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The Green Sheet Online Edition

September 27, 2010 • Issue 10:09:02

Insider's report on payments
Cash still standing its ground

By Patti Murphy
The Takoma Group

Despite decades of innovation and public relations campaigns promoting electronic payments, cash is still the most popular way to transfer monetary value in most parts of the world.

Economic conditions clearly impact the use of cash, with usage rising in times of economic uncertainty. In July 2010, for example, consumer credit outstanding in the United States fell for the sixth straight month, according to the Federal Reserve. At $3.6 billion, the decline works out to 1.75 percent on an annualized basis.

A new report by San Francisco-based Javelin Strategy & Research suggests the protracted recession has given rise to a new, "cautious consumer" who prefers pay-now options to credit cards.

The report, Payment Card Issuer Strategies 2010: The Rise of the 'Cautious Consumer', paints a bleak picture of changing consumer spending habits, with a precipitous decline in credit card usage, as more payments shift to cash, checks, prepaid and debit cards.

The situation is especially pronounced in California and Texas, which combined represent almost 20 percent of the U.S. population, Javelin said. Both of these states have suffered huge losses in jobs and real estate values since 2008.

Recent legislative and regulatory initiatives also play a role in driving down credit card usage, Javelin said - legislation such as the Credit Card Accountability Responsibility and Disclosure Act of 2009, which prohibits card companies from marketing to college students.

Taken together, these trends contributed to a 31 percent drop in consumer credit card usage between 2007 and 2009, Javelin reported. If this downward spiral continues, the report added, fewer than 50 percent of consumers will be regularly using credit cards by the end of 2010.

Debit and prepaid card usage, however, continues to rise, with debit card volumes eclipsing credit card transactions, according to both Visa Inc. and MasterCard Worldwide.

"Javelin's research shows that as the economy recovers, many credit card-wary, cash-hoarding consumers have the means, but simply lack the motivation to spend," said James Van Dyke, Javelin's President and founder.

Even before the recession, however, U.S. consumers were increasing their use of debit cards and cash. The U.S. Department of the Treasury calculates that paper money in circulation grew nearly 700 percent between 1975 and 2005.

In 2006, consumers spent four times as much using cash as they did using credit cards, according to the Federal Reserve Bank of Boston. In 2007, Treasury's Bureau of Engraving and Printing produced nearly 38 million banknotes of varying denominations each day, and the U.S. Mint produced an average of 42 million coins a day.

Cash and kidnapping?

Meanwhile, in Ireland, which has the dubious honor of being the most cash-dependent nation in the European Union, there's an emerging effort to wean folks from cash by portraying electronic money as a crime prevention measure.

I was amused when I heard the recent news report. Apparently, in Ireland, bankers and their families have become prone to kidnappings for ransom - a crime often referred to as "tiger kidnappings." In one such incident, a banker's wife was held hostage for several hours and released only after the banker handed over to the kidnappers the equivalent of about $460,000 in cash from the vault of the bank branch he ran.

Following this latest kidnapping, the Irish Minister of Justice, Dermot Ahern, made a plea for his countrymen to kick their cash habit.

One idea he had that's apt to strike a chord with bankers is to start charging for ATM withdrawals. Irish law generally forbids ATM fees. Last year, the Irish withdrew the equivalent of $38 billion from ATMs, according to a report by National Irish Bank, a Dublin-based commercial bank.

"The reliance on paper-based payments has a number of high costs for our society," said Dr. Ronnie O'Toole, the National Irish Bank's Chief Economist. O'Toole estimates annual savings, nationally, of about $1.5 billion if all paper payments were converted to electronic methods, like credit and debit cards.

O'Toole also agrees that less cash in circulation would thwart crime. "People don't often make a connection between their ATM usage and criminal attacks such as tiger kidnappings, but the connection is very real," O'Toole said in a statement. "The way to stop these attacks is to stop transporting so much cash."

Specific suggestions O'Toole offers include retailer incentives for customers to use credit or debit cards and requiring all taxi cabs in Ireland to accept payment cards.

Cash as king

Despite my Irish heritage, I don't know much about Ireland or its economy. Nor do I claim any knowledge of the impetus behind tiger raids.

What I do understand, however, is that the relationship between people and cash spans at least 25 centuries and that governments and bankers have been trying to supplant cash for at least 600 years, when the first paper checks were introduced in Europe.

Yet, despite these protracted efforts to supplant coin and currency, cash continues to grease the wheels of commerce in Europe and the world.

Card-based alternatives like debit and prepaid may be gaining rapid and broad-based adoption, but these innovations have done little to diminish the cash economy. And it's also not just criminals who like cash.

According to the Federal Deposit Insurance Corp., there are at least 9 million U.S. households where no one has a bank account. For these folks, cash is king.

"Cash has unique and durable qualities, including being 'human friendly'," noted Mike Lee, Chief Executive Officer of the ATM Industry Association, in a 2008 presentation titled "The Long-Term Future of Cash." Some of the most obvious of these qualities are that cash:

  • Is fee free for consumers
  • Is the most tangible and liquid form of money
  • Has no credit risk attached to its use
  • Is a public asset, controlled by the central bank (in the United States, that's the Federal Reserve)
  • Is easy to use
  • Is accepted everywhere
  • Enjoys instantaneous settlement

Or, as a friend of mine is fond of saying, "Cash has no enemies."

There may be some businesses, like airlines, that prefer not to be bothered handling cash and coins. But for most individuals and businesses, cash is a tangible representation of wealth that few would be willing to part with even in the best of economic times. end of article

Patti Murphy is Senior Editor of The Green Sheet and President of The Takoma Group. She is also the founder of InsideMicrofinance.com. Email her at patti@greensheet.com.

The Green Sheet Inc. is now a proud affiliate of Bankcard Life, a premier community that provides industry-leading training and resources for payment professionals. Click here for more information.

Notice to readers: These are archived articles. Contact names or information may be out of date. We regret any inconvenience.

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