The Green Sheet Online Edition
August 27, 2012 • Issue 12:08:02
Insider's report on payments
What's still in your wallet?
Forget cards. Forget checks. If dollars spent were the qualifying factor, cash would win the popularity contest hands down. Prepaid cards and mobile payments may help displace cash from its position of prominence in our wallets, but there's still plenty of cash there, too.
Most U.S. consumers rely on cash - 99.8 percent, according to the Federal Reserve Bank of Boston, which tracks consumer payment trends. U.S. cash in circulation totaled nearly $1 trillion in 2010, according to the Federal Reserve Bank of San Francisco. An analysis by San Francisco Fed economists Jeremy Gerst and Daniel J. Wilson revealed the number of greenbacks in circulation is growing at a rate of 1.7 percent per year and is expected to continue apace throughout the decade.
Cash strong in long-term mix
"An empirical analysis indicates that alternative payment technologies have tended to keep cash growth in check, but other factors have more than offset this," Gerst and Wilson wrote in the FRBSF Economic Letter in the fall of 2011. They added that the "unique attributes of cash, such as the anonymity it offers payers and its appeal as a back-up store of value, mean that currency will likely play an important role in the nation's payment system for some time to come."
By comparison, credit card usage has been falling. A report by Hitachi Consulting and the Bank Administration Institute revealed credit card transactions made up just 19 percent of in-store payments in 2010, down from 22 percent in 1999. Check usage fell from 18 percent of in-store purchases to 5 percent. The number of cash payments fell too, by 13 percent, but at 26 percent of all in-store payments, cash was eclipsed only by debit cards, which represented 42 percent of POS transactions in 2010.
Cash has always been popular for person-to-person (P2P) payments, as well. Shopping at farmers markets and craft fairs, splitting dinner tabs between friends, riding public transportation, transacting with micro merchants and gifting are just some of the obvious scenarios in which cash prevails. Now evidence exists that prepaid cards are displacing cash in many of these situations.
Prepaid as cash replacement
I wondered just how well prepaid cards stand in for cash, so I purchased a prepaid card to use in lieu of cash for a month - replacing the pocket money I take out of the ATM each week. After looking at several options, I settled on the Walmart MoneyCard. My first hint that this may not have been the best choice was the disclosure statement that came with the card. Confronted with pages of barely discernible print, I didn't bother reading it. If I had, perhaps I wouldn't have been as surprised to learn that I had to pay Wal-Mart Stores Inc. $3 for loading cash onto the card at one of its MoneyCenter ATMs.
(I chose to use an ATM rather than wait in a long line for a customer rep. I also could have loaded the card at a checkout, but the cashier didn't know what I was talking about when I mentioned it; I used cash to pay for my purchases that day.)
As I walked away, it seemed counter-intuitive to feed a stack of $20 bills plus $3 into an ATM in return for a piece of plastic that's supposed to take the place of using cash. It also became clear that one reason prepaid cards (the general purpose reloadable cards) are growing at a rapid clip is the meager use of the reload features.
Failure to reload prepaid
In 2010, the Federal Reserve Board counted 6 billion prepaid cards with $140 billion in value in Americans' wallets. And according to Geoffrey Gerdes, a Senior Economist at the Fed who follows payments, the value of prepaid loads is growing at an annual rate of 30 percent. But how much of this activity is simply folks getting a new card rather than reloading an existing card?
A recent discussion paper from the Federal Reserve Bank of Philadelphia shed light on this. Consumers' Use of Prepaid Cards: A Transaction-Based Analysis examined adoption by analyzing 280 million transactions using more than 3 million cards issued by the prepaid card company Meta Payment Systems.
Tracking my experiences against the data showed that I wasn't alone in abandoning my card after spending the first load. The median active life of a reloadable prepaid card purchased from a retail establishment is 63 days, according to the paper. Bank-issued cards remained active the longest, at 515 days.
Fees for retailer-issued cards averaged $7.17, according to the Philadelphia Fed. That is slightly more than what I paid in fees on my MoneyCard for a month. (But then, I also refrained from using ATMs, a big fee generator.)
Here are additional data points regarding retailer-issued prepaid cards from the Philadelphia Fed's research:
- Median number of purchases - 14
- Total value of purchases - $118.90
- Percentage of cards used to make at least one cash withdrawal - 38.7
- Median number of cash withdrawals - 3 (not including POS cash back transactions)
- Total value of loads per card - $217
- Median load amount - $60
So, OK, prepaid cards are a bit cheaper than a bank checking account. But they aren't truly comparable to checking accounts.
Mobile ideal for P2P payments
That's why I believe mobile payments are a better substitute for cash. After all, it's the form factor that makes the most sense, since just about everyone has a mobile phone. And then there's the "cool" factor.
Some of the largest banks in the country are pushing mobile for P2P payments. Retailers are, too, as demonstrated by the recent partnership between Starbucks Coffee Co. and Square Inc.
The Starbucks deal is huge and could well catapult mobile payments into the forefront of our consciousness.
Still, cash is here to stay. And for good reasons. A recent article on the website e27.sg, which follows Asian tech startups, put it well when it asked readers, "Even if organizations, financial institutions and governments are prepared to move into a cashless society, would you, as an individual, start trusting and living in the digital currency?"
I know I wouldn't. What about you?
Patti Murphy is Senior Editor of The Green Sheet and President of ProScribes Inc. She is also the founder of InsideMicrofinance.com. Email her at email@example.com
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