If you want to protect part of your wealth from the ups and
downs of the financial markets, the old saying still holds true:
Cash is king
. But when it comes down to actually
spending
your hard-earned money, cash's long reign looks like it's about
to come to an end.
For centuries, cash has served the primary role in day-to-day
commerce, helping ordinary people trade their labor and products
for the goods and services they need without cumbersome
negotiations over bartering or exchanges. Yet slowly but surely,
alternatives to cash have taken root
and grown. Although you can still find some places that insist on
cash if you try hard enough, it's increasingly clear that
greenbacks no longer have the dominant role they once did in
doing business.
Passing on the throne
You can see one sign of this change of leadership just from the
way that people actually use -- or increasingly, don't use --
cash in everyday life. According to a recent Rasmussen Reports
survey cited in
Money
magazine, 43% of Americans get through an entire week without
using cash at all.
That's a telling statement on how far cash has fallen. But
given all the choices that people have to spend, it's not all
that surprising. Consider:
- For decades, millions of people have used checks as their
primary way of paying for things. Check-use continues to be
popular despite advertising aimed at portraying checkwriting as
an antiquated, backward payment method fraught with delay and
complications. Even as they move to offer alternatives to
checking accounts,
banks rush to impose fees on their
checking-account customers
that they hope will produce millions of dollars in extra
profits for their crisis-ravaged financial statements.
- In just the past 40 years or so, credit card brands
Visa
(
V
) ,
MasterCard
(
MA
) ,
Discover Financial
, and
American Express
have risen from the ground up, building out worldwide networks
of payment-processing systems that allow people to buy whatever
they want without producing a single dollar bill -- or even, in
some cases, without having a dollar to their name.
- More recently, the rise of the Internet and smartphones has
led to further innovation in payment systems, with
eBay
's(Nasdaq: EBAY) PayPal taking the lead in providing a
cashless medium of exchange
. Now, banks and credit card companies are all clamoring to
provide both alternatives to PayPal as well as mobile-payment
systems that make paying for stuff as easy as swiping your
mobile device in the general direction of a cash register.
Increasingly, you'll get to know each of these methods
first-hand. But how can you
make
money from this inevitable shift away from cash?
Look for the sure thing.
Just as checkwriting has survived the credit card revolution, so
too will credit cards last for a long time even in the face of
newfangled smartphone-based systems. Many consumers are still
leery of how secure new technology is in protecting their money
and rely on the guarantees against fraud that credit card holders
enjoy by law. Moreover, with many card-issuing banks still
offering huge rewards to customers for using credit cards, their
reliance on plastic as a business model isn't going away anytime
soon.
Buying bank stocks is an obvious first way to play the
continuation of a card-dominated society. But as we learned all
too well during the financial crisis, issuing banks retain the
substantial credit risk of their customers, and although they're
well-compensated for that risk with double-digit interest rates
on cardholders who carry balances month-to-month, they can still
produce losses. For both
Bank of America
(
BAC
) and
Citigroup
(
C
) , ailing credit card businesses posed big challenges during the
financial crisis.
The second, more certain way to play credit cards is to look
to the card-network companies who don't themselves issue their
cards. Visa and MasterCard have played that model to perfection,
with strong and growing profits since their respective initial
public offerings. Their success will persist for years to
come.
Looking to cash in
On the other hand, if you're dead-set on looking for the
cutting-edge play in payment advances, PayPal has demonstrated
how it can be done. Essentially, PayPal has found a way to earn
the same take on transferring money that credit card companies
earn without taking any of the risk. That's kept eBay afloat even
as its namesake auction business has struggled in recent years,
and makes it a promising third way to play the payment space
going forward.
Numerous companies are aiming to provide the infrastructure
for mobile payments. But at this point, with so many players
competing for dominance, betting on any one of them to be the
eventual winner is fraught with risk. Aggressive investors may
find strong prospects, but with so many well-established
investment opportunities already available, conservative
investors will see little reason to go beyond the tried-and-true
players in the space.
Managing your cash is just one element of putting together a
smart long-term money strategy. Another key is saving for
retirement. To get some advice on how to make your cash grow,
please read The Motley Fool's special report on retirement
investing. Inside, you'll find useful tips along with three stock
ideas for your portfolio. Get on the path to retirement happiness
today!
Fool contributor Dan Caplinger has made $100 in cash go an
awful long way from time to time. You can follow him on Twitter
@DanCaplinger. He doesn't own shares of the stocks mentioned. The
Motley Fool owns shares of Mastercard, Citigroup, Bank of
America, and American Express. Motley Fool newsletter services
have recommended buying shares of eBay and Visa, as well as write
a covered strangle position in American Express. Try any of our
Foolish newsletter services free for 30 days. We Fools may not
all hold the same opinions, but we all believe that considering a
diverse range of insights makes us better investors. The Fool's
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