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A bright future for cash, despite an economic downturn

Mike Lee predicts a massive credit slowdown and an increased use of cash in the wake of the global economic recession.

March 18, 2009 by Mike Lee — CEO of the ATM Industry Association, ATM Industry Association

Mike Lee is the chief executive of the global ATM Industry Association and a commentator in ATM Future Trends Report 2009, which Marketplace and ATMIA published last week. Learn more about the report, which is available on ATM Markeplace.

Due to the global credit and banking crisis of 2007-2008, consumers are likely to be cautious about using credit cards during retail peak seasons and even around paydays for some time to come. That could be a boon for cash.

This current cycle of caution about credit will likely push up the proportion of cash-based sales and debit transactions. Such a cycle would tend to last as long as the financial and economic crisis has a sting in its tail.

Mike Lee

According to Deloitte's 23rd Annual Holiday Survey, which polls more than 10,000 adult consumers, 64 percent of respondents think the economy is in a recession. Additionally, the National Bureau of Economic Research recently announced that the country's economy is officially in recession. The number of foreclosures, redundancies and bankruptcies (both personal and corporate) has been ghastly.

Credit for businesses is hard to come by, too, in this economic climate.

For example, the latest Deloitte Chief Financial Officer survey, published in October 2008, shows that the credit crunch is continuing to squeeze the supply and price of credit available to U.K. corporations:

97 percent of the CFOs polled said credit is costly, up from 89 percent in June and 59 percent a year ago.
89 percent of the respondents said credit is hard to obtain, up from 77 percent in June and 48 percent a year ago.

Clearly, there is a squeeze on both corporate and consumer credit.

Eduardo Castro-Wright, president and chief executive of Wal-Mart's U.S. division, reported a sharp fall of 7.4 percent in credit-card payments as a percentage of total payments in 2008. A Zogby International online survey of 2,520 U.S. adults conducted in December 2008 suggested that 73 percent of U.S. consumers this holiday season plan to use cash and savings to pay for their holiday purchases, while only 18 percent plan to use credit cards. The United Kingdom's payments association, APACS, says that in the first quarter of 2008 the average value of a credit-card purchase fell by Â£1 to Â£34.33.

There could well be a reinforced long-term shift in the payments landscape from debt to more debit and from credit to more cash. APACS is forecasting there will be 9 billion annual debit-card payments in the U.K. by 2017. The British Retail Consortium 2006 annual study revealed that the proportion of debit-card payments cards continues to grow steadily in Britain at the expense of other payment methods, including credit but excluding cash.

The same survey of retailers showed that cash measured in transaction volumes is still the dominant method of payment used by customers and is the most cost effective. For larger purchases, debit cards have come the dominant method of payment, accounting for 44 percent of the overall sales turnover.

It could reasonably be argued that a slowdown in credit-card usage will continue throughout the financial crisis and that there will be new regimes for governing the use of credit long after the crisis is over.

On the other hand, people's memories can be short if the pain of this crisis does not run too deep or last too long. A return to strong economic growth and liquidity in the markets could one day see consumer credit bounce back, depending on how much structural change there is in the economic and financial landscape. It is interesting to note that at the end of October 2008, a coalition of nearly 600 non-governmental organizations from 88 countries called for a fundamental transformation of the international financial and economic system.

Greater public ownership and oversight of banks would lead naturally to stricter rules about credit and borrowing. The new economic order will affect the long-term roles played by credit, cash, debit cards and other payment methods.

Credit is an inherently riskier form of money than cash. After the global collapse of credit in 2008, the appetite for granting and receiving credit naturally diminishes in direct proportion to the sense of loss caused by the market collapse. Payments patterns are starting to change in response to these evolving circumstances.

To understand the future of cash as a payment method vis-Ã -vis other payment methods in this context, it is important to look specifically at the changing patterns of cash spending in the retail sector. What are merchants saying about cash? A 360-degree perspective on cash needs to take into account what consumers and retailers think about cash payments and not just what card issuers are saying.

Cash continues to be a highly competitive retail payment tool. Furthermore, the drivers of continued cash usage are coming strongly to the fore during these recessionary times. What are some of these drivers? These are the kind of factors which will help determine the future of cash.

Cash is fee-free. To customers, cash is free, "now" money, whereas credit is loaned money owned by the bank earning interest from the customer.

In addition, cash works easily and quickly. Both customers and merchants find it cost-effective and fast to use. This is a condition favoring higher uses of cash and, as consequence, higher ATM withdrawals.

The popularity of cash in the retail sector is global.

It is likely that cash will remain the global king of smaller consumer-to-business payments for the foreseeable future, because cash is a comparatively low-risk payment method that enjoys universal popularity and is highly competitive in the retail sector for smaller payments. This reliability, popularity and competitiveness of cash in the retail sector has been especially evident during the credit crisis.

It is also probable that a good portion of the current slowing market share for credit payments over the next months and years will migrate to debit cards and cash in a backlash against risky levels of personal debt. Strong performances by cash and debit cards as leading methods of payment may be expected in the retail sector for 2009 and beyond.

During periods of economic uncertainty, consumers will tend to revert to less risky methods of payment and financial behavior in general. I therefore believe new technologies in the payments space, such as mobile-phone payment options, may not quite see the high levels of growth in 2009 they may otherwise have legitimately expected. It is possible that online shopping and payments may, by contrast, grow better than expected as consumers look for bargains on the Internet while saving on the fuel costs of traveling to shops.

In conclusion, the following general expectations are reasonable to assume:

Cash will long remain the global king of smaller retail payments of about $10 and below.
Cash will continue to dominate purchases of basics like food, while purchases of luxury items will continue to slow in recessionary times.
Debit cards and cash will remain the leading methods of payment for consumers in the foreseeable future.
New payment technologies may not see the growth they expected, due to a climate of caution prevailing in financial services, with customers reverting to tried-and-tested methods of payment they trust and know best until general uncertainty starts to dissipate and business and consumer confidence returns, leading to a more adventurous spirit.
Online shopping and payments, however, are likely to enjoy growth as economic pressure forces consumers to look harder for small and big ways to cut down on costs and expenses.

In short, I foresee no serious challenges in the next five years to the entrenched worldwide niche role of cash as the payment method of choice for smaller consumer-to-business payments. The solid performance of cash during 2008 and the emerging cycle of caution about credit are positive news for the ATM industry.

Along with being the CEO of ATMIA, a nonprofit trade association with more than 1,100 members in about 50 countries, Lee also is chairman and founder of the Global ATM Security Alliance. This year Lee completes his graduate work in Futures Studies at the Institute for Futures Research at the Graduate School of Business, University of Stellenbosch in Cape Town, South Africa. He also holds post-graduate qualifications in English, education and theology.

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ATM Industry Association (ATMIA)

The ATM Industry Association, founded in 1997, is a global non-profit trade association with over 10,500 members in 65 countries. The membership base covers the full range of this worldwide industry comprising over 2.2 million installed ATMs.

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