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12:22 PM
David Austin, CetoLogic
David Austin, CetoLogic

Reports of Cash's Death Greatly Exaggerated

Consumer preferences and the actions of the Federal Reserve indicate that cash will remain an important part of the payments ecosystem for a long while.

A recent Bank Systems & Technology article, ‚Banking on the Death of Cash, asserted that cash is headed for the same fate as the now-extinct subway token. While cash may no longer be as ubiquitous as debit, credit and prepaid cards, the reality is that currency and coin is too powerful of a payment form to ever be fully eliminated from the economy. From a historical perspective, no payment innovation has rendered one of its predecessors obsolete ‚ from cash, to checks, to plastic, to the mobile wallets of today.

While the percentage is certainly lower than it was a decade ago, it is estimated that cash was, in fact, used for about 29 percent of all U.S. retail payments in 2012, according to McKinsey & Co. As retailers forego the traditional cash register for mobile technology and check-out scanners, this may force consumers to adopt these new payment technologies and ultimately displace cash further down the line. However, consumer behavior clearly shows an affinity for cash as a way to better budget and in some cases, keep purchases private. As personal finance pundits like Dave Ramsey suggest, grandma's way to handle money via the old cash envelope is still a very effective budgeting plan. From a security standpoint, many consumers view cash as a safer alternative in light of recent high profile data breaches tied to card payments at retailers like Target and Nieman Marcus.

The U.S. Bureau of Engraving and Printing produced more than $8.4 billion in notes during 2012, with $100 bills accounting for more than $3 billion of that total. Credit card companies, banks and emerging technology providers are still competing with cash because it remains prevalent in the U.S. economy, is the superior form of payment outside the U.S. and remains the primary payment transaction option for the unbanked.

From a regulatory standpoint, consumer bank fees tied to the Durbin Amendment are actually driving consumers to use cash more often for small transactions, and on the other end of the spectrum, mortgage lenders have returned to the norm of requiring increased levels of borrower liquidity to facilitate meaningful down payments. While cash's role in the economy may not be as significant as in previous generations, it still has an important role to play today.

Perhaps most notably ‚according to the Federal Reserve Bank of St. Louis ‚ currency in circulation is projected to increase to a level of more than $1.2 trillion by 2015, which is counterintuitive to what many industry experts claim. This increase in cash is being driven by the Federal Reserve as a tool to stimulate the economy and at present, the Fed has stated no plans to take this circulated cash out of the system. Currently, the Fed continues to pump cash into the economy at a rate of about $75 billion per month.

As long as the Fed continues to put more cash into the economy and banks still sit on millions of dollars in cash, greenbacks are not going anywhere. Should financial institutions be excited about the payment technology evolution? Absolutely. Developments in new technologies are giving consumers more choices in how to make their payments. However these innovations simply do not change the fact that there is a glut of cash remaining in circulation and how consumers continue to embrace the classic currency.

David Austin is Vice President of Atlanta-based CetoLogic, a provider of software and analytics solutions for financial institutions and retailers.

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