The Less-Cash Society

Talk about the death of cash goes back thousands of years. Of course, to many Gen Yers, the world began in 1978, so what ever happened before that is irrelevant.

Recently, talk of a cashless society has grown louder with the growing popularity of debit cards, prepaid cards, and digital wallets. A Barron’s article titled The End of Cash? said: 

“This year, greenbacks will account for an estimated 29% of U.S. retail payments, according to McKinsey & Co., down from 36% a decade ago. Among the wealthy and the upper-middle class, cash is almost extinct in the U.S., having given way to credit and debit cards. McKinsey says that cash comprises just 2% of point-of-sale payments for households earning more than $60,000 a year. Cash’s disappearance has been slow but inexorable.”

My take: We are nowhere — NOWHERE — near a cashless society. 

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First off, if the percentage of retail payments made in cash dropped from 36% to 29% over the course of a decade, that’s not even a single percentage point per year!

Really? You telling me that with the popularity of debit cards, prepaid cards, credit cards, online payments, alternative payments (e.g., Paypal), etc. , these alternatives to cash have only put a 7 percentage point dent in cash-based retail spending? 

I mean, c’mon, now. We know that the use of checks has declined significantly over the past 10 years. But with all these card-based payment mechanisms, the drop in cash has averaged 0.7% per year. Ha!

—————

The McKinsey numbers also hint at another factor that will keep cash from dying off. 

IF cash will account for 29% of retail spending this year, AND cash comprises just 2% of point-of-sale payments for households earning more than $60,000 a year, THEN cash-based spending among people earning less than $60k must be incredibly high (unless, of course, they don’t spend any money, which doesn’t seem likely). 

—————

But there’s another big reason why cash is far from dead.

In the US, retail sales (B2C) is about $4.3 trillion, monthly bill pay is about $4.7 trillion, and I have no idea how big the underground economy is. If you want to assert that cash disappears from these categories, fine.

Nearly every article and analysis about the end of cash ignores P2P (person-to-person) spending, however. (That’s because, as far as I know, Aite Group — more specifically, yours truly — is the only company to actually estimate the size of P2P spending in the US, UK, and Australia).

When we did the analysis in 2010, the P2P economy was about $865 billion, 53% of which was in cash. Looking at it from a different angle, cash-based P2P spending accounts for about 40% of the total use of cash among US consumers.

If you think that that $460 billion or so in cash-based P2P transactions has gone electronic or mobile in the past two years, then don’t bogart that joint, my friend, and pass it over to me.

Actually, I’ve sized online and mobile P2P in the US for 2012, and although the growth rate since 2010 is respectable, it’s nowhere near what it could be if financial institutions did a better job of marketing their electronic P2P capabilities.

—————

When it surveyed consumers in 14 countries last year, ACI Worldwide found that the percentage of consumers who prefer cash for P2P transactions — while declining since 2009 — is still quite high in some countries.

In the US, for example, the percentage of consumers who prefer cash for P2P transactions fell just one percentage point between 2009 and 2012, from 51% to 50%.

       % of consumers that prefer to use
           cash for P2P transactions
             2012   2009   Chg
Italy         62%    74%   -12%
Brazil        57%    58%   -1%
Australia     51%    62%   -11%
US            50%    51%   -1%
UK            45%    54%   -9%
UAE           44%    48%   -4%
China         42%    67%   -25%
Canada        41%    46%   -5%
Germany       39%    52%   -12%
Sweden        34%    52%   -18%
India         31%    42%   -11%
Singapore     22%    40%   -19%
South Africa  20%    43%   -22%
France        12%    14%   -2%

Source: ACI Worldwide survey of 4,200 consumers, Q1 2012

—————

In addition, ACI found that in 2012, 44% of US consumers said they used less cash in than they did in 2009. But nearly one in four said they used more. What might surprise you is that about one in five Gen Yers, Gen Xers, and Boomers all used more cash.

————–

Bottom line: As we enter the year 35 AM (Anno Millenial), it makes for great headlines to pronounce the death of cash. But in the US, at least, it’s simply not true. Until we crack the P2P nut, cash isn’t going away. 

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32 thoughts on “The Less-Cash Society

  1. Another factor, albeit minor in the overall scope of things is that every pin reader, transaction device and every phone runs on electricity that has become more and more unstable with the massive storms on our planet. Just ask those in NJ, NY, New Orleans, and anywhere in Florida how important cash is when everything goes dark and you can’t charge your phone. People will want the security of cash until another payments option becomes as strong of a standby at least.

