Wednesday, July 13, 2011

More Consumers Paying Cash

From what I am hearing locally, there is a new trend to cash at retail, with many of the same people who made the transition from credit cards to debit cards in 2009 now moving on from debit cards to cash for most purchases. Why are people using cash more often? Paraphrasing some of what I’ve heard (much of which is second-hand):

  • The bank is discouraging debit card use. The bank charges transaction fees for debit cards after the first 35 purchases in each month, encouraging people to use cash for smaller purchases. Or, the bank limits debit card purchases to $300 per 24 hours, encouraging people to use cash for larger purchases. Some people have adjusted by using debit cards only in limited categories, such as pharmacy purchases, movie tickets, table-service restaurants, and gasoline, but are paying in cash for groceries, routine store purchases, and fast food.
  • There might be debit card fees. The bank is sure to add new fees eventually, and if you don’t rely on the bank so much, you won’t get socked with those fees during the month when you first discover them. It is easier to not use banking services so much than to keep track of all the new fees that banks charge. This line of thinking is a sign that the social contract between consumers and banks is breaking down.
  • Cash just seems simpler. Cash hasn’t changed significantly in the last 50 years, so this just means the debit cards have become subjectively more complicated than they were five years ago when people were using them for the “convenience.”
  • I don’t know, I hadn’t noticed. For whatever reason, the debit card habit didn’t stick. The perceived value of the debit card faded until it was below the threshold of consciousness, at which point the potential for using the card was forgotten. Maybe the novelty of the debit card wore off. One man I talked to stopped using his debit card because he lost his online banking password and couldn’t check his account balance, then forgot to start using it again after he got a new password. Most of the people in this category are still carrying their debit cards and using them for online purchases, and hadn’t noticed until I asked that they were no longer using them for in-person purchases.

None of this is enough for me to call it a lasting trend, though my hunch is that that is what is on the way. There was a trend toward cash early last summer that didn’t turn into anything big, but now that banks are planning more fees, there may be more impetus behind the movement from cards to cash.

The move from credit cards to debit cards, and now from debit cards to cash, is part of a process of consumers becoming more conscious about their spending, which in turn is an necessary part of consumer deleveraging. As consumers become more financially conscious, banks and other businesses that sell to consumers will have to scramble to catch up. If people continue to pay for many of their purchases in cash, it will be a sign that this trend is picking up steam.