By now, Americans know the strange math of minting: Each penny costs about 4 cents to make. Chances are you have some in a jar, or scattered among pockets, purses and car ashtrays.
As small as it is, the penny punches above its weight culturally. If it ever disappeared, so too might the simple kindness of “take a penny, leave a penny,” alongside timeless classics like penny loafers and the tradition of tossing a penny in a fountain.
But the penny’s days are indeed numbered. The U.S. Mint pressed the last 1-cent coin on Nov. 12. While pennies will remain legal tender, old ones will gradually be taken out of circulation.
The impact will be felt as small, cash-reliant Main Street merchants face another test of adaptability in a system that increasingly favors scale, technology and plastic. It will also be felt by people who rely on cash – often people without bank accounts who have the least room to absorb shifts in price.
My interest comes from my former lives as the chief financial officer of a large credit union and as a small-business owner. Now, I bridge theory and practice as a professor, studying the challenges facing Main Street businesses.
When the penny goes away, some will win, some will lose – and for some, it’ll be a coin toss.
The most obvious winner is the U.S. government, which will save tens of millions of dollars each year by no longer minting the coin.
Banks and credit unions will likely benefit too. Pennies are disproportionately expensive to handle: Every bag of pennies gets counted, sorted, rolled, verified and shipped back to the Federal Reserve, generating labor and equipment costs.
Large retailers will likely also win. Size and scale make it easier to undertake preparations, both big and small, such as reprogramming cash registers. Larger companies also have the talent and bandwidth to figure out the true costs and benefits of accepting cash or noncash payments. If most of their transactions are already digital, they could be relatively indifferent to the end of the penny.
Large retailers also negotiate lower card-processing rates, which are the fees merchants must pay to the card companies. These rates aren’t uniform: Large chains get discounted pricing based on sales volume, while small businesses face higher costs for identical transactions.
For small, Main Street businesses, the penny’s disappearance highlights the structural disadvantages they already face – and I think it will force a reckoning about what types of payments benefit their bottom lines.
Local businesses are likely to round cash transactions to the nearest 5 cents, resulting in what economists call a “rounding tax.” Rounding to the nearest nickel could cost businesses and consumers about $6 million annually, according to researchers with the Federal Reserve Bank of Richmond.
And it wouldn’t offer much relief if more shoppers turn to plastic and other noncash payments. That’s because most small merchants lack the negotiating power to lower their card-processing fees.
Card acceptance comes with a layered stack of costs for merchants. Together, these average 2.5% to 3.5% per sale for many small businesses. Also, there are expenses related to adopting the latest payment methods and then keeping them updated.
That said, handling cash also comes at a cost, and it’s not always easy to know what’s best for business. One analysis found that accepting cash costs 53 cents per $100 of sales, compared with $1.12 for accepting debit payments using a signature and 81 cents for PIN-based debit. Of course, businesses also should keep in mind that different customers will have different payment preferences.
And speaking of customers, those who are most likely to feel the pinch are people who still rely on cash: older adults, lower-income households, people without credit cards or bank accounts, and people who budget in cash because it provides firmer spending discipline.
A few cents added to a grocery total or a convenience store purchase may not matter to someone tapping a rewards credit card, but cash-dependent consumers experience those small increases directly, with no offsetting points, perks or end-of-month cash back.
Digital-first consumers may barely notice the penny’s disappearance. They tap phones, scan QR codes and use payment apps that will still settle to the exact amount.
While businesses haven’t received final guidance on how to handle payments in the post-penny era, one option is to price electronic transactions to the cent and round cash transactions to the nearest nickel.
Consumers who use cashless payments may believe their choice doesn’t affect how they shop, but behavioral research says otherwise. Credit cards reduce the “pain of paying,” leading people to spend more – often 10% to 20% more than with cash. Credit card rewards programs further incentivize card use. But those rewards are funded by higher merchant fees that ultimately translate into higher retail prices.
Killing the penny makes economic sense for the government and some businesses, yet it also highlights a deeper truth: Efficiency tends to reward the already efficient. For many, however, even when the change is small, every cent still counts.
Nancy Forster-Holt is a clinical associate professor of innovation and entrepreneurship at the University of Rhode Island. Distributed by The Conversation and The Associated Press.
