The way we pay for things has changed immensely over the past
century. From the proliferation of checking accounts to the rise
of the credit card and later the debit card, we now have far more
options in making payments than humans have had throughout the
bulk of history. And as Internet-based transactions have become
much more commonplace, the electronic payment systems that have
accompanied online retail have blossomed into a
potentially game-changing driver of
innovation
.
But if you think that electronic payments are going to
replace
all those other forms of payment,
think again
. People have strong attachments to the way they pay, and it's
going to take a lot more than a smoother customer experience to
get most people to change.
Cash is dead? Long live cash
Fortune
's July 2012 issue will have a cover story called "The Death of
Cash" that details the rise of smartphone-based payment systems.
The author argues that the
rise of the company Square
, which allows small merchants to accept credit cards using iPads
or other mobile devices as cash registers, will revolutionize the
way people pay for things. With just some initial setup,
customers can pay for things using their smartphones -- without
ever even taking their smartphones out of their pockets or
purses.
As the article points out, though, one problem is just how
many different companies are tripping over themselves to try to
offer mobile payments. Clearly,
Visa
(
V
) and
MasterCard
(
MA
) have to
defend their credit card turf
by making sure that any mobile payments don't bypass their
networks. Similarly, banks don't want their card businesses to
suffer, even as
eBay
's(Nasdaq: EBAY) PayPal would ideally cut cards out of the
picture entirely in order to save on the merchant transaction
fees that PayPal has to pay on card transactions. And when you
bring smartphones into the picture, you introduce the opportunity
for mobile carriers to fight for their share, with
AT&T
(
T
) , T-Mobile, and
Verizon
all working in a joint venture to stake their claim to become the
payment method of choice among savvy consumers, while
Sprint
(
S
) has worked separately to build partnerships for mobile
payments.
Incentives don't work
But all of this focuses on the business end of the equation. The
real reason that cash isn't in any danger of dying is simple:
Consumers won't let it. An admittedly out-of-date 2002 GAO report
showed a roughly equal split between using cash, checks, and
plastic on grocery-store transactions. More recently, a Federal
Reserve report using 2009 data focusing on non-cash transactions
showed that people wrote $31.6 trillion in checks annually,
compared to $37.2 trillion in electronic ACH transactions and
just $3.5 trillion for credit, debit, and prepaid cards
combined.
Arguably, if consumers wanted to get the best deals, they
would always use credit cards. That's because credit cards offer
the best rewards to smart shoppers, allowing you to get free
float on paying until the end of the monthly credit card cycle as
well as cash back, airline miles, or other perks for spending.
That's free money that's available to anyone who's responsible
enough to pay off their bills at the end of each month rather
than paying ridiculously high interest rates to carry a
balance.
But the evidence shows that credit cards
aren't
the winners of the changing payment industry. Checks still play
an important role, and perhaps because debit cards are the
electronic equivalent of checks, debit-card popularity has
outpaced credit cards.
The real payoff
In the end, cash's biggest benefit is that no one's skimming
anything off the top in a cash transaction. There's no bank to
charge checking account fees or credit card interest, no
mobile-payment processor taking a commission on each payment.
Cash is the most efficient way to transfer value from one person
to another, and until that changes -- and there's no reason to
think it
ever
will -- cash will live long and prosper.
Mobile payments are just one part of the huge changes taking
place in technology. But the biggest player in the smartphone
revolution may have nothing to do with payments. Check it out in
the Fool's special report on The Next Trillion-Dollar Revolution
and learn more about this game-changing stock. The report is
free, so why wait? Do it today.
Fool contributor Dan Caplinger is confident cash will never
disappear. He doesn't own shares of the companies mentioned in
this article. You can follow him on Twitter @DanCaplinger. The
Motley Fool owns shares of MasterCard. Motley Fool newsletter
services have recommended buying shares of eBay and Visa. Try any
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not all hold the same opinions, but we all believe that
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