As of 2023, the Detroit City Council
instituted restrictions on businesses regarding cashless operations for the
purpose of protecting consumers that do not have access to bank accounts or
cashless services. This ‘prohibition on cashless operations’ primarily applies
to businesses which offer consumer goods or food for sale at a physical
location. For instance, a bodega, a food truck, or a restaurant. Technological
advances have broadened the payment options available. The decision to accept
or refuse these options can have significant consequences for small businesses
and their customers. Debit and credit card payments are common, and merchants
are typically charged a
1.5-3.5% fee for credit card payments. Businesses like Stripe and Square offer point of sale technologies that
mitigate the physical bulk of cash registers, charging businesses 2.6%-2.9% per
transaction. As of March 2024, Venmo is purportedly accepted by two million merchants, who are charged $.10 plus 2.29% of
each transaction total for ‘tap to pay’ transactions. Americans are relying on digital wallet
applications at an increasing rate, with over 50% of individuals reportedly
using digital wallet applications more frequently than traditional payment
methods according to a 2023 Forbes survey. As of late 2022, an estimated 2,352
businesses in the United States accepted bitcoin as a payment method.
Problems with and Allowances for
Cashless Policies
As the cashless
economy advances, it runs the risk of further marginalizing low-income
communities, undocumented individuals, and people of color, because they are likely to be ‘unbanked’ or
‘under-banked’,
meaning that they either are unable to obtain a bank account or required the
use of an ‘alternative financial service’ such as a check cashing service,
payday loan
or other types of extractive payment methods. This is a salient issue for
Detroit, as over 100,000 Detroiters
were unbanked as of 2023.
To address this issue, the Detroit City Code was amended to prohibit certain
businesses from going completely cashless. There are some exceptions for non-physical transactions
such as online shopping,
‘membership’ models, ride-share apps, rental companies, and even parking lots. Interestingly, the amendment also
explicitly permits businesses to refuse
hundred-dollar bills as payment. This right to refuse large bills is
likely due to a myriad of factors such as suspected counterfeiting, security
risks associated with keeping sufficient change, and the general absence of federal
legislation mandating stores to accept cash as a form of payment.
Reverse
ATMs and Their Impact
Businesses impacted by this new rule
are required to have a conversion device
on the premises that converts cash into a
prepaid card that allows a consumer to complete a transaction if the businesses wish to refuse
cash. For businesses that are
subject to an elevated risk of being robbed, the investment may be worthwhile. These devices are
referred to as ‘reverse-ATMs’ and have been installed in Major
League Baseball stadiums (including Comerica Park), airports, hotels, amusement
parks, and in other large-scale operations. Detroit’s mandate for these
machines may be economical for large businesses but may not be economically
feasible for small businesses due to the fees associated with operation of the
ATMs. Reverse ATM services have concerning sales practices. For example, they
typically do not list their pricing or fee information visibly online. Data on
the rates and fees charged to businesses by Reverse ATMs is scarce, as these
companies often require potential
customers to contact
their sales departments in order to acquire pricing
information. Therefore, the client business is unable to readily quantify this
new expense and the requirement may have a detrimental effect on
profitability. Reverse ATMS are also strictly regulated in order to protect consumers.
For example, they cannot charge a fee, they cannot require a minimum deposit
greater than five dollars, the cards the device distributes must not have an
expiration date, cannot collect the personal information of the customer, and
any balance of unused cash must be returned to the customer upon return of the
prepaid card.
Penalties for Violations
The penalties for
violations of this article can be quite severe. Any person found guilty of
violating any provision of the article may be fined up to $500 as well as
sentenced to up to 90 days in jail for each day that the violation continues! In other words, a week of business
operations in violation of the article could carry a maximum penalty of $3,500
and over a year and half of jail time. The resulting implication from this
substantial penalty and the nebulous costs of installing and operating the
required cash-to-card converters is clear: applicable small businesses in
Detroit would be unwise to refuse cash payment by customers at this time.
Membership and Online Application Model
Exceptions
If your business has a
membership model, which may include a subscription service for its products, it
will fall under one of the exemptions. Most of us think of the Wholesale Club
membership model popularized by Costco, which is an exception, however if your
business sells consumer goods exclusively through a membership model requiring
payment by means of an affiliated mobile device application or online
application, such as monthly coffee or smoothies, then both the monthly payment
and any goods purchased within the subscription will qualify for the exemption.
Another point of consideration is that the exceptions for a ‘membership model’
entail two distinct categories. Perhaps the most widely known example for this
model is represented by Panera Bread’s Unlimited Sip Club subscription. The Unlimited Sip
Club recently experienced a national operations outage and was suspected to have been
the target of a cyberattack.
So, while a small retail business in Detroit is legally permitted to experiment
with going cashless through an online or app-based subscription model for
retailing physical goods, the associated risks such as the relatively untested
nature of the business model, the highly variable
costs of developing the necessary
application,
and the vulnerabilities to cyberattack introduce new risks. All things
considered, it is likely both a safer and more equitable policy for a relatively
secure small business to accept cash payments.
By Spencer Bunting