For quite a few years I have been enjoying the benefits of retailers offering “cash-back” whenever I use my debit card. The benefits to the consumer are obvious as it reduces the number of times I need to visit an ATM machine on a monthly basis. I am sure that the concept of cash-back is nothing new to you, although depending on what country you live in there will be more or less proliferation of this service. Here in Canada many large retailers now offer cash-back on a regular basis.

 

For those readers who have not yet experienced a “cash-back” offer, the concept is deceptively simple: let’s say you go to the local big box retailer and purchase an item worth $30. The cashier will ask if you would like any cash-back with that and can usually offer you any amount up to $100 or $200, which is then added to the value of your original purchase. Simple right? The money all comes out of your bank account and the retailer avoids the regular bank fees and charges associated with making their daily or weekly bank deposit to their account. Here’s the kicker – I recently met with a large retailer who is planning on entering the check cashing industry even though their regular business is selling household products and services. When I asked why they would want to enter a market that is so unrelated to their normal business, I received a sly smile in response. The answer? – “We want to stop depositing cash receipts to our bank!”They are attempting to completely eliminate the need to make any bank deposits by recycling all their cash receipts back to the consumer through their new check cashing service. A lofty ambition but not terribly practical, one would think. Yet statistics from a pilot project run by this retailer would seem to indicate otherwise. In fact they were successful in avoiding over 90% of their normal bank deposit activity and they feel that with a little fine tuning that remaining 10% is very achievable.

Now let’s consider the impacts of this type of activity in a country where there are Custodial Inventory and Currency Recirculation policies in place. Both of these policies are designed to reduce the central bank cost of processing currency. These policies are indeed successful and have created a new industry for Banks, CIT’s (Armored Carriers) and other entrepreneurial 3rd party service providers. However, in every country where such policies have been implemented there is one significant disadvantage – the quality of currency in circulation deteriorates over time. Now imagine if every retailer practiced a cash-back policy that resulted in a significant if not total elimination of their deposit activity. Who would be responsible for (or even be able to) cull unfit currency from circualtion? Perhaps my central bank will contract me to hand-sort the fit from unfit. After all, who else would be touching the currency on a regular basis but the consumer and the retailer? We already know the whole idea is for the retailer to reduce or eliminate deposit costs, so they won’t want to cull fit from unfit and then have to deposit the unfit. After all a note is an item of value no matter what it’s condition and so the bank will still need to charge for the processing of it.
So I ask you, person involved in the currency processing industry – is “cash-back” a good thing or a bad thing?

I’m watching my paper money disintegrate in front of my eyes!