<http://online.wsj.com/article_print/0,,SB109053116869571496,00.html> The Wall Street Journal July 23, 2004 PAGE ONE Paper Losses As Cash Fades, America Becomes A Plastic Nation Even State Troopers Accept Credit and Debit Cards; McDonald's Capitulation A Swiper for Church Donors By JATHON SAPSFORD Staff Reporter of THE WALL STREET JOURNAL July 23, 2004; Page A1 Whenever state trooper Michael Poupart pulls over a speeding motorist on I-94 in Wisconsin's Kenosha County, he offers to take Visa or MasterCard debit and credit cards right there on the side of the road. Drivers initially look puzzled, until the trooper explains he has a card swiper onboard. "Then they say 'OK,' and hand over the card," he says. "They'd rather deal with it right there." Trooper Poupart is one reason the nation passed a watershed last year. For the first time, Americans used cards -- credit, debit and others -- to buy retail goods and services more often than they used cash or check in 2003. The nation now uses cards to subscribe to cable TV, pay taxes and hire Phil Marlowe, a 17-year-old in Tyngsboro, Mass., to cart stuff in the back of his Chevy Silverado. He carries a cellphone with a "PowerSwipe" snapped onto the back to handle his card transactions. His sales roughly doubled when he started advertising credit-card acceptance on the side of his truck. "One lady gave me a $30 tip just because I accepted cards," he says. Vending machines, subway systems and charities now accept cards. The government is handing out cards in lieu of food stamps and child-support disbursements. Hip-hop mogul Russell Simmons is marketing a service that lets people put their paychecks directly onto a Visa card, giving consumers without bank accounts access to plastic. At "Da Money," an online chat room where consumers trade financial tips, participants recently touted the benefits of Mr. Simmons's card. "For the Ladies, YES! There is a...'pre-paid' VISA credit card and it is PINK!" said one writer. "Let Puff Daddy top that!!!'' By letting consumers buy things with unprecedented convenience and speed, cards have transformed the economy. They have helped keep consumer spending strong even through terror attacks and recessions. When people pay with plastic, they tend to spend more -- often more than they have in the bank. Thus, credit cards also have fueled an explosion in consumer debt. It is expected to hit $838 billion this year, an increase of 6.8% from 2003 and more than double what it was ten years ago. The aircraft carrier USS Harry S. Truman went completely cashless earlier this year. The Navy issued MasterCards to all 5,000 sailors aboard. On payday, seamen insert cards into a machine that electronically loads money stored onto each card. They then use the cards for all onboard purchases. The Navy estimates sailors on the Truman buy 250,000 soft drinks monthly. When it was a cash ship, somebody had to collect half a ton of quarters each month from all the Truman's vending machines. Those coins then had to be redistributed. Now it's all settled electronically. An added benefit: Shipmates can use the same cards while visiting nightclubs or movie theaters on shore, as well as to send money home. The Navy has even put a swiper by the door of the chapel as a substitute for the Sunday church-service collection plate, says Cmdr. Boyle McDunn, a chaplain aboard the Truman. A currency can be anything that all members of a society agree it should be. The current boom in plastic is one of those rare moments in history when that agreement shifts and one payment form overtakes another as the preferred way to pay. The first such change came sometime between the 10th and 6th centuries B.C., when Greece and India each introduced metal coins, which surpassed barter or the shell currencies of earlier times. Coins dominated trade for the next 2,000 years, until the introduction of checks by Italian merchants in the Middle Ages. In 1690, Massachusetts became the first of the colonies to introduce paper money. Cash took decades to gain broad acceptance, but eventually became the standard of payment for the next three centuries. The first credit card was introduced as a service for the wealthy in New York in 1950 under the Diner's Club brand. Today, U.S. consumers use plastic to buy $2.2 trillion in goods and services each year -- roughly 20% of U.S. gross domestic product. Last year, cash was used in 32% of retail transactions, down from 39% in 1999. Credit-card usage has remained stable, accounting for about 21% of purchases during that time. Meanwhile debit cards, which take money out of checking accounts immediately after each purchase, shot up to 31% of purchases last year, from 21% in 1999. CHARGING AHEAD The rise in plastic by the numbers Households with payment cards 1970 16% Today 73% Amount consumers purchased with cards 1994 $724 billion 2003 $2.2 trillion U.S. GDP attributed to card purchases 20% Average cards held per household 1971 0.6 2003 7.8 Merchants accepting cards 1971 820,000 Today 5.3 million Amount Visa USA processes over its networks per second $32,000 Card solicitations to be sent to households this year 4.9 billion Solicitations sent for cards touting shopper rewards 2002 811 million 2003 1.27 billion Average amount a household spent on cards in 2003 $15,066 Amount cardholder must spend* with an American Express card to qualify for a Personal chef for cooking lesson and dinner for eight $95,000 Three-day polo lesson in Palm Springs, Fla. $180,000 Suborbital space flight with Russian cosmonauts $20 million *Total spending requirement can be less depending on where card is used. Sources: Sinovate Mail Monitor; Cardweb.com; Paywithplastic.org; American Express; Visa USA; Nilson Report Consumer activists have long warned of the dangers of credit cards, which have caused many a tragic story of personal bankruptcy and become fodder for late-night TV commercials for debt doctors. As cards spread, critics say consumers are running tabs for increasingly routine purchases. "You could end up paying interest on ice cream," says Travis Plunkett of the Consumer Federation of America. Roughly 60% of credit-card holders roll