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
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 An admittedly out-of-date 2002 GAO report showed a roughly equal split between using cash, checks, and plastic on grocery-store transactions.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.
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