John OMalley

FIN 320 Klingenhagen

05/28/15

Current Issues Project

For as long as the concept of money has existed, people have used physical forms of
payment, such as gold coins, silver pieces, or paper money, to complete transactions and
exchanges with one another. These and all other forms of cash became essential to bartering, a
process that predates even the concept of money itself. However, in recent decades, we have
begun to see a shift from traditional forms of payment, namely cash and checks, toward
electronic forms of payment, such as debit cards, Apple Pay, or PayPal. This shift has been due
largely because of the rapid technological development that has taken place in recent years and
the constant introduction of new and ever-improving payment technologies.
Despite this shift toward electronic forms of payment, we will probably not become a
completely cashless civilization at any point in the foreseeable future simply because of the fact
that cash accounts for a high percentage of the average Americans retail payments. According to
a study conducted by the Federal Reserve, cash accounts for forty percent of the number of
payments the average American consumer makes, the largest of any payment instrument
(Marous, 2014). This is true for several reasons, however, the three main factors that could
explain this trend are; that cash is the leading instrument of payment for low-value transactions,
with half of all transactions under $50 being done in cash (Bennett & Conover, 2014), cash is the
preferred back-up form of payment to all other methods, and finally that cash is the leading
payment instrument for a myriad of different expenditure categories, including: entertainment,
transportation, gifts and transfers between people, and food and personal care expenses (Bennett
& Conover, 2014), although it should be noted that many of these expenditures are considered
low-value purchases.
At the same time, another very compelling reason why we will probably never see a
completely cashless society is that a significant portion of the population does not use banks, or
is at least underbanked, leaving these people without access to alternatives to cash. According to
a survey done by the Federal Deposit Insurance Corporation (FDIC), as of 2013, 20.0% of
American households (24.8 million) were underbanked, meaning they had some kind of bank
account but also used alternative financial services outside of the banking system, while 7.7% of
households (9.6 million) were completely unbanked (FDIC, 2013). These numbers are even
worse for minority groups, with more than 20% of Latinos and African Americans essentially left
out of the banking system (Sullivan, 2013). The notion of a cashless society almost seems farfetched when there are millions of people within the American population that are completely
reliant on cash and lack even the most simplistic of bank accounts.
While it is true that, in all likelihood, we will not become an entirely cashless society at
any point in our lifetimes, in the years and decades to come, we will continue to see a growth in
the number of electronic transactions done by Americans who are part of the banking system.
This is true for a number of reasons. The first reason, and perhaps the greatest factor, is that
electronic forms of payment are becoming increasingly more convenient for modern American
consumers. Debit and credit cards are already accepted in the majority of stores, and new forms

of electronic payment can be found in an increasing number of stores as well, meaning that
people no longer have to constantly make trips to the ATM before going shopping.
The next reason we will continue to see a shift toward electronic methods of payment is
that, as these new technologies continue to develop, new innovations and methods of payment
are being constantly introduced and improved upon. These new payment technologies include
applications that due away with the need for a credit card while making in-store purchases, such
as Apple Pay, as well as technologies that expedite the online purchasing process such as PayPal.
Another example of new payment technologies is Chase Banks QuickPay, which allows Chase
customers to send money online to other Chase customers using only their cell phone number
and email address. Some of the largest companies in the world are even competing against each
other in this market, as Google is set to unveil Android Pay to compete with Apple Pay, as well
as the Google Wallet, which will compete with services such as QuickPay and other online wallet
services (Zillman, 2015). Thanks to these new payment technologies, people no longer even
require a debit card in order to make ATM withdrawals. BMO Harris Bank, the Chicago-based
subsidiary of Canadas Bank of Montreal, recently introduced their new mobile application
which allows users to make ATM withdrawals without having a debit card on hand. To do this,
customers log into the BMO Harris mobile-banking app on their smartphones, enter the specific
amount they would like to withdraw and a QR code will appear on the screen. They then walk up
to an enabled ATM and press the mobile cash button. The customer then holds up their QR code
on their smartphone to a reader and the ATM dispenses the requested amount of cash (Trichur,
2015). From these facts, we can determine that we are moving towards an age in which the
smartphone is becoming an essential part of the transaction process.
Another reason we will continue to see a shift towards a cashless society is that younger
generations have shown an increasing preference toward electronic forms of payment over cash.
According to a study done by Citi Group, just thirty percent of people under the age of thirty
stated that cash was their preferred method of payment for smaller purchases, compared to just
under fifty percent of people fifty years or older. Instead, debit cards were the payment method
of choice, with about 40% of millennials stating it was their preferred payment option. In
contrast, a mere 25% of people over the age of 60 said debit cards were their payment method of
choice (Darlin, 2014). This preference for current electronic forms of payment, coupled with the
constant introduction of new and ever-improving payment technologies means that as these
younger generations get older, we will continue to see an increase in the number of electronic
payments made.
The final reason we will continue to see a shift in preference towards electronic forms of
payment is that, like with younger generations of Americans, these new payment technologies
are becoming increasingly appealing in developed foreign economies, particularly Nordic
countries. Sweden, is the leader in the European Union when it comes to card payments, with
230 transactions per inhabitant, although Denmark and Finland, as well as non-European Union
counties Norway and Iceland also ranked high on this list (Roos & Doyle, 2015). In these
countries, several different methods of electronic payment have become popular. In Sweden,
iZettle is an app that allows consumers to use their smartphones to make payments in stores and
restaurants. The Swedish National Bank has also introduced a jointly-developed smartphone app
called Swish, for making payments between friends, while in Denmark, the MobilePay app has
1.8 million users in a nation of 5.6 million people (Roos & Doyle, 2015). Truly, this shift

