We take the existence of cash for granted. We are used to being paid in cash, buying things with cash, storing our cash in banks or investing cash in the stock market.
Without cash, it would be necessary to engage in barter — a trading of goods and services. There is no doubt that such a system of trade is less efficient. It would require more time on everyone’s part to assign a value to what they have and try to match it up with someone who needs that particular product or service. For this reason, currencies were one of the earliest innovations of humanity, whether they took the form of precious metals or seashells.
Because we take cash for granted, we often overlook or simply ignore the price of converting products and services into cash and then converting cash back into products and services. This is particularly true when the transaction includes an extension of credit, whether it is a purchase of a product with a credit card on Amazon, a payday loan or the transfer of cash from one person to another. It is common for a business to pay a processing fee on a credit-card transaction of 3 percent to 5 percent. This cost is passed on to the customer in the form of higher prices.
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The current surge in cryptocurrencies, such as Bitcoin, has brought new attention and focus to the issue of whether we are paying too much for the convenience of cash. If we can transfer cash or something of value quickly and securely around the world by means of reallocation of data within a digital file, what should be the appropriate cost of completing a transaction?
Every time we travel internationally, we may change dollars to euros or other currencies and have to pay a currency exchange rate. The transaction is digital and immediate (in milliseconds). Why is there a relatively high fee for making the exchange? Are we paying legacy rates to address costs and risks that no longer apply?
If all we are doing is moving money from one financial institution to another, what is an appropriate fee for managing this transaction (a bare-bones transaction)? As we add additional services (extension of credit, protection against hacking, shipping, currency conversion, etc.) we may expect to see the cost of the transaction increase. However, is the value of the services we are receiving matching the price charged for these services?
I have observed sales where the entrepreneur paid more fees in completing the transaction than the entrepreneur earned in profits on that transaction. How can the transfer of money represent an undertaking of such costs and complexity to match all of the work that went into setting up a business, making the product or service and selling it to a customer?
Any effort by a business advocating for ‘Buy Local’ is contradicted by shipping money-transfer fees to companies located in New York, San Francisco, Omaha or other cities outside of Colorado.
When raising capital, the issue of using cash is greatly amplified. A business may seek to buy equipment, purchase a building, hire personnel or cover costs of operations by raising money. It must spend money to raise money to pay for the costs of planning, promotion, broker and filing fees, in addition to whatever it gives up in profits, revenues or rewards. A direct transaction or barter may save a great deal of money. Different approaches to raising money may also save fees.
An entrepreneur may want to rethink how and where it is using cash and any activities in which it is raising money. Are there quicker, better, less-expensive alternatives that may achieve the same or a better outcome? Can these costs be avoided instead of passing them along to customers or investors? Must these costs be managed in order to remain competitive?
Karl Dakin is a principal with Dakin Capital Services LLC. Reach him at firstname.lastname@example.org.