The Green Sheet Online Edition
June 08, 2015 • Issue 15:06:01
Insider's report on payments: Going cashless sounds like nonsense
It's been said before, but it warrants repeating: old payment methods never die. Instead, history has shown the payment pie keeps growing to accommodate new payment methods and form factors. That's why cash will never disappear, nor will check payments, even as newer, cooler ways to pay (like mobile and crypto-currencies) gain converts.
A recent press statement out of the United Kingdom illustrates that cash may have lost ground, but it is still entrenched. "Cash overtaken by 'non-cash' payments in 2014," the Payments Council stated. (The Payments Council is a trade association representing the UK payments industry.) At 18.3 billion transactions, cash represented 48 percent of all consumer and business payments in the UK in 2014, down from 52 percent in 2013.
With 19.8 billion transactions, noncash payments (including checks, credit and debit cards, and automated clearing house-like payments) were 52 percent of the UK payment pie last year. Debit cards were the most popular cash alternative, representing 26 percent of all consumer and business payments in the UK last year, the council reported.
The Federal Reserve found a similar breakdown of consumer payments in the United States: at 40 percent, cash accounts for the single largest share of consumer payments, followed by debit cards (at 25 percent) and credit cards (17 percent).
Why put kibosh on cash?
Apparently, others take issue with the staying power of cash. JPMorgan Chase & Co., for example, now restricts customers from making cash payments for consumer loan products: credit cards, auto loans, mortgages and lines of credit. The mega-bank also notified safe deposit box customers that they may no longer store cash and coins in their boxes unless the items are collectibles.
That news came on the heels of a widely reported pronouncement by Citigroup Inc. Chief Economist Willem Buiter that cash should be abolished outright or taxed punitively. Buiter isn't alone; his comments mirror those of other economists, including Kenneth Rogoff, Professor of Economics at Harvard University. Their reasoning: too many people holding too much cash makes it tough for central bankers to conduct monetary policy.
Some technologists have called for eliminating cash and moving to mobile payments to help eradicate poverty. Bill Gates is the most notable. He has contributed hundreds of millions of dollars to mobile banking programs that target the poor and unbanked in developing countries.
Most recently, the Danish government proposed that beginning in 2016 certain retailers not be obligated to accept cash payments. The proposal applies to restaurants, clothing retailers and gas stations. It was included in a package of economic measures the government said are intended to reduce costs and improve productivity for Danish businesses, and must be approved by Parliament.
According to published reports, the proposal has met with little opposition. One reason is that Denmark already leads the European Union in the use of credit and debit cards, and about one third of the population regularly makes mobile payments.
"Shoppers don't want to worry about having enough cash in their wallets," said Dave Hobday, Managing Director at Worldpay UK. He said this is particularly true for millennials. Hobday pointed to Worldpay research that found nearly 60 percent of Brits between the ages of 25 and 34 prefer to never carry cash.
U.S. cash usage cuts across demographics
An analysis of the Fed's data, published in 2014 as Cash Continues to Play a Key Role in Consumer Spending: Evidence from the Diary of Consumer Payment Choice, failed to uncover a similar pattern in the United States. "Indeed, all age groups use cash more frequently than one might expect based solely on stated payment preferences," the report stated.
According to the Fed, 43 percent of U.S. consumers describe debit cards as their payment instrument of choice, and these individuals do, indeed, use debit cards for most of their transactions. Similarly, 30 percent say they prefer cash, and these folks use cash for at least half their payment transactions. Not surprisingly, the Fed's data show the unbanked and underbanked are big on using cash. Ditto for U.S. households earning less than $25,000 a year.
But rather than income or age, transaction size is the most obvious determinant of when Americans prefer to use cash. "All income and age groups use cash in roughly equal frequency, and particularly for transactions valued at less than $10, making cash the dominant payment instrument for very low-value transactions," the Fed stated. "Moreover, consumers use cash especially heavily for certain types of everyday expenditures, like food and personal care items." It added that cash also is a good backup option when other payment methods are not available, especially in person-to-person transactions.
What's not to like?
I like cash. I like it because cash is universally accepted. I like it because it provides me with a modicum of privacy. I like cash because it helps ensure that I get better service, such as when I leave my car with a parking lot attendant or check into a hotel. I often prefer cash because it can be quicker and cheaper than using a credit card or debit card, especially at convenience stores and coffee shops. And when I get cash – typically from an ATM – I prefer to get at least $100. It's how I cost-justify paying those pesky ATM transaction fees.
Mostly, though, I like using cash as a budgeting tool, not unlike the way I sometimes use prepaid cards. You see, I'm a bit of an impulsive spender. (Seriously, I have closets and drawers crammed with unused clothing and gadgets to prove it.) If I limit my spending to cash on hand, I save myself a lot of money in the long run.
I'm not alone. On any given day in October 2012, 22 percent of U.S. consumers had at least $100 on them (purses, wallets, pockets); 8 percent carried $200 or more, according to U.S. Consumers' Holdings and Use of $100 Bills, published last year by the Federal Reserve Bank of Boston.
It may sound like a lot, but it's really not that much money, especially when you consider the impact of inflation over the years on the value of money. For example, after adjusting for inflation the "real value" of a $100 bill declined six-fold, to about $16, between 1969 and 2012, according to the Boston Fed's report.
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 firstname.lastname@example.org.
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