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Cash in Hand Is Worth More Than Card In Bush

There’s no shortage of studies about the hidden costs of cash. Take this recent HBR report for example. On the face of it, they all make a solid case for society to turn cashless from tomorrow.

However, upon scratching the surface, I’ve never found a single one of these articles penned by merchants who are the biggest victim of these purported hidden costs of cash. On the other hand, every merchant I've come across gladly accepts cash. Some of them go out of their way to spurn cards despite posting “Visa / Master Welcome” signs in their premises.

When it comes to payment modes, why's there such a huge disconnect between views expressed from ivory towers and behavior patterns witnessed on the ground?

Is it because of the allegedly high MSC / MDF fees incurred by merchants for accepting cards? Maybe. But, I think the real reason goes beyond that explicit cost.

The cab industry, which is notorious for shirking cards, provides a good clue for understanding the root cause of this disconnect.

I’ve encountered several cab drivers who wriggle out of their company's commitment to accept cards with antics like:

  1. Covering the POS machine with a cloth or old sock, signaling that cards won’t be accepted.
  2. Claiming that the printer is not working, therefore cards can’t be accepted.
  3. Pressing the wrong button on the POS machine when I present a card and showing me the inevitable error message on the display as reason for inability to accept card payments owing to “server problems”.

Generally, I don’t bother to get into an argument and move on after paying with cash.

But I decided to probe a little deep when I recently came across a cabbie who readily agreed to accept cards when I made that a precondition of engaging his cab. Midway through the ride, the cabbie swerved into a petrol pump and filled petrol. Instead of paying for the fuel by cash from his pocket, he asked me to swipe my credit card. He assured me that the fuel cost would more or less equal the fare, which I wouldn't need to pay at the end of the ride.

In essence, the cabbie fulfilled his commitment to accept credit card but palmed off the actual transaction to the gas station.

Struck by this cabbie's ingenious tactic for evading a card payment, I launched into a diatribe about the hidden costs of cash and asked him why he avoided cards so vehemently. This is what he told me:

When customers paid by cash, the cabbie got the money immediately. However, when they paid by card, the money went to the cab dispatch company from where the cabbie had to collect it. This task took two days and required at least one fareless trip to the company's office. As a result, accepting cards was not good for his business. (But, as I couldn't help noting sardonically, it was good for the cab dispatch company's cash flow).

The cabbie’s response exposed a major hidden cost of accepting card payments, namely the time, effort and money incurred by a merchant to recover money from middlemen who enter the picture in cashless modes of payment. This is over and above the aforementioned MSC / MDF fees.

So cash is not the only mode of payment that comes with hidden costs.

What's more, the hidden costs of cashless payments go beyond the taxi industry.

Take a small business accepting card payments on its website via PayPal or a similar Payment Service Provider (PSP). The money first goes into the PSP’s account. In theory, the PSP has to transfer it to the merchant’s bank account on demand or automatically (within 24 hours, as is the case in India). From personal experience (see Is It Adios To PayPal From India? on my personal blog) and anecdotal evidence, it seldom works like that in actual practice. Not to single out PayPal but the PSP is well known for arbitrarily freezing merchant accounts. The merchant spends a lot of time and energy to appeal to the PSP for releasing the money. Only the anointed few get any response from the PSP. In most cases, the PSP unfreezes the merchant account only after 180 days. During this period, the merchant’s cash flow is adversely impacted. This is a huge hidden cost that doesn't appear on any quotes or invoices.

What's worse, hidden costs for cashless modes of payments can sometimes cripple a business. I read somewhere about an event organizer who sold out all tickets for a forthcoming show but couldn’t access the cash to pay artistes and rent because its account was frozen by the PSP. As a result, the company was forced to cancel its show and suffered a severe blow to its reputation from which it couldn’t recover.

Not even the harshest critic of cash would accuse that its hidden costs are so severe as to kill off a business.

Ever since I got my first credit card in the mid 1980s, I've preferred cards over cash for several reasons (think rewards for one!). However, the society wasn't cashless then. More than 25 years later, it still isn't cashless today. And I doubt if it will become cashless for another 189 years. I know that's one year less than the figure I'd predicted in The Death Of Cash Is At Least 190 Years Away but that post is one year old now!

Because, thanks to the hidden costs of card, cash in hand will always be worth more than card in bush for many businesses for a long time to come.