towards electronic payment methods has expanded beyond the United States and become a
global trend.
So what does this shift towards electronic instruments of payment mean for the banking
and financial systems within America? For Banks, it means greater potential to collect fee
income. To banks, cash is the least profitable source of income, and fee income has actually
surpassed interest income on credit cards. Although down from recent years, overdraft fees
totaled $31.6 billion in revenue in 2011 (Wharton, 2012), a substantial amount. Another added
benefit to banks is that receiving each electronic payment comes with priceless customer data,
allowing for the potential to keep a record of customer spending habits they could use to their
advantage (Wharton, 2012). In contrast, for consumers, these new technologies raise a number of
concerns. Although these technologies have an advantage in that they are convenient, consumers
are in turn, more likely to overspend because of the buy now, pay later mentality that comes
when making these purchases and the use of these payment methods often comes with monthly
or yearly maintenance fees (Wharton, 2012). Most importantly, it is much easier for thieves to
steal credit or debit card information than cash. On the other hand, as these technologies continue
to advance, it also means less fraud and faster transactions for banks and consumers alike. For
example, with the new BMO Harris Mobile Banking app, fraud becomes a much harder crime to
commit without the customers information stored on the magnetic strip on the debit card. At the
same time, a mobile transaction only takes an average of 15 seconds, compared to an average of
45 seconds per debit card transaction (Trichur, 2015).
In conclusion, while the idea of a cashless society may have gained some transaction in
recent years, in reality, we will probably never become an entirely cashless society at any point
in the foreseeable future for a multitude of reasons. The two most significant reasons for this are
that cash accounts for a high percentage of the average Americans retail payments (40%), and
that a very high percentage of the American population is either underbanked (20.0%) or
completely unbanked (7.7%). Cash will always have a place in our society, whether it be for
tipping at restaurants, a more convenient form of payment for smaller purchases, or even the
relative sense of comfort that comes with being able to physically hold your money. However,
just because there will always be a value for cash within our society does not mean we will not
see a shift towards electronic forms of payment. These new payments are the way of the future
and over time, we will continue to see an increase in both the number of electronic transactions
that occur as well as the total value of electronic payment transactions. This is due for a number
of reasons, including; that electronic instruments of payment are more convenient for consumers;
new payment technologies are constantly being developed and improved upon, as well as
invested in by some of the largest and most profitable corporations in the world; these new
instruments of payment are becoming increasingly more popular amongst younger generations;
and finally these advancements are becoming more and more popular in developed economies
around the world, namely Sweden and other Nordic countries like Denmark. While these
technologies will not due entirely away with cash, they will play a great role in shaping the
future of the financial world.

Works Cited
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Spending: Evidence from the Diary of Consumer Payment Choice." Federal Reserve
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2014. Web. 26 May 2015.
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