No Cash for the Plumber? Just Charge It

Government panel on limiting cash use recommends mandatory acceptance of credit cards. But what exactly will that do?

AP

Your toilet is blocked but you can’t find cash or a checkbook? You’ll still be able to pay the plumber if the interim recommendations of a government committee on limiting cash use in Israel are implemented.

The Locker committee, headed by Harel Locker, the director general of the Prime Minister’s Office, recommended this week that every business with revenue of more than 79,500 shekels ($22,779) a year, the cutoff point for various tax obligations — including those that consist of no more than a single self-employed person, like a plumber or repairman — be required to have a device for clearing credit cards and debit cards. Under the recommendations, the credit card requirement would be a condition for obtaining a business license.

The goal of the recommendations — including a previously reported requirement that cash transactions be limited to 7,500 shekels — is to minimize the extent of off-the-books payments by encouraging the use of electronic payment, which goes through credit card companies and banks. The latter are required to report to the Israel Money Laundering and Terror Financing Prohibition Authority.

Experience in other countries shows that limiting the use of cash reduces money laundering, a Justice Ministry official said.

The under-the-table payments that constitute the grey economy cost the state 40 billion shekels to 50 billion shekels in lost tax revenues a year, a sum nearly equal to the defense budget or the education budget, said Locker. If the state were collecting this money, it could lower VAT or income tax rates, he added.

Yet mandatory acceptance of credit cards is likely to be an expensive proposal for small businesses, and it won’t necessarily achieve its goals.

That’s because Israel’s credit-clearing market is not competitive, and is controlled by three credit card companies. The clearing companies have outsize power over small businesses, charging noncompetitive rates on credit transactions: 2% of every transaction and a minimum fee of 100 shekels a month. For small businesses, whose profit margins can easily be only 10% of turnover, the clearing fee could eat up 20% of profits.

It’s unlikely that another player will enter the credit-clearing market, which faces significant regulatory barriers imposed by the banks commissioners, since the three credit card companies are owned by the country’s three largest banks. The Locker recommendations do not include a call to lower these barriers.

Ultimately, the Locker recommendations are likely to assist the players in the credit market, while small businesses that carry out transactions off the books – which is already illegal under current laws –are likely to keep on carrying out transactions off the books, in cash.

The recommendations also include penalties for violating the 7,500 shekel limit on cash transactions.

A member of the Locker committee noted that the cash limit would not force most people to change their shopping habits, since most law-abiding citizens do not regularly make such large cash purchases. It is targeted at businesses that accrue large quantities of cash from off-the-book transactions. The limits would make it more difficult for them to use the cash, the source explained.

Individuals who violate the cash limit would be guilty of a criminal offense and fined 25% of the value of the transaction, while businesses would be fined 35%. Breaking up a transaction into smaller transactions as a way of skirting the limit would also be considered a criminal offense. A year after this takes effect, the limit would be reduced to 5,000 shekels.

Exceptions would be made for transactions between two private citizens, such as the sale of a secondhand car.

The committee also calls for increasing regulation on non-bank check clearing and non-bank credit, noting that legitimate businesses operate alongside criminal operations in these fields.