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Comments: (9)

A Finextra member
A Finextra member 22 July, 2014, 08:53Be the first to give this comment the thumbs up 0 likes a ha. Ketharaman. The answer to your conundrum is in the P&L management of a small business and the countries tax laws. Not payment technology. I am afraid you will not find any proprietors helping you with this research as that could end up being very expensive. The card interchange fee is low single digits and is primarily subsidised by cash payers. Except where there is a fee for card payment. Card payments a secure, traceable and can even manage your inventory. Corporation tax in the UK is 20% on profits. Cash is difficult to trace. Can you prove you took that cab ride to the Ivory Tower. The answer is probably no. Nor can the tax man.
Ketharaman Swaminathan
Ketharaman Swaminathan - GTM360 Marketing Solutions - Pune 22 July, 2014, 09:49Be the first to give this comment the thumbs up 0 likes


TY for your comment. In the interest of brevity, in my post I'd deliberately skirted the inevitable insinuation that cash leads to tax evasion. But, now that you've raised it: 

  • Cash and tax precede card and electronic payments by several centuries. So, cash does not automatically imply tax evasion.
  • Proceeds of big time crime - e.g. insider trading - typically flow via wire transfers to offshore banking venues. Needless to say, no taxes are paid on them. So, electronic payment does not automatically imply tax compliance.
  • There are zillions of businesses where the sale is recorded - and tax paid - although the payment is received largely in cash e.g. QSRs. Likewise the same cab industry where drivers shirk cards: The ride can be booked by mobile app, the passenger gets a print or electronic receipt at the end of the trip. And, to answer your question, yes, I can absolutely prove that I took any of these rides because I have the receipts. And since I submit these receipts along with my tax returns in order to claim deductions for these expenses, the tax department can also prove that these rides were taken and that the monies changed hands. 

Tax compliance or evasion depends more on whether the transaction was recorded or unrecorded, rather than the mode of payment.

A Finextra member
A Finextra member 22 July, 2014, 10:49Be the first to give this comment the thumbs up 0 likes

Bless you Sir,

You say; “Cash and tax precede card and electronic payments by several centuries. So, cash does not automatically imply tax evasion”. But it has been a problem ever since.

  1. This is an academic study on US perspective: They reckon its worth $345B
  2. The next clip is a UK HMRC report that suggests that btax evasion due to cash payments is over £2B in the UK. Being the tax collector they will probably not over estimate it.
  3. The Final clip is a nice stroy on how The Israeli Tax Authority is using innovation to battle cash tax evasion in taxi.

My clue to you that there was more going on is when your taxi took you to the petrol station and gave you a fuel reciept instead of a taxi reciept :-).


Susan Cleary Morse, Stewart Karlinsky, &

Joseph Bankman

According to government reports, most individuals with business income

fail to pay all their taxes, although some appear to cheat more than others. 1 Underpayment

of tax on business income is commonly attributed to the receipt of

cash. 2 The owner of a clothing store, for example, might sell a dress for cash

and not report the cash. Underpayment of tax by individuals on business income

contributes significantly to the federal tax gaIT-the difference between

what taxpayers owe on legal source income and what they pay. 3

The government estimates that the annual tax gap equals $345 billion.4

Susan Cleary Morse is a Teaching Fellow at Santa Clara University School of

Law. Stewart Karlinsky is Professor Emeritus at San Jose State University. Joseph Bankman

is the Ralph M. Parsons Professor of Law and Business at Stanford Law School.



(2007) [hereinafter GAO SOLE PROPRIETOR REPORT] (noting that "at least 6 1% " of Schedule

C filers underreported net income in 200 1 but that results were "skewed" in that the sole

proprietor taxpayers whose underpayment amounts put them in the top ten percent accounted

for sixty-one percent of understated taxes).

2. See Joseph Bankman, Eight Truths About Collecting Taxes From the Cash Economy,

TAX NOTES, Oct. 29, 2007, at 506, 506-07 [hereinafter Cash Economy] (connecting

sole proprietor government data and the cash business sector).

3. See Eric Toder, What Is the Tax Gap?, TAX NOTES, Oct. 22, 2007, at 1, 2 (noting

that the tax gap measurement excludes noncompliance stemming from failure to report taxable

income generated by illegal activities).

4. Treasury and the I.R.S. estimate the gross federal tax gap for 200 1 at $345 billion;

after enforcement and collection efforts and late payments, the net federal tax gap estimate



2007 TAX GAP REpORT] (reporting gross and net tax gap numbers); see also Toder,

supra note 3, at 5 (discussing National Research Program ("NRP") and I.R.S. estimation methodology).

How much tax is lost because of undeclared cash in hand payments?


The UK Chartered Institute of Taxation:

Estimates go from £2 billion a year upwards. The most recent estimate of the ‘tax gap’ (the difference between what HMRC collect and what they think should be collected) estimated that £4 billion a year is lost to tax evasion and a further £4 billion to the ‘hidden economy’. Within this, they estimate that £1.3 billion is lost to 'ghosts', those who have earnings from employment or self-employment and fail to declare any of this income, and £1.8 billion is lost to 'moonlighters', those who pay tax on their main job through PAYE but have a second job or additional income from self-employment. Of course, not all of these are tradesmen. A report from a parliamentary committee back in 2008 identified the three key ‘areas of risk’ in the hidden economy (ie where HMRC are most at risk of tax being lost) as self-employed people, such as builders and decorators, who often receive cash payments; individuals who trade on the internet; and buy-to-let landlords.


