RIP The Penny, 1793 – 2026
On May 22, the U.S. Treasury Department placed its final order for penny blanks. Those blanks will allow the penny to be printed through 2026, but once they’re gone, that’s it. No more new pennies. After 233 years, the era of the penny will be over.
So what does that mean for the day-to-day business of thousands of merchants that still accept cash? And will the discontinuation of the penny affect their payment processing? The answer is nuanced. Let’s break it down.
The Impact on Day-to-Day Business
Cash Transactions
The first thing to remember is that the penny isn’t being banned. New pennies will continue to be printed through next year, and even after that, there is ample supply in circulation for years to come. It will still be legal tender. Eventually though, as supply dwindles, they will be phased out of circulation. Once that starts to happen, businesses will eventually stop accepting them because they won’t have enough to give back as change to a customer.
When that happens, businesses will need to start rounding cash transactions to the nearest five cents. The US isn’t the first country to discontinue its $.01 denomination, so there are models to follow. Canada, for example, ceased production of its penny back in 2012.
The rounding will occur on the transaction total. This means that if the total at checkout is $4.82, the transaction will need to round down to $4.80. If it is $4.83, it will round up to $4.85. And while the rounding doesn’t necessarily need to apply to individual items, we are likely to see changes in pricing strategies. The practice of using .99 or .95 in pricing goes back over a hundred years, but with the phase out of the penny, this strategy may wind down as well.
Electronic Transactions
For credit/debit cards, ACH, and digital wallets, no rounding is needed. POS systems, online checkouts, and payment gateways are already configured for cent-level precision.
When Canada removed its penny in 2012, the country adopted a dual-pricing strategy where the final total on electronic transactions remained priced to the cent while the final total on cash transactions was rounded to the nearest five cent increment. Other countries such as Australia, New Zealand and Sweden approached this situation in the same manner. (An interesting side note, New Zealand has also eliminated its five cent coin. Could the nickel be next? Considering it costs almost $.14 to produce one nickel, the idea isn’t without merit.)
What this means though, is that the precedent has been set by other countries to approach the removal of the penny in a similar fashion. In fact, some experts recommend NOT rounding the final total on electronic transactions because it would require every POS and electronic transaction system to do a full rewrite of their code and tax reporting tools. This would create a huge financial and operational burden.
Where things do get tricky though, is when it comes to tax and compliance, which we will get to in a moment.
Operational Effects
Removing acceptance of the penny from transactions will allow time savings at checkout. It will also reduce the need for penny handling, counting, and storage, which will simplify cash management for merchants. Ultimately, this may not be a huge benefit since only about 14% of Americans paid for their transactions in cash in 2024.
Another consequence will be in the area of charitable donations. Charities like The Salvation Army that ask for your change as you leave your local store during the holidays will need to reevaluate how they accrue donations. Even the loss of a $.01 denomination can add up to significantly less donations.
The Impact on Payment Processing
POS and Integrated Payments
Payment processors are already configured down to the penny. This means that no technical changes will be needed for electronic transactions, as long as the transaction amount is charged for the exact amount. For cash transactions, POS systems and software payment integration may need to be reprogrammed so that the final total is rounded. Also, reconciliation processes may show small discrepancies between reported and collected tax due to rounding, but these are both expected and manageable. Again, this isn’t the first time this has happened globally.
Tax and Compliance
The United States faces a unique dilemma. Back in 1998, the U.S. passed the Internet Tax Freedom Act. This bill prohibits states from enacting discriminatory taxes on electronic transactions. In scenarios where a merchant rounds the total down for a cash transaction but leaves the total the same for an electronic one, situations could arise where the electronic transaction collects more tax. That is illegal according to the ITFA. Unless states find a way to update the language of the ITFA, this is just one of the legal hurdles that will need to be ironed out in the near future.
One potential solution would be that sales tax would continue to be calculated to the penny on all transactions. Rounding will only apply to the final cash total. This will create some minor audit discrepancies due to rounding, especially if a merchant is in a cash-heavy business. But the way other countries have managed this has been by reporting cash transactions and electronic transactions separately. In fact, studies from Canada show that merchants saw a minimal net impact per store. If anything, they saw slight bump to revenue due to rounding up more than down.
A Push Toward Cashless Payments
If there’s one thing that may come out of the discontinuation of the penny, it’s that it may push consumers and businesses even more toward cashless transactions. Since digital transactions avoid the complexities of rounding and are easier to track and audit, many businesses may encourage their customers to pay digitally.
Conversely, merchants are becoming more sensitive to the cost of payment processing and a further increase in digital transactions may increase this expense. To counter this, merchants have been turning to strategies such as surcharging and cash discounting. While surcharging will remain the same as it only affects credit card payments, a cash discounting strategy will need to evolve in order to account for rounding on transactions.
In the end though, the removal of the penny from circulation will definitely have an impact on business; just how much remains to be seen. For now, while some operational and tax reporting procedures may change, day-to-day business will, for the most part, remain the same. Especially considering it may take years, if not decades, before the penny is truly gone.
With all that said, since we won’t be able to charge a penny for our thoughts anymore, we’ll just pass these along for free.
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