Should you go digital with all your money?
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Humans have continuously been finding new ways to pay for things. This began in prehistoric times, with bartering and trading. Eventually, humans turned precious metals like gold and silver into coins for currency. Then came paper money — cash. Later we began switching out dollar bills and coins for pieces of plastic in the form of credit and debit cards.
How we pay for things is still changing. You can now pay for your morning coffee or wire thousands of dollars across the world with your phone.
Consumers are increasingly comfortable with the idea of a plastic society, in which phones and plastic rule supreme. Cash may still be king for now, but, an increasing number of stores, businesses and even banks no longer deal in physical cash.
A 2017 study by the Federal Reserve Bank of Atlanta found that the number of people with a mobile payment app on their phone had increased over the past two years, from 40.4% to 52.1%. Popular apps included Venmo, PayPal and Zelle.
“You are really seeing a recent increase of electronified payments, including online money transfer or services like Venmo,” said Scott Lapstra, a management consultant who specializes in payments and banking. “Just a lot of people doing transactions online.”
Mobile payment apps work similar to debit cards. You connect them to your bank, and money is drawn from your account when you use the app. You aren't borrowing money from an issuer when using a mobile payment app, so you can't go into high-interest debt, like you can with a credit card.
Mobile payment apps also increase the ease of paying — no longer do you have to swipe your card for the payment to go through.
“There was this euphoria that you could just point your phone at the register and ‘click’ and pay just like that,” said Robert Litan, senior fellow at the Brookings Institution.
But there have been efforts by card companies to adapt, like the introduction of chip technology, said Lapstra. Chip-enabled cards have increased protection from fraud, making them more attractive to consumers.
The same Atlanta Fed study found that debit and credit cards accounted for 55% of consumer payments in a typical month in 2017. Cash only made up 27.4% of all payments. 12% of consumers said they didn’t use cash at all.
The Federal Reserve Bank of San Francisco said cash was used in only 32% of retail transactions in 2015.
“Cash is increasingly being used mainly for small payments,” said Kenneth Rogoff, professor of economics at Harvard University and former chief economist of the International Monetary Fund. “For payments of over $100, it trails credit and debit cards, electronic payments and checks, and will soon trail smartphones.”
Lapstra believes the future of mobile payments lies with applications like Venmo and Zelle.
“They would replace cash more than anything, and could even compete with Apple Pay,” he said.
Zelle, for example, allows for rapid money exchanges from one bank account to another, using only an email address or phone number, said Meghan Fintland, spokeswoman for Early Warning Services, the network operator behind Zelle.
Apple Pay and Google Pay, are two of the biggest mobile payment apps on the market for retail purchasing. Despite being around for some time, they have yet to take the place of cash and cards. This could be because credit cards often offer rewards to their users, including cash back and travel miles. Apps like Apple Pay and Google Pay do not.
“There’s not a compelling reason to use your phone over what’s in your wallet. The value prop isn’t there,” said Lapstra. “The only way it would change is if they had a loyalty plan.”
He gave the example of Starbucks’ mobile app. Each time you make a purchase using the app, you get points. Those points can eventually be redeemed for freebies and discounts. And it appears to be successful — Starbucks says it now has more than 16 million active users.
“There are no negatives to moving away from cash,” Lapstra said.
He said the benefits of going cash-free apply to almost everyone. For individuals, it will mean shorter wait times at the register, a thinner wallet and fewer paper receipts. For retailers, it will mean a more streamlined payment process. And for the government, it could mean less illicit activity driven by cash.
The physical nature of cash can make it easier to lose access to, said Lapstra. If $20 is stolen from your wallet, you have little recourse in getting it back. But if you are robbed from your online or credit accounts, you can put a stop to it and (generally) get a refund.
Some believe cash will continue to rule supreme, at least for a while.
“Paying for things is a habit, like the way you buy coffee, your groceries — everything,” said Claire Greene, payments risk expert at the Federal Reserve Bank of Atlanta. “People’s preferences are sticky. Their habits are slow to change.”
When a new method of payment is introduced to the market, consumers simply add them to their physical (or digital) wallet instead of discarding their old payment methods, Greene said.
“Technology is always changing. Consumers are not,” she said.
While cash may be less safe in some respects, digital currency has its own risks.
“Consumer fraud is always a concern,” said Lapstra.
As our digital information and accounts are stored by more banks, retailers and payment providers, we become more vulnerable to that information being leaked.
The Equifax breach in 2017 exposed the account data of more than 143 million customers, including names, Social Security numbers, credit card numbers and documents with personal information.
As many consumers begin to manage their money exclusively in the digital sphere, thinking about their personal information going public is terrifying.
“It’s a scary thought,” said Litan. “But companies are increasingly creating new ways to combat this issue, like data encryption.”
There are ways to protect your personal information yourself in an increasingly digital world. And if your data is breached, there are steps you can take to try and come out on top.
Cash likely isn’t going anywhere anytime soon. While more payment apps will debut in the future, it’s important to keep track of all your money when adopting new ways to pay. An easy way to do this is with a budgeting spreadsheet (like this downloadable one). That way, you can keep track of all your money at once, both physical and digital.
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Image: Jimi Filipovski
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