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The economic implications of Starbucks’ no cash experiment

If it is your job to be responsible for a business’s finances, unless you operate a floating crap game, sell illegal drugs, run a bank, vending machine company or gambling casino, you can come to hate cash.

Cash is expensive to handle, messy and counting it is error-prone. It causes accounting discrepancies that are time-consuming to resolve. It also creates problems in storage and transport. And lastly, cash increases security risks because it presents internal and external temptations that no business wants to deal with.

It is understandable, then, that many businesses want to restrict or even reject payments in U.S. currency or coin. On the security side, for example, taxi cabs have long ago adopted limits on the size of bills they will accept, and many 24-hour convenience stores do the same. And there is no place at all for cash payments in internet sales. Payment is made up front, prior to shipment or delivery, with credit or debit cards.

Recently, Starbucks began an experiment at its store in the Russell Investment Center in Seattle, which now is not accepting U.S. currency or coin for purchases of its coffee or food items.

The company did not disclose the reason for the experiment, but it could be understandable for any number of reasons related to the inefficiencies and risks of handling cash. Or it could be simply that the speed of the new credit card readers makes them faster than processing a cash transaction.

Speed is important for Starbucks; while lines of waiting customers are a tribute to customer demand and loyalty, they eventually discourage buyers. Few people enjoy waiting on line, especially in the rushed early morning hours.

Starbucks’ experiment in payment processing efficiency has drawn a lot of fire, including by many people who quoted what was printed clearly, in all caps, on their money: “THIS NOTE IS LEGAL TENDER FOR ALL DEBTS, PUBLIC AND PRIVATE.”

So, is the Starbucks no-cash policy legal? Probably.

Jane Winn, a law professor at the University of Washington, says the issue hinges on one word: “debt.” If there is no debt, there is no issue of legal tender. She is undoubtedly right but the legality question isn’t quite that straightforward. (What is, these days?)

In a retail establishment, if the customer is denied delivery or does not accept it, and cannot or will not pay, and the product is easily returned to the shelf, there is clearly no debt. If a product is custom-made and ordered with the understanding that the customer will pay for it, and it is delivered to and accepted by the customer, it looks more like a debt.

Starbucks’ products are all menu items, but the beverages often are made to order. They cannot be returned to inventory or resold. It is a common occurrence for a Starbucks staffer to try to find a taker for a complex soy milk latte with caramel that was produced in error due to a misheard or misunderstood customer order and cannot be returned to inventory.

Starbucks is probably not vulnerable to a lawsuit on its cash-only experiment. The federal courts have seemed reluctant to tell private businesses what kind of payment arrangements they will accept – possibly because the U.S. Code does not clearly address private debts when it discusses legal tender.

In any event, the company could reduce or eliminate the problem by installing a cash-accepting checkout machine resembling those in supermarkets.

What could be more worrisome are the side effects of a full-scale expansion of the no-cash concept nationwide and globally. Here in the United States, Starbucks will have to address any unintended discriminatory dimensions that may be exposed. The cash economy is still substantial. Statistically, it is heavily weighted toward the poor and the elderly, and both groups enjoy some protections under the law. Both groups also tend to see smartphones as beyond their budget or their ken. And while installing cash-accepting machines could finesse this problem, in the interest of community relations Starbucks may decide to modify its no-cash policy in some locations.

None of these potential problems presents an insurmountable obstacle to the no-cash concept, and latte lovers and coffee enthusiasts would be well advised to get used to it. Electronic Funds Transfer payments are the future of retailing because they address the shortcomings and inefficiencies of cash – lowering costs and increasing profits. EFT has its own problems, of course, with identity theft being just one of them, but most of the risks are shifted to the customer.

It also opens up an opportunity for some company to sell revised versions of the old saloon sign: to read: “In God we trust. All others pay by EFT”

By James McCusker:  Bothell economist, educator and consultant.


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