The age of consumer-credit-made-easy for good times and fast spending, with the guy next door showing off the new 52-inch plasma TV in his living room but struggling to pay his mortgage, is over.
For years consumer-payment preferences and trends have steadily shifted from cash and checks toward electronic alternatives, such as credit and debit. Most notably, a perfect storm of ultra-convenience, attractive rewards, aggressive marketing and old-fashioned greed overtook a majority of Americans with credit cards.
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Now, as the consumer credit market continues to deteriorate, millions of people across the country are starting to move away from credit cards — either voluntarily or involuntarily — and go back to the novel philosophy of only spending money they have in the bank. That means cash, debit or check. Sure, some consumers rely on credit cards for the sake of convenience and pay their balances in full each month. But the vast majority of cardholders borrow some, if not most, of the money they charge. After all, credit card issuers make the bulk of their profits from interest income, finance charges and late fees.
Many consumers have already maxed out their credit cards, and millions more will max out in an attempt to stay afloat as the recession deepens. Furthermore, in an 11th-hour attempt to mitigate risk, banks are tightening lending standards and notifying millions of customers that their credit card limits have been substantially reduced.
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| Sam Ditzion |
For millions of Americans, credit will simply no longer be an option — at least for a few years. It will be back to the basics: living within one's means. Green is the new platinum.
Contrary to popular belief, cash is not obsolete. Even though the mix of electronic transactions has rapidly increased in recent years, cash still represents the dominant payment mechanism in the United States. In fact, over the past five years, the value of cash in circulation has actually grown at an average annual rate of approximately 4.22 percent. This rate of growth is low and essentially flat, after accounting for inflation and population growth. But cash is still king.
The debit card, which offers the ability to withdraw cash from a checking account with the convenience of using a credit card, will also benefit from the consumer credit crisis. But some consumers have concerns about debit fraud and liability.
In fact, more and more people simply do not trust themselves with any type of plastic, credit or debit, and are removing those plastic cards from their wallets altogether.
Some families are starting to budget by withdrawing a finite amount of cash from the ATM each week to pay for all of that week's expenses. Other families are reverting to the Depression-era monthly envelope system, placing cash in envelopes labeled rent, groceries, clothing and so on. When it's gone, it's gone.
A cash-only budgeting system might be the only thing that actually works for many Americans.
Cash: A reliable spending source
Nearly 9 percent of U.S. families do not even have bank accounts and make all of their purchases in cash.
Many small businesses also prefer cash as a way to avoid hefty transaction fees. And cash drives the ever prolific under-the-table and underground economies. Without a paper trail, the opportunities for under-reporting are endless.
The sad truth is that many Americans were never taught the simple but critical lesson of only buying what you can truly afford.
This crisis, however, may very well present a golden opportunity. When the dust settles, millions of Americans will be smarter and savvier when it comes to their personal finances. Widespread financial irresponsibility got our country into this mess. Going back to basics will get us out of it.
Sam Ditzion is the chief executive of Boston-based Tremont Capital Group and a regular contributor to ATM Marketplace. Tremont Capital Group is a consulting firm that specializes in providing strategic planning, litigation support, valuation, and merger and acquisition advisory services to the ATM and general payments industry.
