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Dueling Dollars: Paper or Plastic?

  
  
  
  

Credit Card ReaderNothing is ever simple, especially when it comes to money. Fortune magazine’s recent issue, hot off the press, featured a cover article titled The Death of Cash, with a most appropriate picture of a hundred dollar bill being shredded through an iPhone. Abstract? Ok, maybe a little… but certainly an accurate portrayal of the revolution towards more and more electronic and mobile payments, otherwise known as a cashless society. It’s inevitable.

Meanwhile, back at the ranch; Visa, Mastercard and several US Banks are attempting a $7 billion settlement agreement over a class-action lawsuit filed by a group of merchants over accusations that the card networks have conspired to fix pricing and generate ‘overpriced swipe fees.’ The common gripe of business owners being is that the processing fees are just too much.  A piece of the proposed solution within the settlement is that businesses will now have the freedom to surcharge their customers paying with a card, something that has commonly  been regulated by card networks.

But what is the cost to the business? Are credit cards and the growing use of mobile payments helping or hurting businesses?

The Journal of Consumer Research (JCR) published a study in 2011 that makes it difficult to accuse credit cards of having a negative effect on the marketplace. According to JCR studies dating back all the way to 1979, “The use of credit cards leads to increased willingness to spend and greater spending amounts.”   They continue by explaining the psychology, “Payments with cash leave a vivid memory trace and are more punishing (as the customer is physically parting with their cash). However, credit card purchases require only a signature, and hence the pain of payment is of a lower intensity.”

Ari Shapiro of NPR’s Morning Edition noted in a recent broadcast, “I read that when McDonald's started allowing credit card purchases, the average purchase went from $4.50 up to $7.00.”

So, what gives: Paper or Plastic? I say paper. There is no doubt that an even greater shift towards electronic payments is what lies ahead, for so many reasons.

In an interview with Fortune’s Jennifer Reingold, JCPenney CEO Ron Johnson announced the next phase of his ‘transformation’ plans for the retail giant: no more cash registers by 2013. “My goal…by the end of 2013 is to eliminate the cash route,” said Johnson. It’s only a matter of time before more and more businesses follow suit…

For those businesses so focused on the costs associated with this trend, the ones who are taking action against card networks; it’s time to find a solution. Pam Cherba, president of Lakeshore Interiors in Navarre, Minn., which participated in the class-action lawsuit told the Wall Street Journal her clients often use credit cards to pay for her carpeting and window treatments, which can run thousands of dollars. “To add surcharges to a previously quoted price is bad form: "You lose your relationship and credibility," Cherba says.

Businesses like Kroger (who spearheaded the lawsuit) are taking a much wiser step towards saving money on swipe fees; offering discounts for paying cash. According to CBS4 in Denver, the nation’s largest grocery store chain is considering offering customers a two percent discount if they pay with cash creating a win-win situation, at least until businesses, card issuers and banks can agree on reasonable swipe fees.

The future is now. As we invite in yet another player (mobile companies) to the big business of making and moving money – it’s time to heed the wisdom of the late American industrialist, Henry Ford, “Coming together is a beginning; keeping together is progress; working together is success.”

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