The Future of Money: Are We Going Cashless?

(DeclanTM)

Most people have a love-hate relationship with the bills and coins in their wallets. On the one hand, paying with cash — once ubiquitous — can be cumbersome in today’s fast-paced environment. No wonder that it’s becoming less and less commonly used as plastic in the form of credit and debit cards takes its place. On the other, many still consider paying with cash the safest way to guard against sneaky bank fees and interest charges.

So how did plastic get around to winning over cash? According to the Federal Reserve, it all began in the 1990’s. Between 1995 and 2006, the number of non-cash transactions per person grew from 250 a year to over 300. Examining note destruction data in more detail, economists at Cleveland’s Federal Reserve Bank claim that cash usage peaked in the mid-1990’s (which is roughly the same time paper checks peaked.)

While it is difficult to track the exact number of cash transactions in a given timeframe, cash has clearly taken a backseat to other payment tools.

The Rise of Debit Cards

It’s no coincidence that cash usage peaked and began declining in the mid 1990’s. The culprit? Debit cards. As senior research analyst Red Gillen told the New York Times, “when debit cards were introduced in the early ’90s, that was the beginning of the slow and gradual decline of paper checks and cash.” The trend away from cash was further cemented in the early 2000’s. According to the Cleveland Fed, the following non-cash transactions grew between 2000-2003, with percentage growth shown in brackets:

* Credit card transactions (6.7%)

* Automated Clearing House transactions (13.4%)

* Electronic benefit transfers (15.4%)

* Debit card transactions (20%)

During the same period, the number of paper check transactions declined by 4.3%.

The debit card hasn’t lost an ounce of popularity during the late 2000’s. Just the opposite: in May 2010, ABC News reported that MasterCard debit customers spent as much on debit ($118 billion) during the first quarter of 2010 as they did on credit cards – the first time that this has ever occurred. Visa’s debit-card volume first exceeded its credit card volume for the first time even earlier, in December 2008.

The Fall of Cash

(JMRosenfeld)

It was largely the increased convenience and safety of debit that inspired people to gradually use less cash in their day-to-day spending. Twitter co-founder Jack Dorsey spoke for many consumers when he told the New York Times that “the problem with cash is that it is tangible, it’s inconvenient, you have to carry around a bunch of bills and you have to continually go to the A.T.M.”

U.S. coins (namely the penny and nickel) now cost more to produce than they are actually worth. And the United States is not the only country to be witnessing a decline in cash-based transactions. The UK’s Telegraph, citing a Payments Council report, predicted that cash will be used in fewer than half of all UK transactions by 2015. The trend is already underway: just 59% of 2009’s 37 billion transactions were cash-based, down from 73% only ten years ago.

Japan, meanwhile, has reportedly discussed a total abolishment of cash in order to fight deflation in that country. London’s Times Online found that while the idea might appear to have come from “the realms of economic science fiction,” the recommendation to do away with cash completely has been seriously discussed among Japan’s financial authorities since June 2009. In all, the Times Online reports that currency in circulation is about 16% of GDP in Japan (compared with 2%-3% in most other developed countries.)

A Cashless World

(Jorge Quinteros)

The realistic prospect of an entire country abandoning cash illustrates the direction in which world commerce is headed. A whole host of forces (from government policy to consumer trends) is conspiring to make cash less and less relevant to daily economic life.

In fact, new transaction methods are popping up every day. Cell phone-based payments, for instance, have become widespread overseas in recent years and are now a standard means of paying for just about anything in Japan. The Times Online notes that of Japan’s six competing cashless payment systems, “many” are built into wireless phones. In total, Japanese consumers are estimated to carry some 120 million cashless payment chips.

In the United States, companies like PayPal are making it easy to make purchases and swap money using only a mobile phone. Rather than trying to replace credit and debit cards, American companies like Square and GoPayment are equipping phones to work with them. As the New York Times explains, the credit and debit card issuers “stay in the middle, extracting a fee with each swipe or bump” of the mobile phone. It may take a while for consumers to abandon cash completely, but in many ways, even here in the U.S., we already are a cashless society.