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3 Ways to Profit From the Cashless Society

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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 (NYSE: V  ) , MasterCard (NYSE: 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 (NYSE: BAC  ) and Citigroup (NYSE: 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 disclosure policy is the king of disclosure policies.


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Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On July 11, 2012, at 1:39 AM, Rowants wrote:

    Ebay forgot who got them where they are today. They treat their sellers like crap. Most of the little ones that were there in the beginning are gone, and the bulk of the professional sellers now would probably be better off on Amazon. Paypal sticks it to sellers also. I'm sure most buyers have no idea how big a cut paypal takes. I used to sell quite a bit on Ebay, but due to the ever increasing fees, and the outright combativness they have against sellers, I don't list hardly anything anymore. And as a buyer, the type of items I used to buy don't get listed much anymore either.

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Dan Caplinger
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Dan Caplinger has been a contract writer for the Motley Fool since 2006. As the Fool's Director of Investment Planning, Dan oversees much of the personal-finance and investment-planning content published daily on Fool.com. With a background as an estate-planning attorney and independent financial consultant, Dan's articles are based on more than 20 years of experience from all angles of the financial world.

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