  2. Well put Ron! Let’s not forget we live in a country that can’t mount a resonable effort to end the use of the penny, for fear we would upset the homeless population and cause a sticker shock epidemic due to the rounding up of goods and services.

    Cash is going nowhere, especially when it’s $0.10 cheaper for me to buy gas with it. And it’s hard for me to buy anything on the black market without it..haha.

    What would movies be if every shady transaction required the swipe of plastic (or a hilarious NFC Wallet attempt) instead of a suitcase full of cash.

    • Jayson: I’m willing to assume that one day the price differential for cash vs. other payment methods could go away. And the underground economy (w/ its suitcases full of cash) may not be a great argument for sustaining cash.

      But you’re onto something here: Product placement in movies. It can’t be long, now, before we see a movie where the drug dealer swipes a card w/ a Square reader. C’mon, Dorsey, get on it!

  3. Snarketing New Year Ron!

    I spent my holidays with family in the north of England (ex-industrial town) and the Isle of Man (banking tax haven that was digitally connected many years ago). I wasn’t surprised by the number of businesses that didn’t accept cards and cash was the only option. Speaking to family and friends, they were all of the mindset that cash = control and that the UK economic recession supports their approach. People use smartphones to make telephone voice calls in these places!

    Outside of major cities and marketing bubbles, people live in a steady state real world and change isn’t readily embraced. Banks, telcos, global digital brands and start-ups are not trusted and therefore new payment methods will be slow to penetrate the masses. Not an issue for many, but dealing with diverse marketing realities should now be the norm.

    • “they were all of the mindset that cash = control ”

      That is indeed the mindset. But that does not mean it is correct. In fact, I would go so far as to say it is entirely wrong.

      I think if you compare the figures for retail spending, share of retail spending in non-cash instruments and growth in notes and coins in circulation it is pretty clear that cash is being used for tax evasion, crime, benefit fraud, corruption and a variety of other welfare-reducing activities. It should be government policy to reduce it year-on-year.

      Also, remember that the US is a special case, because so much of the cash “in circulation” is actually under mattresses outside the US, and therefore an interest-free loan from the rest of the world to Uncle Sam.

      • Thanks for the comment Dave and your interesting perspective on people’s mindsets and Govt. policy. Whilst I am all for wiping out criminal activity, I don’t see a Govt. role in defining whether people can use cash. If people are comfortable with it, then so be it. I can guarantee that none of my friends and family are committing any crimes whatsoever and they choose cash for sensible control reasons.
        - Darren Oddie -

  4. The predictions of a cashless society are usually made by folks selling mobile payments solutions and are based on wishful thinking rather than fact. The surveys say that consumers think mobile may EVENTUALLY displace SOME cash and card transactions. They do NOT says mobile will replace ALL cash & card transactions. In the industrialized world, mobile payment is a solution looking for a non-existent problem. Except for the novelty factor, mobile payments aren’t much easier than fetching a card out of a wallet or cash out of a pocket. Besides, mobile payment terminals are nowhere near as ubiquitous as card terminals. The final question on consumer surveys should ask consumers which payment vehicle they’d prefer to rely on after dropping their analogue wallet and their mobile phone from shoulder height onto a sidewalk.

    • “The predictions of a cashless society are usually made by folks selling mobile payments ”

      Actually, as I think Bernado Batiz-Lazo’s presentation on the paleo-future of cashlessness at this year’s Consult Hyperion Forum will say, the predictions of a cashless society have historically been associated with utopianism and have been more closely associated with a desire for the elimination of money than reflection on particular technologies :)

          • Using utopian ideals as the basis for an argument for mobile payments takes any discussion way beyond sound business concerns. Mobile financial services have the potential to play an important role in the global financial system, but as an incremental form of exchange, NOT a cash replacement.

          • I think you have misread my post. You said that “predictions of cashless society are usually made by folks selling mobile payments”. I was merely pointing out that this is not true. Predictions of a cashless society are _usually_ made by people promoting utopian ideals and are _closely_ associated with a desire for the elimination of money.

            I wasn’t arguing about mobile payments (although I’m happy to) I was arguing about predications of a cashless society. Both of these are interesting topics — I wouldn’t say either is “mindless” — but you are, of course, entitled to your opinion.

            By the way, I think that mobile financial services are a different topic to mobile payments, but I wouldn’t want to be accused of mindlessness with regards to those either, so perhaps we’ll save that discussion for another day.

  5. Legalize drugs, gambling and prostitution (as Libertarians advocate) and you could probably chop the amount of cash Americans need/use in half.

