As Cash Fades, America Becomes A Plastic Nation

[R. A. Hettinga]

<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.


-- 
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R. A. Hettinga <mailto: rah at 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'