, American history is defined by stripping communities of color of their wealth. Just this week, the National Community Reinvestment Coalition published a report that banks are twice as likely to offer white entrepreneurs help with their small business loan applications compared to black entrepreneurs.
We’d also like companies to be more “LMI-curious” and even adopt a “pro-poor”1 mandate that strives to deliver services to those who might otherwise be excluded. In his Money20/20 keynote, Dan Schulman, President and CEO of PayPal, described the company’s mission as one of “democratizing financial services.” When the banking and fintech industries take a financially inclusive and democratic approach, everyone wins.
Low-to-moderate income families need their own version of Section 230 protection 2 or their own fintech sandbox that functions like an on-ramp to equitable financial services. In the absence of national consumer protection, I predict that we’ll see a lot more local corrections like pro-cash legislation 3 in New York City and San Francisco. These band-aids will have to hold us over until we can implement a holistic cashless solution that works for all Americans, like postal banking, 4 Central Banking of the Future, 5 or publicly-supported digital wallets and currency, 6 positioned as a utility. If a policy or regulatory solutions send shivers down your spine, then innovators should get busy innovating.