    Also, as the first sentence of this post sort of suggests, a “cashless society” wouldn’t be a first for humanity. In our history as a species, we’ve survived longer without cash than with it. Physical currency has only been around for a couple thousand years. We would, in effect, be returning to a cashless society.

    • Just for the sake of argument, say that the nitwits predicting a “cashless society” had prevailed. That would mean that nothing could be purchased for the foreseeable future by tourists in Vatican City, as the Central Bank of Italy has shut down all electronic payments due to money laundering concerns. Cash is the only accepted means of exchange in one of the world’s leading tourist destinations. Similarly, cash would be the likely default payment mechanism in any retail location experiencing a loss of power and communications anywhere in the world.

  6. It is fair to say that Cash is unlikely to disappear any time soon but its use has declined significantly. Remember that although the use of cash has declined by just 0.8% annually in the past 10 years, the use of cash per person is much lower given that US population has increased by 15% or ~ 35 million.

    Given the certainty of transition from cash to digital money (credit cards, debit cards, prepaid, p2p transfers, etc.), the central issue facing Financial Institutions – Banks and Credit Unions included – is determining the impact of reduced need and use of Cash by Consumers and Businesses on their operating models, scope of services, and revenue / costs.

    We have already seen digitization driving traffic away from branches so much so that most are now (very expensive) ghost towns. As cash becomes less important / frequent payment method, what are the implications to Bank / Credit Union infrastructure such as branches, ATMs, back office equipment, back office staff? How will Banks and Credit Unions respond when the biggest traffic driver of traffic (ie. need to cash through the branch and/or ATMs) disappear? Think about what happened to Blockbuster when it was no longer necessary to rent a physical CD to watch a movie? What happened to Borders and countless other bookstores now that it is not necessary to purchase a physical artifact to read a book?

  7. When I moved from a state without an income tax (Texas) to one that did (New York), and bought a house, I quickly became aware of the number of otherwise reputable contractors who offered substantial discounts for cash payments. Whether this is P2P or Underground is a matter of semantics, but I don’t see these folks as interested in accepting a payment from my smartphone. These legitimate businesses and Jayson’s gas stations (as well as the little independent one around the corner from me that offers full serve for self-serve cash prices) will maintain a grass-roots business case for cash for the foreseeable future.

  8. % of retail spend in cash in 2001: 36%; in 2011 (decade later): 29%. Assuming that the rate of fall of cash usage continues at the same rate (~20% per decade), a quick calculation would show that use of cash would stop altogether by around 2211 i.e. 198 years from now (for those interested, I can make available my Excel calculator). However, the fall in the use of cash is not a one-way street. Increasing security concerns around online payments are leading to regulators enforcing greater security measures, which in turn are adding to the friction in making online payments. As a result, people who have previously been using online payments could turn to cash going forward. This was recently vindicated by the recent announcement of cash-on-delivery as an additional method of payment by a leading airline in India, which has outsourced the (offline) cash collection process to a new startup. The airline hopes to persuade a new segment of card-wary consumers to book tickets online with this new MOP. But, even if the new MOP cannibalizes consumers now booking and paying online, the airline is still happy since the cost of the cash collection service is actually lower than the average Merchant Discount Fee currently incurred by the airline for accepting card payments.

    • “the cost of the cash collection service is actually lower than the average Merchant Discount Fee currently incurred by the airline for accepting card payments”

      This sounds great. Can you send me a link, as there may be other merchants out there who want to hire them too. These guys will be billionaires because surely all online merchants will use them instead of cards.

      • The outsourced provider of cash collection service is called GharPay (www.gharpay.in), which is a pun in Hindi+English (“Hinglish”) for “at home” and “pay at home” . Given that the leading Silicon Valley VC firm Sequoia has invested in this startup, you’ve company in thinking that these guys will be billionaires.

        • Their web site says 40 rupees plus 2% which seems to me to be roughly same as the merchant service charge for cards. I think their proposition is more about reaching customers without payment cards than undercutting the cost of payment cards, isn’t it?

          • (1) V/MC is highly unlikely to reduce its standard MDF / MSC rates (2-2.5%) for the airline in question, which, however, would’ve successfully negotiated lower cash collection fees than the rack rates posted on GharPay’s website – B2B transactions are highly negotiable in India (if not elsewhere), especially assymetric ones like these that involve a large corporate on one side and a startup on the other (2) Plane ticket booking by people not having payment cards? Highly unlikely in India (if not globally) where air travel is still a luxury that can be afforded only by the affluent set who certainly have one or more bank accounts and debit cards if not credit cards in addition. (3) While I can’t talk for GharPay, the airline in question has reportedly introduced this new MOP primarily to backstop customers currently booking and paying online from ditching the channel due to fears of online payments getting lost somewhere in the cyberspace during the multistep process mandated by regulators, and secondarily to expand the online channel to new customers who have payment cards but won’t use them to make online payments owing to security concerns.

