When the recession hit, Adam and Allison Stewart started searching for ways to tighten their budget. Eventually, Allison looked at the couple’s credit card bill, and what she found was disturbing.
The Stewarts had been paying more than the minimum balance each month to eliminate their $7,000 debt more quickly. Even so, almost one-third of every payment was going toward interest.
The Baton Rouge couple buckled down, doubling up on payments for seven months until the debt was paid. Then they canceled the card.
The Stewarts now have more than $7,000 in savings. And with the exception of their home mortgage and car loans—both of which were financed long before the start of the recession—they have only one form of payment: cash.
“We’ve started socking away as much as we can every month, and it has become almost like a game to see how much we can make that balance go up,” Allison Stewart says. “We have several major purchases we want to make—a new refrigerator and dishwasher, and an outdoor kitchen—but not until we can pay cash for it. And I know this may sound funny, but it feels really good to be in this situation.”
The Stewarts aren’t the only ones who have resorted to currency in tough times. Cash is emerging as the new king of commerce.
The Federal Reserve Bank of Boston’s Consumer Payments Research Center, which conducts an annual national study of consumer payment practices, found in its most recent survey that cash payments increased a whopping 26.9% from 2008 to 2009.
Consumers have more cash on hand, too. They’ve tripled their rate of personal savings from 2% of their disposable income to about 6%. The typical consumer now keeps $291 in cash on hand, a 26.5% increase, while withdrawing $434 per month from his or her bank account, a 29.2% climb.
In a typical month, more than half of all consumers paid with cash or a debit card, which is directly connected to a bank account; and debit cards—once the most popular form of payment—now are used only slightly more often than cash. In addition, one in three consumers now have a prepaid card as opposed to a credit card.
During the same period, consumer usage of credit cards decreased by nearly 30%.
“For many years, consumers had been migrating away from paper instruments towards cards and electronics,” says Scott Schuh, director of the Consumer Payments Research Center. “In 2009, consumers reversed that trend and moved back to more reliance on cash.”
A similar statistical study of the Capital Region has yet to be conducted, but there’s plenty of anecdotal evidence to suggest that cash fever has caught on here, too.
And not just for things like Happy Meals and double lattes. We’re talking big-ticket purchases, like furniture, appliances, cars and even wedding receptions.
On a recent Monday, a customer walked into the Infiniti of Baton Rouge dealership and paid $15,000—in $100 bills—to finance a lease. Infinitis don’t run cheap, with a median vehicle price of $34,000 and, on some models, a manufacturer’s suggested retail price of more than $70,000.
But cash deals are no surprise to General Sales Manager Brett Kemp, who says that one in 10 customers pays in cash, even though there’s no difference in price.
“We’re a luxury branch, so our customers have more access than most to cash,” he says. “Most of our customers are business owners and professionals who graduated up to this luxury line of cars.”
At Gerard’s Fine Furniture Gallery on Florida Boulevard, there is no discount for paying cash. The financing through GE Money is nothing to scoff at—one year interest-free.
Even so, three-fourths of Gerard’s customers now pay with cash or check for the likes of imported bedroom suites, leather couches, dining room tables and home office furniture. Just 15% pay with credit cards, and only 10% take up the offer to finance.
Owner Gerard Ruth, 80, who has been selling furniture since he was 15, understands the new preferred method of payment.
“I used to have three credit cards myself, and now I’m down to one,” he says. “Some people don’t pay their credit card in full in 30 days. That’s why it’s come to this.”
John Vogt, general manager of the Lamar-Dixon Expo Center off La. Highway 30 near Gonzales, has noticed a trend among young couples preparing to tie the knot: They pay cash.
The multipurpose event facility, which is owned by Ascension Parish, has a thriving wedding reception business, and Vogt says payment is almost entirely cash. The typical rental fee is $2,200.
“My experience at other facilities like this has been that a lot of people charge expenses like that to their credit card,” he says. “But now it’s almost exclusively paid for with cash.”
Although there is the occasional pricey party, such as the $30,000 wedding with 300 guests and a huge catered dinner, Vogt says wedding celebrations are becoming increasingly modest.
“The feeling I get is that people are being just a little more conservative in their spending habits, spending what they have as opposed to building up debt on credit cards,” he says. “And people who are planning a wedding tend to be even more cost conscious.”
Not everyone is thrilled to see cash coming through the door.