balances over each month, paying interest of as much as 22%. Because these cardholders are the most lucrative customers of the banks, critics say they effectively subsidize the remaining 40% of cardholders. Maria Nemeth, a psychologist in Sacramento, Calif., says card usage is becoming so easy and pervasive that consumers are losing the ability to budget. Using plastic, she says, is as hard to resist as junk food, and potentially as dangerous. She regularly tells clients to go on 48-hour "cash diets," refraining from the use of plastic for two days at a time. Tension has also surfaced over the fees that merchants pay the card industry on each transaction. The European Commission argues consumers paying in cash are effectively forced to subsidize the acceptance of plastic. That's because the merchants' cost of accepting cards drives up prices on all goods in stores. Some Christians see the pervasive use of plastic as part of a dark biblical prophecy. Pat Robertson, founder of the Christian Broadcasting Network, has said that plastic may signal the cashless society of the end times foreshadowed in the Bible. Mr. Robertson's network accepts contributions from supporters on both Visa and MasterCard. A big part of the mission of companies like Visa and MasterCard (joint ventures owned by the thousands of banks that issue cards under those names) is to become to consumers exactly what Ms. Nemeth warns against: a ubiquitous presence that is hardly noticed, much less resisted. "It's like the switch on the wall," says Robert W. Selander, president and chief executive of MasterCard. "You turn on electricity and the lights turn on. ... We take it for granted." "We're like the dial tone," says Carl F. Pascarella, president and chief executive of Visa USA Inc., the biggest credit-card company in terms of cards outstanding. Over the longer term, big earnings for the card industry could come from the commission merchants pay with each swipe, anywhere from 1% to 5% of each transaction. It amounts to a tax, of sorts, on the new currency of choice. "There are still trillions of dollars in cash and check that are out there just waiting to be captured on plastic," says Bill Glenn, president of American Express's Merchant Network, which manages the company's relations with merchants. Card issuers have been targeting merchants who refuse to accept plastic, offering incentives and lower fees. The fast-food industry held out for years in the face of intense card-industry lobbying. Behind the reluctance: Signing or punching in code numbers at the counters was too time-consuming for an industry that relies on quick service, and the transaction fees were considered too expensive. In response, the card industry lowered the fees they charge quick-service restaurants and waived the signature requirement. McDonald's Corp. capitulated in March, agreeing to widespread card acceptance at its restaurants, a move that many in the industry say will force other fast-food restaurants to follow. Card companies say McDonald's found the average transaction jumped from $4.50 to $7 when customers used debit and credit cards instead of cash -- in part, because cardholders tend to buy for more people. A California company named Creditel Corp. has found a way to turn the cellular telephone into a swiper. Its "PowerSwipe" snaps onto the back of Nextel cellphones. Stadium food hawkers were given the devices before last year's Super Bowl in San Diego. Fans were able to charge beer and hot dogs from their seats, without missing any of the game. The cellphone can even fax a receipt to the cardholder's office or home. Emily Cook, a U.S. Olympic ski team member sponsored by Visa, participated in a year-long Visa experiment in which she used plastic for every purchase over $10. Rushing through airports from country to country to join qualifying meets, she never had to change currencies. For roughly 60 million Americans without bank accounts, however, living without cards is getting harder. They can't easily rent cars or stay in hotels, among other things. "You're effectively locked out of the American Dream if you don't have some kind of plastic, and it's going to get worse," says Mr. Simmons, the hip-hop mogul, whose RushCard lets holders put their paychecks onto plastic. U-Haul International Inc., the truck-rental company, has begun issuing "payroll cards" to about 3,000 of its employees, or about 17% of its work force. They are mostly hourly workers who lack bank accounts. Workers can withdraw cash once a week from any automated teller machine without paying a fee, and they can use the cards wherever Visa is accepted. They can even get cash back after a purchase from the supermarket without any charge. The company, meanwhile, says it is saving about $500,000 a year in costs associated with issuing checks. More technological innovation is coming, and plastic itself may eventually fall into disuse. After all, it is the numbers carried on plastic, not the plastic cards themselves, that are necessary to complete transactions. Since cards are susceptible to theft and fraud, the industry is working on "biometric" identification techniques. Computers would link credit-card numbers, housed on an electronic database, to unique body parts such as fingerprints, irises or facial characteristics. Card industry executives envision consumers being identified at cash registers with devices such as fingerprint readers or eye scanners, which would replace the signature or PIN that consumers currently use to verify identity. Online shoppers might identify themselves by pressing fingers to a silicon wafer embedded in the keyboard, which would read the fingerprint, match it online with a copy held by bank or merchant, then authorize the sale. They wouldn't need a card at all. -- ----------------- R. A. Hettinga <mailto: rah@ibuc.com> The Internet Bearer Underwriting Corporation <http://www.ibuc.com/> 44 Farquhar Street, Boston, MA 02131 USA "... however it may deserve respect for its usefulness and antiquity, [predicting the end of the world] has not been found agreeable to experience." -- Edward Gibbon, 'Decline and Fall of the Roman Empire'