Courtesy of Knowledge@ Wharton

The Consumer Conundrum

Convenience is arguably the biggest benefit to consumers when it comes to going cashless. No longer do they need to seek out a bank branch or ATM before going shopping. In fact, mobile payment applications have made it possible to complete a purchase without even having a credit card on hand. And paying with a card or smartphone comes with the convenience of having an electronic record of the transaction.

But consumers often pay the price for such advantages. For one, there is greater temptation to overspend with a credit card since all purchases are "buy now, pay later". Additionally, stealing credit card or debit information is much simpler than taking cash from a person. "Your statement comes through every month, and you must examine it every month because you are always at risk of losing your credit card or someone getting your credit card number," says Jack Guttentag, a Wharton professor emeritus of international banking

Going cashless has other, less immediately apparent financial liabilities. Nearly all pre-paid debit cards, for example, are embedded with activation and monthly maintenance fees. Even if you pay off your credit card every month to avoid finance charges, there is likely to be an annual fee, especially if you are part of a "points" promotion or some other bonus plan. Debit cards come with the danger of overdraft penalties. "Currency is free," notes Jeremy Tobacman, a Wharton professor of business and public policy. "It's a point that is easily forgotten, but it is not a trivial difference. In most forms of electronic transactions, there is some payment for the consumer."

Banks and credit card companies have a vested interest in convincing consumers to convert to going cashless. In 2011, credit card issuers reported $154.9 billion of revenue, according to the credit card advisory firm R.K. Hammer. A separate study from the same firm said that in 2011, fee income surpassed interest income for all issuers of cards (including credit, debit and prepaid cards). Though down from previous years due to new federal regulations, overdraft fees totaled $31.6 billion in 2011, research firm Moeb Services reported.

For banks, less consumer dependence on dollars and coins means greater potential to collect fee income, the likelihood of fewer people visiting bricks and mortar bank branches and a diminished need for staff to handle more intensive cash-based transactions. "For financial institutions, these various payment innovations are a source of profit," Guttentag says. "Cash is the least profitable [source of payment], and it's a lot of hassle."

An added benefit to banks and retail businesses receiving electronic payments is that priceless customer data comes with each transaction. Shevlin suggests that businesses that have a record of all their customers' spending habits could then use it to their advantage. "Knowing how you spend your money helps marketers," he notes.