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 (NYS: V) and MasterCard (NYS: 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 (NAS: 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 (NYS: 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 (NYS: 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 An admittedly out-of-date 2002 GAO report showed a roughly equal split between using cash, checks, and plastic on grocery-store transactions.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.
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At the time this article was published 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.
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