The Israeli Tax Authority is using innovation to battle cash tax evasion.

It turns out that taxi drivers have a very low tax compliance rate. That’s because they deal in cash. (When I was Maine’s state revenue commissioner we had compliance problems with fisherman and wood cutters who frequently also worked for cash.)

An article in Globes, Israel’s business website, says the Israeli Tax Authority has nabbed “dozens’ of taxi drivers who evaded taxes. The Israelis obtained a court order to get records from Get Taxi, a popular taxi app. After randomly selecting 50 drivers for tax audits, the government found most had not reported all their fares. Some paid fines while others may be facing criminal charges. With 3000 drivers signed up for Get Taxi in Israel, we suspect the other 2950 will soon be facing tax audits too.


Ketharaman Swaminathan
Ketharaman Swaminathan - GTM360 Marketing Solutions - Pune 22 July, 2014, 11:36Be the first to give this comment the thumbs up 0 likes

Sorry but there's a fundamental misunderstanding here: My post mentions where I paid but doesn't say anything about receipts for this specific cab journey. The ways things happened, I paid by card at the petrol station but I got the taxi receipt from the cab driver. I submitted the taxi receipt as part of my tax return. Per records available with me and submitted to the tax department, the cabbie / cab company are on the hook for the income and couldn't have evaded tax in this specific case, with due respect to what happened in Israel, Maine or elsewhere.

While tax evasion might be a huge problem, cash can't be singled out for perpetrating it. And, as I mentioned above, the big ticket variety of it certainly happens via cashless modes of payments. 

A Finextra member
A Finextra member 22 July, 2014, 13:35Be the first to give this comment the thumbs up 0 likes

Cash is not just for tax evasion - it is for convenience which also enables tax evasion. Why go through the pain of setting up a merchant account with an acquirer, getting your payments several days or weeks later, being charged MSCs and - most importantly - pay a 20% VAT on each of those transactions? Why bother if you can just accept cash and not do any of the above?

And by the way, that £2bn figure is probably for one average UK city like Newcastle - cash economy is far greater than most think!

Ketharaman Swaminathan
Ketharaman Swaminathan - GTM360 Marketing Solutions - Pune 21 December, 2014, 12:40Be the first to give this comment the thumbs up 0 likes

The hidden CICO cost has become an even bigger barrier towards card acceptance since I wrote this post. Almost all cab companies have stopped accepting cards by now. Many of them have launched prepaid mobile wallets. While the companies are promoting mobile wallets heavily, their drivers are even more vehemently protesting their use by passengers. Apparently it now takes 15 days for cabbies to "cash out" payments made by mobile wallets.

Ketharaman Swaminathan
Ketharaman Swaminathan - GTM360 Marketing Solutions - Pune 03 March, 2015, 19:42Be the first to give this comment the thumbs up 0 likes

I just got this tweet:

DamigosV  @s_ketharaman@aussiedhaliwal Incredibly in regional Australia, it may take 2 weeks for Cabcharge funds to reach the driver!

A Finextra member
A Finextra member 11 March, 2015, 07:08Be the first to give this comment the thumbs up 0 likes

Electronic payments (card/e-wallets etc) take more time to reach the beneficiary, which is a cause of concern to cab drivers (and other small businessmen). 

But why should this be an issue for the cab driver if he pays for his expenses by credit card? He will benefit from a delayed debit to his CASA as well.

This is a multi-faceted issue, where tax evasion and high fee concerns are definitely in play.

Ketharaman Swaminathan
Ketharaman Swaminathan - GTM360 Marketing Solutions - Pune 11 March, 2015, 12:50Be the first to give this comment the thumbs up 0 likes

@AdityaG: Good question. I've a few likely answers: (1) I've used taxis in at least 10 countries. I haven't seen a single driver paying for fuel and other expenses by credit card (2) Even if they do, it's basic human nature to want to "eat your cake and have it too" (3) A cabbie once told me he broke off from Taxi Company X and Y because they delayed his payments well past their T+15 day commitment and signed up with Company C because this company was reputed to pay on its committed T+7th day (4) Problem with deferred payment is not technology or the deferred period per SLA. It's that the payee has already rendered a service and is helpless in front of the payer who suddenly achieves supreme power to keep delaying payments on a whim. Apparently, some payers even demand a bribe to release payments.

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