As the U.S. Treasury phases out the use of the penny, it’s creating a host of new challenges for businesses and consumers that could cost all of us a good chunk of change.

That’s because eliminating the 1-cent piece is more complicated than it seems, creating a two-tier system that treats customers who pay with cash differently than customers who pay electronically, whether that be with a debit or credit card or a digital wallet. This raises a host of legal and regulatory concerns, from unequal treatment of consumers to proper tax collection. While there’s still a lot to figure out, the bottom line is clear: We’ll all be paying more when it comes time to check out.

The crux of the problem is rounding. As pennies exit circulation, it is becoming increasingly difficult for retailers to make exact change for cash transactions. Without pennies, cash transactions will have to either be rounded up to the nearest 5 cents or down to the nearest 5 cents. Because federal and state officials have not provided guidance on the issue, businesses are left to set their own rounding policies.

The law of uniform distribution tells us that over many transactions, there are likely to be as many transactions that are rounded down as rounded up. But this scenario disproportionately affects consumers who rely on cash, the majority of whom come from lower-income households or are adults over the age of 55, according to Federal Reserve Financial Services.

There are still implications for customers who pay with a card or electronic payment, however. If rounding only applies to cash transactions, consumers paying with a card may be penalized as they are required to pay the exact amount while those paying with cash may have their transactions rounded down to the nearest nickel, depending on the total cost of a transaction.

This uneven treatment not only raises questions of fairness, but the lack of guidance from federal and local government also leaves retailers at risk of violating sales and excise tax collection rules and consumer protection regulations. It’s an untenable and unfair position for businesses, even as retailers do their part to adjust to the exit of the penny responsibly, including communicating with customers about what they should expect at the register.

Consider this real-world scenario: Under federal law, those receiving Supplemental Nutrition Assistance Program benefits cannot be treated differently than non-SNAP recipients. Because SNAP benefits are loaded onto debit cards, they are processed as an electronic transaction. That means SNAP recipients will pay the exact amount for an item, whereas their non-SNAP counterparts paying with cash may have their total rounded down.

This puts retailers in direct conflict with federal law. Though the Illinois Retail Merchants Association is working to educate state and federal officials on needed policy updates caused by the phaseout of the penny, it will take time before changes can be put in place. In the meantime, retailers are being forced to take on costly regulatory and compliance risks.

Meanwhile, as more consumers choose to pay electronically rather than with cash to avoid the hassle of rounding, they’ll also be on the hook for more payment processing fees. That’s because each time a card is swiped or tapped, retailers are charged fees by card processing companies. In 2023 alone, these companies collected more than $172 billion in payment processing fees, most of which is passed on to consumers in the form of higher prices.

Our association has led the way in limiting these fees — securing passage of the first law in the nation to prohibit banks and credit card companies from charging processing fees on the tax and tip portion of a transaction — but Wall Street banks, credit card companies and card processors are fighting these consumer protections in court. Regardless of the outcome of that case, the transition away from the penny will only increase the use of digital payment methods and the accompanying fees.

Eliminating the penny may seem like a small change, but businesses and customers will feel the impact long after the coin disappears.

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Rob Karr is president and CEO of the Illinois Retail Merchants Association.

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