Market Watch: The Fall of Cash

Yuji Sakai

Yuji Sakai

It is a widely apparent social-economic phenomenon that electronic payment is replacing paper money as our primary transaction method. Consumers in the US have been using debit/credit cards to purchase large and expensive goods and services or to transfer large amounts of money. Recently, there has been a rising trend of smaller transactions, such as buying snacks in a local deli, converting to a digital format as well.

In a survey conducted by the Princeton Survey Research Associate International for CreditCard.com, the usage of credit cards on purchases under $5 is rising. The survey interviewed 1000 Americans adults by phone. As result, 616 out of the 1000 respondents said they have credit cards. When the interviewer asked the cardholders about paying methods when purchasing items under $5, more than half of the young, educated, affluent, or employed population admitted that they paid with their cards instead of cash. Even within the older, less affluent, or unemployed populations, there still exists a significant portion of consumers that paid with cards instead of cash. In fact, 2 out of 5 of Americans had purchased items with credit card on items that cost less than $5.

Who uses credit card and who uses cash for petty purchases

Who uses credit card and who uses cash for petty purchases

However, most Americans still prefer paying with cash over debit/credit card; there are more than 70% of the 50+ years old prefer to pay with cash rather than electronically. Perhaps it is not easy to change a habit that had been with them most of their lives. At the same time, within the older population, the trend of using debit card over cash has been increasing over recent years. For the younger generation, more than half population that’s between 18-49 years old prefer to pay electronically instead of cash. This trend is even more obvious among the younger millennials. In addition, some millennials may simply remain acquainted to the new payment method as soon as they reached adulthood.

“Debit cards can be obtained at a very young age,” explained Stephen Lesavich, lawyer and author of “The Plastic Effect: How Urban Legends Influence the Use and Misuse of Credit Cards.” “For example, my 17-year-old son has a parent-supervised, high-school checking account at my bank and a debit card was issued for this high-school checking account, which he tied to a mobile pay system on his mobile phone.”

Payment method shift in recent years by age groups

Payment method shift in recent years by age groups

There are many benefits in using credit cards instead of cash. Besides saving time on large purchases and counting changes at the counter table, many banks now offer cash back reward programs to motivate consumers to pay with credit cards. Consumers can receive a small percentage of cash (usually around 1%) rewarded back from their purchases. At the same time, banks like Chase feature auto billing paying services with users’ bank accounts. Users don’t need to worry about paying late fees anymore due to a forgotten deadline. Meanwhile, consumers who continually purchase with credit cards and are able to pay their credit card bill can easily amass high credit scores. It will be easier for them to receive better loan/mortgage offers than those with low credit scores. Nevertheless, consumers can track all of their purchases with credit cards, regardless of amount. Even if the card is lost or stolen, it is possible to report the loss to the bank and freeze all money within the card. This contributes in making credit card usage safer than cash usage. With all of these benefits, there is no doubt that credit cards are gaining popularity among consumers, as it saves both precious time and money.

However, it will still take some time for electronic payments to completely replace paper money. In the US, not all small brick and mortar business owners in the US accept credit/debit cards. In some neighborhoods, it is common to see signs like “Sorry we don’t accept debit/credit cards,” “cash only,” or “credit card only allowed for $10+ purchases.” All debit/credit card transactions require a small 2-3% processing fee and the credit card machine could be costly for some small businesses too. Lastly, not every customer pays their credit card bill at the end of every month. If the customer doesn’t pay their bill, then it serves as a loss for the business as well. In other words, receiving credit card payment can be more costly and more risky for certain small business with smaller profit margins.

Cash only sign outside of a small, local store

Cash only sign outside of a small, local store

Meanwhile, alternate payments other than debit/credit card or cash are on the rise too. It is possible to pay by smart phone applications too. Users are able to input their bank account and personal information into their smart phone apps like Google Wallet, PayPal, or Apple Pay. With the collected information, these applications allow consumers to transfer money easily. Although it has occasionally raised the privacy and security concern about what type of information the merchants or the developers are able to access and share with, it can’t be denied that this method is faster and more convenient than cash and cheaper than credit cards, as there’s no processing fee. Since everyone essentially has a smart phone today, it will be easy for this paying method to gain popularity. At the moment, many large companies are accepting Apple Pay.

In China, alternate payment method through mobile apps is very popular. WeChat, a multifunctional app, released a function that allow users to transfer money through “WeChat Pay.” Users may set up their bank account information with their phone and pay for anything as long as the merchant accepts WeChat payments. At the same time, WeChat is a widely used application among the Chinese population due to its large variety of functions, such as instant messaging, taxi hailing, and blogging. Even small business owners are using it as one of their methods to receive payment. Perhaps one day, Google Wallet and Apple Pay may develop enough features to become the “WeChat” in the Western world - dominating the popular mobile payment methods and taking advantage of the already widely used smart phones.

A cashier scanning QR code during a WeChat Pay transaction

A cashier scanning QR code during a WeChat Pay transaction