Consumers are spending> again, but gone are the days of swiping and signing for everything from lattes to lawn furniture. Shoppers are reaching for paper money, and as they do, stores and even credit card issuers are increasingly ready to reward them with more cash.
Already customers are showing a strong preference for cash. Consumer spending is up 2.2% so far this year, but none of the four major credit-card companies have benefitted from the increase. Visa credit-card transactions were down 1.2% in the first half of the year, compared with the same period in 2009, according to the Nilson Report, which tracks payment systems. MasterCards were used for about 10.2% of all card transactions, also down, and the company acknowledges that its growth is coming from debit card use these days. Discover transactions also dipped slightly; only American Express s business remains steady.
Instead, consumers appear to be spending money they currently have, paying for purchases with a debit card or actual cash. The dollar amount charged with debit cards has grown 15% this year (spending on credit cards was up just 1.9%). And debit-card transaction volume is expected to grow 8% to 12% annually, according to the TowerGroup, which tracks bank cards. A lot of people are leery of credit cards and don t want to fall back into debt that s why you re seeing this migration, says James Brown, emeritus professor at the University of Wisconsin at Milwaukee and former director of the university s Center for Consumer Affairs.
Here are three more signs that cash is making a comeback.
Gift cards are out
After nine consecutive years of gains, gift cards are on the wane. Sales of gift cards are expected to drop to $86.2 billion, an 11% decline from their peak in 2007, according to CardHub.com. Shoppers want to avoid pitfalls like expiration dates and inactivity fees that can quickly erode a card s value, says Kwame Kuadey, chief executive of GiftCardRescue.com, which buys and sells gift cards. Even if you use a portion of the gift card, these inactivity fees can kick in if the rest of the card remains unused for at least 12 months. However, the Card Act eliminated other loopholes, including extending expiration dates to at least five years after the gift card is issued. Before, expiration dates could kick in at any time and often did within one year.
Meanwhile, more consumers are selling the gift cards they already possess for around 10% to 20% less than face value to third-party sites like GiftCards.com, CardHub.com, PlasticJungle.com and GiftCardRescue.com. Sales at GiftCardRescue.com are up 1,000% through October of this year compared to the same period in 2009, says Kuadey. PlasticJungle.com says sales have more than doubled through the middle of this year. People would rather use the cash anywhere they like than be restricted to a specific store, says Dan Horne, professor of marketing who tracks the gift-card industry at Providence College. In turn, consumers who shop at specific stores can buy the cards at a discount; for example, GiftCards.com recently listed a SpaFinder gift card worth $100 for $86 and a $37 Home Depot card for $34.
Cash discounts are coming
Within a few months, consumers could save up to 2.5% on most purchases by paying with cash. A clause in the financial reform bill allows merchants to discount items for shoppers who pay with dollars. And the Justice Department settlement last month with MasterCard and Visa allows retailers to discourage the use of rewards credit cards or other credit cards they deem expensive in order to avoid the high fees that card issuers charge when a store customer pays with plastic.
The result could be a system of price tiers, where retailers offer different prices for each product based on method of payment with cash the cheapest, says Doug Kantor, counsel to the Merchants Payments Coalition, a coalition of retail trade groups. They d love to be able to offer discounts for cash, and that could soon happen, he says. So, consumers who pay with cash could, say, get a $200 coat for $195. Some might extend those lowest level prices to debit card purchases, he says. If you spend, say, $800 in cash on groceries each month about average for a middle-class family of four, according to the USDA that 2.5% savings could add up to $240 a year.
Even credit card companies know you want cash
To counter this shift to cash, credit-card companies are offering some of their own up to $100 to encourage consumers to sign up and make purchases, promotions not seen since 2007, says Odysseas Papadimitriou, CEO of CardHub.com, which tracks credit card offers. To qualify, consumers need a FICO credit score of at least 720. Of course, just like cash for checking account offers, banks expect to make thousands of dollars off these accounts. These cards are mainly offered to consumers who pay in full every month, represent a low risk of default, but who are heavy credit-card users who net credit-card issuers about 1% of the total purchase price each time they swipe their card fees that merchants pay the card companies, he says.
To get the $100 sign-up bonus, you ll have to give up cash, too, at least in the short term. With the Chase Freedom Visa card, consumers have to charge at least $799 in the first three months to get $100, and with the Discover More card, you ll have to charge at least $500 in the first three months for $100. And even then, most issuers post the money as a credit to your statement.