As the US Treasury phases out the use of the coin, it creates a host of new challenges for businesses and consumers that could cost us all quite a bit of change.
That's because eliminating 1 cent is harder than it seems, creating a two-tier system that treats customers who pay in cash differently than customers who pay electronically, whether with a debit or credit card or a digital wallet. This raises a variety of legal and regulatory issues, from unequal treatment of consumers to proper tax collection. While there's still a lot to figure out, the message is clear: We'll all pay more when it comes time to pay for services.
The crux of the problem is rounding. As pennies go out of circulation, it becomes increasingly difficult for retailers to make accurate change in cash transactions. Without pence, cash transactions would have to be rounded either up to the nearest 5 cents or down to the nearest 5 cents. Since federal and state officials have not provided guidance on this issue, businesses are left to set their own rounding policies.
The law of even distribution tells us that among a set of transactions, there are likely to be as many transactions that are rounded down as they are rounded up. But this scenario disproportionately affects consumers who rely on cash, most of whom come from low-income households or are adults over 55. according to the Federal Reserve Financial Service.
However, there are still consequences for customers who pay by card or electronic payment. If rounding is only applied to cash transactions, consumers paying with a card may be penalized because they will be required to pay the exact amount, while those paying with cash may have their transactions rounded to the nearest nickel, depending on the total value of the transaction.
Not only does this uneven treatment raise questions of fairness, but the lack of guidance from federal and local governments also exposes retailers to the risk of violating sales, excise tax, and consumer protection rules. This is an untenable and unfair position for businesses to take, even though retailers are doing everything they can to responsibly accommodate penny withdrawals, including communicating with customers about what they can expect at the checkout.
Consider this real-life scenario: Under federal law, those receiving Supplemental Nutrition Assistance Program benefits cannot be treated differently than recipients not participating in the SNAP program. Because SNAP benefits are loaded onto debit cards, they are processed as an electronic transaction. This means that SNAP recipients will pay the exact amount for an item, while their non-SNAP cash-paying counterparts may receive a rounded-down amount.
This puts retailers in direct conflict with federal law. Although the Illinois Retail Merchants Association is working to inform state and federal officials about the necessary policy updates necessitated by the coin phaseout, it will be some time before changes can be made. Meanwhile, retailers are forced to take on costly regulatory and compliance risks.
Meanwhile, as more consumers choose to pay electronically rather than cash to avoid rounding hassles, they will also be forced to pay more payment processing fees. This is because every time a card is swiped or tapped, card processing companies charge retailers a fee. In 2023 alone, these companies collected over 172 billion dollars in payment processing fees, most of which are passed on to consumers in the form of higher prices.
Our association has been a leader in limiting these fees – securing the passage of the nation's first law prohibiting banks and credit card companies from charging processing fees for taxes and gratuities on a transaction – but Wall Street banks, credit card companies and card processors are fighting these consumer protections in court. Regardless of the outcome of this case, the move away from pennies will only increase the use of digital payment methods and the associated fees.
Giving up the coin may seem like a small change, but businesses and customers will feel the effects long after the coin is gone.
Rob Carr is president and CEO of the Illinois Retail Merchants Association.
Send a letter to the editor of no more than 400 words. Here or by email [email protected].