  9. Good point from the Financial Brand, we would be returning to a cashless society :)

    Of course a cashless future isn’t going to show up tomorrow. It probably won’t show up in Gen Y’s lifetime. But the numbers and the trends to make it conceivable– if cash in retail payments follows McKinsey’s percentage drop for another 50 years, it’ll be gone.

    Good points about cash in low income household spending and P2P payments– that’s increasing adoption of smartphones is so interesting. Of course low income adoption trails high income adoption, but at distances that decrease with age and that across the board indicate that smartphones are NOT a luxury good. (see the chart in this article: http://www.businessinsider.com/us-smartphone-market-2012-9). There are already many apps, financial institution specific and not, that make P2P payments easy from smartphones. I think that decrease in cash will ramp up with smartphone adoption, and then have a long tail as people like those on the Isle of Man stick with hard currency.

    As for Jim’s point, nearly everything relies on electricity now, so a current-dependent currency would only exacerbate, not fundamentally change, our helplessness in face of Sandy.. and people would do what they do today, write down names and charge when the power’s back up!

    • @MelanieF: When you say cash will be gone in 50 years, you’ve probably used the percentage drop on a non-compounded basis since, after using the same figures on a CAGR basis in this Excel model (http://www.sketharaman.com/Research_&_Intellectual_Property.htm#raip20), I reach the Zero-Cash-Day 190 years away. Anyway, simple or compound really doesn’t matter since, as I’ve argued in this blog post (http://www.finextra.com/community/fullblog.aspx?blogid=7254), the movement between cash and noncash modes of payment is not necessarily unidirectional, we’re likely to use cash even after two more centuries.

      • Ketharaman: When I published Aite Group’s report forecasting the use of cash in 2010, I also computed that — at the rate at which we forecasting the decline in the use of cash — it would take ~200 years for cash to go away. But I think the reality of it is that there will be external shocks — like regulatory action — that, at some point, will hasten the decline in the use of cash.

        • Ah, great men think alike and all that :) It’s interesting that you predict regulatory action to make cash go away whereas, as I’ve argued in my Finextra post, I’m seeing cash making a comeback precisely because of regulatory action! I guess the former is the intended result of regulatory action whereas the latter is the unintended consequence of it.

        • Ketharaman: Yes the 50 year prediction is a straight percentage drop– of course it’s very hard if not impossible to make an accurate prediction of the rate of decline, too many variables of uncertainty. Like I mentioned I have a hunch that the rate will continue to drop quickly, at 7% a decade or a bit less, for the next 20-30 years as smartphones enter the market and the payments revolution matures, but that it will have a long tail– maybe stretching out to 200 years– as people cling to cash for niche purposes (like illegal activities, although now we have bitcoins for that) and uncertainty.

          Ketharaman & Shevlin: I’m not sure if regulatory action will be decisive one way or the other– Durbin has probably hastened the end of cash by making it cheaper for merchants to swipe, but I could see other anti-identity theft or fraud measures making online and mobile payments more of a pain.

          • Melanie: Just to clarify, when I opened the door to regulatory action, I wasn’t thinking short-term. I highly doubt that there would be any regulatory mandate coming down within the next 10-20 years. But beyond, that, who knows.

            Also: When I forecasted the use of cash in the US in 2010, I projected the rate of decline at about 2% PER YEAR for the next few years. So I’m bit surprised to see you say you that the rates “will continue to drop quickly at 7% PER DECADE.” On what basis are you making that projection?

  10. 7% was just the McKinsey number (36-29), it seemed reasonable to me when I first read the article. I certainly haven’t thought as much about the factors that would contribute to a projection as you have; my general feeling (“hunch”) is that the use of cash will continue to decline at the current rate — possibly a little faster, possibly a little slower, for another 20 or 30 years, and then have a long tail. In essence I agree with you, cash will be around for a while more (40 50 years) at least, P2P is a major obstacle, it’s very hard to predict how technology, regulation, and consumer preference will shape the rate of the trend more than a few years down the road. Is your 2010 forecast available somewhere? I would love to look at your assumptions / the factors you thought were important. I think this is a very interesting question :)

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