Pocket MoneyMuch has been said about the rise of online and mobile banking, and while buying your morning coffee with your mobile phone or managing your bank account over the Internet may be more convenient than the old way of doing things, visions of a cashless society are probably missing the point.
Even if smartphone apps and chip-enabled credit cards seem like they can take care of anything we want to do with our money, there are plenty of reasons why people will always need cash – and it's not just to buy drugs.
MainStreet consulted Philip Graves, a consumer behavior expert and author of Consumerology: The Market Research Myth, the Truth About Consumers and the Psychology of Shopping for his thoughts on why in some cases, cash is still king. Here is what we found.
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When You Buy From the Smallest Businesses
Small businesses have always had to face a difficult reality when considering whether or not to accept credit cards, since every transaction is “taxed” by the bank that issued the card in the form of interchange fees that retailers must pay. And even new alternatives like the much-hyped Square charge fees, even if they do it differently from banks.
“I think for those small-scale merchants where the upfront costs of installing new technologies or the cost per transaction are daunting – street vendors, for example – some of them have not gone down the road of accepting credit card transactions,” Graves says. “They are most comfortable with cash.”
That means the smallest businesses with the thinnest margins will always find a benefit in using cash to avoid paying a small percent of every transaction back to the bank, though there is only one scenario that Graves sees that could trump this.
“Ultimately the process of transition depends on the bottom line,” he says. “Unless people put a cost on using cash it will probably never go away in its entirety.”
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When You Have a Tight Budget
Financial planners often give the advice of using cash as a means to manage debt and stick to a budget, and as long as people will struggle with the amount of disposable income at their disposal, cash will serve an important purpose.
“In areas like bars there is a comfort in knowing when you’ve gone out that you have a set amount to spend that night,” Graves says. “Studies show that when you spend based on your monthly salary versus what you have in your pocket, you spend more.”
Graves says many new innovations allow people to track their spending digitally, like with alerts sent to mobile phones, but that “there’s a control factor with cash that you will never have with other payments.”
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When Technology Fails
It seems like it’s counterintuitive, but advances in technology are by no means accompanied by advances in the reliability of technology. Think about it: Cellphones allow us to make calls anywhere, except around a bunch of tall buildings where you have no service. Laptops let us take thousands of hours of media and thousands of pages of documents everywhere we go, but if your battery runs out and you’re not near a plug it may as well be a giant rock in your backpack.
“You only have to experience putting your phone on a reader and have it say ‘no connection’ once to realize why there will still be a need for cash,” Graves says.
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In Case of Emergency
Along the same lines, Graves points out that there is no such thing as a universal payment method other than cash. It has a “safety net factor,” he says, that you don’t have when you’re stranded on the road and find that the nearby gas station doesn’t accept your Diner’s Club charge card.
“Cash offers absolute solidity and dependability – everywhere will always take it and that’s not true with anything else,” Graves says. “If you’ve got some cash in your pocket you feel that even though something might go wrong, you’re going to be able to buy your way out of the problem. You’ll be able to jump into a cab or get your shoe fixed.”
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When You Need to Remain Anonymous
Another benefit of cash is its anonymity, and despite the fact that this makes it less secure (you can dispute a credit card transaction and get the money back fairly easily, but you can’t do that with cash), Graves believes the anonymity will always appeal to some people, and not just drug dealers.
“Especially for some tradespeople and business owners, they may want money to not go into certain accounts, maybe as a way to avoid taxes and regulations,” he says. “People like to have the flexibility of cash in those situations."
However, Graves believes the issue of anonymity is more important for merchants than consumers, since the accounting of cash revenues is more flexible at tax time.
“People are so accustomed to a paper trail and tracking our finances that I think most are not concerned about anonymity,” he says. “For some businesses though, that may be different.”
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When You Depend on Tips
The idea of anonymity plays out in another way for people in the service industry, where tips can make up a huge amount of a person’s income.
“Industries where tipping is important will see this struggle the most – cash tips are treated very differently than credit card tips,” Graves says.
Waiters and bartenders will probably always prefer tips in cash, since the lack of a paper trail means that taxes only get paid on the tips that get reported.
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When You Want to Help the Homeless
Last Christmas the Salvation Army experimented with a way to accept credit card donations at its ubiquitous red collection kettles, and while the effort was surely not the last of its kind, it’s an innovation that will only take hold for formal charities.
Homeless people, it is safe to say, aren’t likely to have bank accounts, much less be able to accept credit card payments. For the charitable folks out there, it’s hard to see any alternative displacing the practice of giving a few dollar bills or a handful of change to the homeless guy in the train station.
“I think cash will play a role in that type of charity because it’s accepted behavior, but that’s not necessarily true for all types of charity giving,” Graves says, pointing out that charity groups have always been very good at providing donors with every imaginable option for people to give.
“The charities will adapt to account for any loss of income they would get from people carrying less and less cash,” he says. “You’ll probably see a rise in automatic debits where you buy something and establish that a percentage goes to a charity, for example, and you can already give on your cellphone by text message. Whatever happens, charities will react to it but they won’t be drivers of change.”
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Greg Emerson is a writer/editor for MainStreet. You can reach him by e-mail at firstname.lastname@example.org, or follow him on Twitter at @emersongreg.
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