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The Death of Cash Has Been Greatly Exaggerated

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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 (NYSE: V  ) and MasterCard (NYSE: 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 (NYSE: 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 (NYSE: 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 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 never exaggerates.


Read/Post Comments (4) | Recommend This Article (3)

Comments from our Foolish Readers

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 10, 2012, at 12:52 PM, PEStudent wrote:

    When used to pay cash for as much as possible, because of the braking effect on spending when pulling cash from your wallet. But, since I don't carry a credit card balance, I was cheating myself of the average 2% discount I'm now getting from Credit Cards (I'll be getting 5% cash back from Discover on gasoline July-Sept).

    So now I've gone as cashless as possible and I check my balance every few days to make sure I lose track of spending and spend too much.

  • Report this Comment On July 10, 2012, at 1:09 PM, mdk0611 wrote:

    As long as paying cash saves me 5-8 cents per gallon of gas (year around) it will never die.

  • Report this Comment On July 10, 2012, at 2:53 PM, CluckChicken wrote:

    Until the phones become far more secure there is no way I would set my phone to pay for anything. Can easily see the news report now of people just hanging out on busy corners or riding buses and trains stealing money just pay walking by people.

    Until they find a way to do away with risky credit cash will still be around.

  • Report this Comment On July 18, 2012, at 1:23 PM, leobluk3 wrote:

    significative \ no comment...leok

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Dan Caplinger
TMFGalagan

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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