Rap super group Wu-Tang Clan scored a hit in 1993 with the song “C.R.E.A.M.,” which stands for “Cash Rules Everything Around Me.”
Cash may have been king twenty-three years ago, but massive changes have occurred to how we pay for goods and services, with forms of electronic payments such as debit, credit and gift cards increasingly winning market share.
We’ll likely never know whether the rap group updated its hit song to the more accurate, but less catchy, “E-Payments Rule Most Things Around Me” on its latest album, a limited edition of one that sold for $2 million in 2015. Nevertheless, you can rest assured that the album’s purchaser likely paid electronically.
According to The Nilson Report, a trade publication focused on the payments industry, US consumer transactions totaled $8.9 trillion in 2013, with 55 percent ($4.9 trillion) of these remittances coming from cards, 17 percent ($1.6 trillion) from cash and 11 percent ($1 trillion) from checks.
The publication expects purchase volumes involving cash to decline 34 percent by 2018, to $1.03 trillion. This same study forecasts a 46 percent drop in check payments to $0.57 trillion. Meanwhile, purchases made using credit cards are expected to surge by another 65 percent to $4.11 trillion, debit cards by 49 percent to $3.11 trillion and electronic payments by 61 percent to $2.17 trillion.
Some of this transition reflects the growing popularity of e-commerce, which has increased to about 10 percent of US retail sales (excluding auto dealers and gasoline) and continues to win market share from brick-and-mortar retailers. Over the past four years, quarterly e-commerce sales tracked by the US Census Bureau generally have grown at a 12 percent to 15 percent clip relative to year-ago levels.
Brick-and-mortar retailers must compete with an almost infinite number of online storefronts, effectively giving anyone with an Internet connection and a credit or debit card access to the world’s largest virtual shopping mall. And the proliferation of mobile devices means that we can carry this virtual shopping mall in our pockets and shop whenever the mood strikes.
Macy’s (NYSE: M), Starbucks (NSDQ: SBUX) and other retailers have expanded their e-commerce capabilities, enabling consumers to complete their purchases online and pick up their orders in-store. Competitors have taken note and launched similar initiatives. Starbucks has even indicated that the company could roll out its successful mobile payment and loyalty program as a platform for other retailers.
All of these efforts to make shopping and paying for goods and services more seamless translate into more electronic transactions and fewer payments by cash and check.
And several technological innovations should help to accelerate the transition away from cash to cards and electronic payments.
Apple (NYSE: AAPL), Alphabet (NYSE: GOOG), Samsung Electronics (Seoul: 005930), JPMorgan Chase (NYSE: JPM) and Wal-Mart Stores (NYSE: WMT) have all rolled out or announced so-called digital wallets—Apple Pay, Android Pay, Samsung Pay, Chase Pay and Walmart Pay—that consumers can use to pay bills in restaurants and stores.
These innovations depend on a process called tokenization where digital credentials replace account numbers in online and mobile payments, eliminating the repeated transmission of sensitive data with each transaction. A near-field communication chip (NFC) transmits this token to the payment terminal when you bring your mobile phone in close proximity to the reader.
Although these technologies have yet to catch on in a big way, industry participants have noted that the legally mandated rollout of EMV chips in cards and point-of-sale terminals in the US should spur the adoption of tokenized, touch-free payments.
EMV chips can to extend the payment process, leading to longer lines at retailers; the implementation of this technology in international markets generally has helped to boost adoption of mobile payments—one of the big reasons technology and financial heavyweights have launched their own digital wallets over the past year.