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An Expensive Return To Old-Fashioned Cash

20 dollar bills, detail
photo by Nic McPhee

“Old-fashioned” can be a compliment or an insult, depending on the context.

Something old-fashioned may convey a sense of nostalgia, higher quality or simplicity. On the other hand, sometimes something old-fashioned is simply obsolete. Some music lovers still seek out and enjoy vinyl records, but nobody is pining for the return of 8-tracks.

So when it comes to shopping, is paying with cash a mark of honesty and simplicity, or is it simply an antiquated system that we are quickly outgrowing and leaving behind?

According to recent news reports, cash is making a comeback. After the recent security debacle at Target, a sizeable minority of Americans say they have made an effort to use more cash, The New York Times recently reported. Local news outlets from North Carolina to Oregon are reporting similar trends.

The news stories are largely based on polls or anecdotal accounts of consumer behavior, and the lack of hard data is because credit card companies do not want to share their numbers. Visa and MasterCard both declined to respond to the Times’ queries about recent trends in card use, while a spokeswoman from American Express said that seasonal use was in line with prior years. Nor would Target confirm whether it has seen a shift in payment type nationally after news broke about its security breach.

I am not surprised that retailers and card networks are being coy about providing statistics. To my mind, this confirms that they are seeing at least a short-term shift away from plastic, which is bad news both for card companies and for retailers. Companies do not tend to be so reticent about sharing good news.

The hesitance of consumers, especially those who have been victimized by fraudulent charges, to continue using credit and debit cards for most purchases is understandable. It may even be constructive. It just isn’t terribly logical, even from their point of view. And if it is more than a passing reaction, it is lasting bad news for retailers, card networks and the overall economy.

For most of us, cash is not cheap, not secure and not convenient. We get dinged most of the time when we go to the ATM. A $3 ATM charge (below today’s average for the charge when a customer uses a machine outside their bank’s proprietary network) is a 1 percent fee on a $300 withdrawal. It is a painful 3 percent fee on a $100 withdrawal. So either you have to take out larger sums, assuming you have the funds available, or you watch the banking system siphon off a significant share of your money every time you try to get some. Think of those ATM fees as a voluntary tax and ask yourself how much you are willing to pay.

If you do take those larger sums, you have to guard against loss, theft and simple misspending. We have a technical term for it in the financial planning field: “the evaporative effect of money.” Cash has a tendency to evaporate without a trace.

There is also the time element to consider. Tufts University conducted a study this year that found an average American spends 5.6 hours a year traveling to ATMs to withdraw cash. If you spend the time to look for a proprietary ATM to avoid charges, presumably that number will rise.

Cash also makes a target of those who carry it. Muggings, picked pockets and purse snatchings have always been with us, but there has been a general trend toward less street crime that has accompanied the reduced use of cash (though not necessarily as a result). If people start carrying more cash, those who want to relieve them of it will likely be spurred to greater efforts.

Beyond costs in time, fees and risk, it isn’t logical for consumers to abandon plastic for fear of fraud because, for the most part, consumers aren’t directly exposed to the costs of that fraud. Those costs are borne by the card-issuing banks, which are trying with varying success to share some of the expense with merchants. A consumer who promptly reports a fraudulent transaction is held harmless, and often can get a replacement card on the spot or within a day.

There are still a few cash-only establishments around, but the flip side of that coin is that shoppers can’t use cash to access the ever more important world of online retail.

The trick is to monitor what is happening in your accounts - a habit most of us don’t have. A long time ago, a woman I know once handed her fiance a year’s worth of unopened bank statements. Many people just check their bank balances by looking at their ATM, assuming that the bank is always correct and, often without realizing it, that every transaction handled by the bank is legitimate. These habits were always bad; now they downright foolhardy. You might as well leave your money sitting on your front steps. Any account connected to a debit or ATM card should be monitored online at least weekly, but daily would be even better. It takes very little time. The sooner you spot a problem, the sooner it can get fixed.

For all the drawbacks, shifting to cash for routine purchases does help consumers in one respect: They tend to spend more when they spend on plastic. In many lines of business, substantially more. Card companies promote this fact endlessly as they try to persuade merchants that the exorbitant “interchange” fees charged for accepting cards are offset by higher consumer spending. The argument goes something like, “We’re going to rob you, but you’ll make it up on volume.” For consumers who use cash specifically to keep their spending down, the switch might be worth the cost and inconvenience, but they should make this choice purposely after weighing the benefits and drawbacks.

Old-fashioned advice on credit cards still holds. Pay off your credit cards every month; don’t incur those awful finance charges. Treat spending on your debit card as though you were spending cash. Don’t allow your bank to provide overdraft coverage on your debit card, which will save you overdraft fees as well as keep you from getting into a financial hole. Deposit a steady fraction of your pay into a savings account as soon as you get it to make sure you always have something in a rainy-day fund.

In the end, I expect a combination of logic, technology and the facts of modern life to win out. Our payment technologies will move forward, but they won’t ultimately move back to old-fashioned cash and paper checks. Not in a lasting way, at least. To the extent cash sticks around, it will be a supplement, invoked mainly for very small transactions or for privacy; it will no longer be the main player for people making daily purchases.

Don’t be afraid to take advantage of the safety and convenience that modern payment systems offer. You pay for that convenience anyway, since the cost of card acceptance is built into the prices merchants charge, while the cost of absorbing fraud is built into the costs that the banks charge the merchants. You might as well get the benefits you pay for.

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