Christian Street Furniture owner John Burns says his company prefers debit or credit cards. Checks are accepted only if the customer agrees to wait 10 days for his or her merchandise until it clears. If the company deposits over a certain amount of cash and checks, its bank charges an additional fee for processing.
“Cash was never the majority of our business, and now it’s getting to be even less,” Burns says. “We prefer to take plastic all the way. It saves us a trip to the bank, and it’s so much safer.”
Even so, consumers currently have a love affair with cash. When the Consumer Payments Research Center asked consumers to rate different forms of payment based on convenience, security and other factors, a larger share gave cash the highest rating of all.
So in an age when we have the capability to buy a new stereo and pay the cable bill from our mobile phone while taking a bubble bath, why is cash suddenly our payment of choice?
Analysts say the most obvious reason is uncertainty about the state of the economy. Sure there’s talk of a recovery, but there also are reports that 13.9 million people remain jobless, housing markets have hit new bear-market lows, the U.S. factory sector has just seen its largest one-month slowdown since 1984, motor vehicle sales are decreasing by double figures, and the Dow remains 13% below its all-time high.
“Those are the kinds of news items that shock people into saying, ‘Hey, we’re not moving as well as we should be,'” says Gary Littlefield, market president for Gulf Coast Bank & Trust.
Rajesh Narayanan, the Charles Cameron Professor of Finance at LSU, says uncertainty about jobs and about the ability to maintain current income levels is prompting consumers to re-examine their household budgets and search for ways to become more disciplined with their spending habits. During the time frame of the Consumer Payments Research Center study, for example, revolving credit outstanding fell from 8.8% of disposable income to 7.8%.
Consumers are working to reduce their debt, decrease credit card use and put money into savings, even though interest rates currently are not very favorable. Paying cash is part of the plan, too.
“Cash has a touch factor associated with it,” Narayanan says. “When you swipe your credit card, you really don’t have a good mental tally of what is available or what you’ve used up. When you take out $500, you know exactly how much you have left.”
Bennett Blackledge, branch sales and operations manager and business development officer for Gulf Coast Bank & Trust, sees more people like the Stewarts, and also more businesses, preparing themselves for purchases. He thinks that’s part of the reason why savings now account for 6% of disposable income.
“The environment used to be, if you wanted something, you’d just go get it and put it on the credit card,” Blackledge says. “Now what people are doing if they want that big-screen TV is saving the money and then setting aside the cash to pay for it.”
But it goes both ways.
The tight credit market has made it impossible for some people to get credit cards; others have seen their credit limits reduced. The Credit Card Accountability, Responsibility and Disclosure Act of 2009 reduced the overall supply of revolving credit to protect consumers from high-interest debt. The Federal Reserve also implemented similar rules.
The measures limiting a bank’s ability to price its credit card service and profit from it might have reduced a willingness to supply credit to all but the most creditworthy customers.
“What we’ve been seeing is people with a $10,000 credit card and a $4,500 cash limit who had a very good history with the company, all of the sudden now have a $5,000 card because of other exposure they have out there,” Littlefield says. “Companies have been shrinking limits as people have paid down.”
Curiously enough, debit cards, which had emerged as the payment of choice, are falling out of favor, too. According to the Consumer Payments Research Center, debit cards are now used only slightly more often than cash, and their use declined 10% from 2008 to 2009.
Schuh surmises that overdraft fees might partly account for this shift. Until recently, many banks automatically charged sizable fees for overdraft protection unless their customers opted out. Consumers now must opt in to the service.
Also adding to the cash craze, though to a lesser extent, is that some merchants are fed up with the fees they pay to their banks for credit and signature debit card payments. So some retailers, such as gas stations, now offer discounts to steer customers toward lower-cost payments like cash or debit cards with a personal identification number.
There also is evidence of heightened concern among consumers about computer security and identity theft, which might affect usage of some electronic payment methods.
What remains to be seen is whether cash will remain king for very long. Analysts note payment trends are typically cyclical.
“The findings raise the important question of whether this move signals a permanent reversal,” Schuh says, “or a transitory response to the severe recession.”
Narayanan doesn’t expect to see change anytime soon.
“For the foreseeable future, this is the way it’s trending,” he says. “Until we get a good, robust economic recovery, we’re not going to see anything close to what we saw prior to 2007. It appears cash usage is here to stay for now.”
