Is Cash SmartMoney?

SmartMoney had an attention grabbing headline yesterday. Why Cash Is the  New Plastic exerted an irresistible gravitational pull on my mouse.New $100

Could it be that cash, that archaic and germ-spreading form of money whose demise I have both lamented and encouraged, was making a comeback after all?

The first paragraph of the article reads:

Consumers are spending again, but gone are the days of swiping and signing for everything from lattes to lawn furniture. Shoppers are reaching for paper money, and as they do, stores and even credit card issuers are increasingly ready to reward them – with more cash.

So I guess slips of paper and metal disks are making a goal-line defense. Just when you thought that they would go the way of fax machines, the old school pulls it out in the end. Suddenly, consumers are coming to realize that swiping and signing is just a little too easy.

Well, no.

I am certain that the story SmartMoney tells is untrue from data I got from a recent article at SmartMoney called Why Cash is the New Plastic. Its second paragraph tells me that consumer spending is up 2.2% “so far this year.” Paragraph number three says that credit card spending was “up just 1.9%” this year and that debit card transactions are up 15%.

If you believe the 15% growth number (you shouldn’t) and you remember that back in 2009 debit card transactions became more common than credit card ones, you can easily work out that the growth in all plastic spending must have been north of the 2.2% growth in consumer spending. Thus, the plastic share must be increasing, not decreasing, which strongly implies that cash is not making a comeback.

Isn’t math amazing stuff?

After only a few paragraphs SmartMoney forgets the anti-plastic lead-in and starts to conflate debit transactions with the use of cash. At a certain level, this is reasonable. Cash is a flexible term. When I tell the car salesman I will be paying cash he does not expect me to hand over a stack of Benjamins. (Note to self: must try this sometime.) Perhaps when SmartMoney said “reaching for paper money” they were being metaphorical.

But even their story on debit card use is wildly exaggerated. I am not going to accuse SmartMoney of just making the 15% growth number up, but it does not jive with other, more credible, sources. Bloomberg quotes industry newsletter The Nilson Report (which is also cited by SmartMoney) as stating that debit transactions as a percentage of all transactions grew to 65% in the first half of 2010, up from 62.3% a year before.

That is a growth in market share of about 4.3%. It is not clear from the Bloomberg text if they mean share of plastic transactions, which sounds right to me, or all transactions, which is what they say. Either way, going from 4.3% market share growth to 15% absolute growth would imply a 13% year over year overall growth in either plastic spending or all consumer spending, and I think we all would have noticed that.

Even SmartMoney’s fall-back theme, that cash, by which they mean both actual paper and metaphorical debit card paper, is squeezing out bad old credit cards, is weak. Yes, credit card spending is up less than overall spending is up, (1.9% vs. 2.2%) thus it is losing some ground. But not very much. And it is, I must point out, still growing. US consumers have spent more on their credit cards so far in 2010 than they did a year before.

Furthermore, it is not hard to imagine why this slight loss in overall spending market share might be due to temporary Great Recession factors, rather than being a harbinger of some long-term trend.

The increase in debit card use is, in contrast, a bona fide long-term trend observable over many years and not obviously associated with the Great Recession. But the big picture view is not that debit cards are pushing out credit cards. Debit cards are gobbling up market share from cash.

(And checks. Remember them? You young folks may not believe this, but in the old days, when you opened a checking account at a bank they would automatically send you a box of checks without you having to ask.)

As I have said a few times in the past, I think the ubiquitous use of debit cards is bonkers. For almost everybody almost all the time, credit cards are a better deal. I am willing to make allowances for a few people with psychological issues, but that should account for something like 10% of transactions, not 65% of them.

SmartMoney makes the argument that the non-trend they didn’t spot of debit gaining at the expense of credit will continue because soon merchants will be allowed to give discounts for users of cash and debit cards. I suppose anything is possible. And the economic logic does appeal to me. Debit really is, in the abstract, a more efficient system that ought to be cheaper.

But I am pretty sure it will not happen. The discounts, on the order of 1%, would just be too small to make it worth the bother. And if it made sense for merchants, why do they not do it now? Yes, it is currently against Visa and MasterCard rules, but so is asking to see ID, and even big chain stores like Walmart and Home Depot routinely flout that rule without apology or repercussion.

I am hoping, but not expecting, that the trend in favor of debit will recede as consumers come to their senses and use credit. But I hold out very little hope for actual cash. It is now a thoroughly obsolete money technology.

I will miss using paper and metal as money in my daily life, but I think it will never quite disappear. My theory is that it will join the list of romantically old fashioned things we trot out for special occasions. In the future, when you really want to impress your date you will take her for a horse drawn carriage ride in the park, followed by a candlelit dinner. When the bill comes you will pay with folding paper money certificates.

It could happen.

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