Cash and eCommerce: Can They Coexist?

Author: Kevin Moland, kmoland@profitstars.com

Even though everyone declared it was dying as recently as a year ago, cash is still very much alive. In fact, it’s not even sick. New reports indicate that cash is growing, or at least remaining a relatively steady form of payment in most developed countries.

Because it’s nearly impossible to track cash transactions done at the point of sale, researchers use a variety of methods to determine how much cash is being used to make payments. Everyone agrees that the total amount of U.S. currency in circulation has been increasing by about 7% per year since the beginning of the economic downturn in 2008, but most experts attribute this rise to a fear-driven increase in the amount of cash people are stockpiling and not to more frequent use of cash as a means to purchase goods and services. (As evidence of this, the number of $100 bills is growing at a much faster rate than the number of $10’s and $20’s.)

A recent study estimated that the total dollar value of cash used to make payments each year is rising—and would continue to rise—by a small amount in a majority of the countries in the study, but it also predicted that the percentage of point-of-sale transactions involving cash would decline—but only slightly—over the next 10 years in all of those countries.

So, there’s more cash around and more of it is used every year, but cards, online payments and mobile transactions are slowly eating away at cash’s piece of the growing payments pie.

For banks and credit unions, the key word in that sentence is “slowly.” The most detailed surveys indicate that cash’s portion of overall payment volume may shrink by as little as 1-2% over the next decade. In other words, people will continue to use cash as an alternative to checks, cards, and electronic payment methods for years to come.

And why not? Cash offers some compelling advantages over its more refined counterparts:

• It’s Anonymous – Cash transactions can’t be tracked, an important advantage in a society that is increasingly focused on privacy.
• It’s Ubiquitous – Cash can be acquired anywhere and is accepted almost everywhere.
• It’s Autonomous – Cash works all by itself. You don’t have to open an account, divulge your credit score or get your friends to sign up in order to use it.

While the use of cash isn’t restricted to any one demographic group, it’s an obvious staple for the unbanked and under banked, two segments that are getting a lot of attention from the banking industry these days.

Here’s the quandary: While many consumers still want to pay with cash, businesses benefit most when those payments are made online. Electronic payments save businesses money by allowing them to replace expensive cash handling methods with more efficient automated systems. More and more, people who want to pay with cash are going to collide with collection systems that try to funnel them into online channels.

If banks and credit unions want to keep their business clients happy, they need to help them solve this problem. Financial institutions need to find a way to help businesses accommodate cash without losing the cost savings and efficiency inherent in online payments.

What about digital currency? Companies like Bitcoin made a big impression in the financial marketplace by touting the idea of an independent “electronic currency,” but potential regulatory pressures may impact their ultimate success. Some pundits suggest that a large company like Google could develop its own online currency as a means to extend its market dominance.

But even if digital currency lives up to its promises in the online world, will that idea resonate with cash spenders? Will someone who finds security in government backed paper ever be comfortable with an independent electronic currency, no matter who stands behind it?

There are other, more pragmatic services emerging that offer users the option of making cash payments online. By partnering with corporations that have a broad geographic footprint, these services establish acceptance networks that can funnel local cash payments to providers across town or across the country. In this model, users visit the payee’s site, download a bar code or password to their mobile phone, and use it to make their payment in cash at a local acceptance point. The service transmits credit to the payee, thus completing the cycle.

While these online cash services aren’t nearly as flashy as digital currency and aren’t offered by companies with the market clout of Google, they do offer a practical solution that would allow people to keep using cash without abandoning the burgeoning online marketplace.

So what is the future of cold hard cash in an increasingly high tech society? No one can say for sure, but banks and credit unions would do well to begin pondering how they plan to meet the needs of those who wield the almighty paper dollar in the brave new world where online services are king.