Recently, the Financial Times ran an article predicting the “end of cash” and the rise of mobile payments with smartphones. Certainly as the article makes clear, this will benefit the poor in the Third World, as they now get access to banks and credit and more security, than they would before. They can even bank in alternative currencies, perhaps Google or Facebook or some other company will offer “credits’ that are easily convertible to major “hard” currencies and have more luster, not being subject to most of the major players habit of fiat creation of far more money than they should (China, the US, the UK, Japan, and Europe all are guilty there).
But cash is not going away. Indeed, as it might fade away in places like Mali, or South Sudan, or Malawi (would you hold their currencies if you could avoid it?), cash is poised for a comeback in the US and First World.
As much as governments like non-cash transactions (the better to track and TAX you my dears) ordinary people LOVE cash. Cash allows the Craigslist economy to flourish. You can hire a plumber, or electrician, or carpenter, or IT guy off the books. For a modest amount, paid in cash, they can do things for a LOT less (often a third or a quarter of the official quoted amount). You’d be surprised how much that happens in suburbia. When budgets are tight. You would not remodel your house that way. You might get a plumber to unclog a drain that way, though. Cash, simply held in a sock drawer, and used to make grocery payments, or whatever, is untaxable. Since it never officially exists. People who don’t like or trust their governments (most of the Western World these days) love cash for that reason.
Cash is also cheaper for merchants. The reliance upon electronic payment by gas stations is hurting gas stations. Most are small businesses, owned by private individuals (the oil companies sold out in the late 1980′s) and operate on thin margins. Money is made by cash purchases of gas, or impulse buys at the counter of snacks, and such.
Because consumers these days use plastic even for spontaneous small purchases such as gas, snacks and smokes, the station owners say their margins are eroding. Card-processing fees are typically a percentage of sales—ranging on average from 1% to 3% depending on the card—plus a flat fee of about 10 cents per transaction.
Whenever the price of gas rises, as it recently has to about $4 a gallon, an owner’s profit margins become slimmer. If the bill for a tank of gas comes to $50 and the fee is 1% of the sale price plus 10 cents per transaction, an owner pays about 60 cents to the card processor. But if the price of gas goes up, and you have to charge your customer $60 for the same amount of gas, the fee is now 70 cents.
Frank Reluzco, owner of an Exxon station, auto-repair business and convenience store in Frederick, Md., said that roughly 90% of his sales are paid by credit card today, compared with about 75% five years ago. “It costs so much to fill a tank right now; no one’s going to carry around that much cash,” said Mr. Reluzco.
Then of course there are the scams. Global Payments is in the news recently for losing an astonishing amount of customer credit and debit card data (1.5 million) in recent weeks. Criminals unsurprisingly, if they are sophisticated, love crimes with high rewards and low risks. Targeting, increasingly third-party payment systems and small businesses makes that easier, as banks and major Credit Card payment systems have beefed up security spending. Many of these cyber criminals operate in places like China or Russia, beyond any extradition or even pressure.
Then of course there is the old reliable, the card reader scammers who steal your card info and pin numbers by tiny, blue-tooth enabled readers glued inside card readers on pumps. Similar incidents involving ATMs, card readers at a Southern California art mart chain, and other places come to mind.
In short, the cost of plastic is going up. The short lived attempt by Bank of America to charge customers for each transaction involving debit cards is sure to return, as banks look to gouge depositors any way they can to pump up their balance sheets and pay off investors and make bonuses to bankers. That’s why they are bankers!
Customers will pay more, to cover costs of increasing fraud and stolen card data. So too will merchants. The payments system is a high-barrier to entry, Google and Facebook don’t have the cash or expertise or certification to install mobile payment terminals, make deals with banks, and merchants. That is why they are pushing smartphone payments. But those, “near field” payment systems, and phone-based payment systems, only make the field riper for thieves and scammers. Who in turn love low risk and high reward scams and rip-offs.
Cash, is harder to duplicate. Eventually, the US will have to like most Western nations combat rampant tech-thievery by using cash. Yes the dollar is easily counterfeited, but the move to replace the paper dollar with a coin version is a step in the right direction. The Susan B. Anthony, Sacagawea, and Past Presidents coins are a flop, of course. The trick is to make the coin beautiful and representative of value.
At some point, the US dollar like every major currency is facing collapse. Fiat creation of more and more currency eventually reaches a discontinuous point, and the acceptance of the currency collapses like Weimar. This is likely to happen very suddenly. Gold is not the answer, because no one has enough of it, not even Fort Knox. But silver is. Being mildly inflationary (recall that William Jennings Bryan speech about a “Cross of Gold”?) they serve a purpose of an expanding economy while still preserving purchasing power for consumers and savers. Silver has real value, unlike fiat currency, and coins with the traditional (but not late Roman denarius based) seignorage provides an emotional floor to a currency, useful when transitioning from a failed one.
This is also much harder for criminals to duplicate. Coinage with silver requires industrial machinery, not a bank of computers connected to cyberspace in Russia or China. They also have to be distributed, and made far cheaper than what the materials and labor and distribution costs. Silver alloy coins, using the St. Gaudens or similar designs of various denominations: $1, $2, $5, $10, $25, and $50, would do a lot to help restore confidence. The designs are beautiful and timeless, deserve to be revived, and speak to an America filled with confidence. And again, Silver has value.
I don’t think credit and debit cards are going away, they in some form are indispensible for e-commerce. But the costs of everyday transactions are likely to push people in the developed world (with more motivated, higher skilled criminals) back to some form of cash.