Why online shoppers pay with cash

By Felix Salmon
July 5, 2012
Stephanie Clifford, of just how two-tier the US economy has become:

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Here’s a reminder, from Stephanie Clifford, of just how two-tier the US economy has become:

Walmart says the majority of in-store purchases are made with cash or debit cards, and that about 15 percent are made with credit cards.

I wrote on Monday about the downside of painless payments, which is that they make it too easy to spend money. And customers at Walmart, it seems, are acutely aware of that particular syndrome.

Megan McArdle moved to a no-debts, no-credit-cards personal-finance system in 2009, where you set up a detailed budget and put cash in different envelopes. “It sounds unbearably tedious,” she wrote. “But it’s actually incredibly freeing. I have never before felt like I had total control over my money”.

This is the downside of any payments revolution: the easier and cheaper it is to spend money, the less control we have over our own spending. Which in turn means that ultra-convenient payments, probably using your phone in some way or another, are realistically going to be a luxury for the middle classes and a cause of stress and danger for families living paycheck-to-paycheck.

Such families, it turns out, are very good — by necessity — at budgeting. Being forced to pay for everything with cash, or with its plastic equivalent, the prepaid debit card, is not an inconvenience so much as a helpful discipline. There are debt instruments out there, for emergencies — but credit cards aren’t used as a payments technology, because they make it far too easy to get into expensive debt without even realizing you’re doing so.

Clifford’s story, about the increasing number of people paying for things online and then picking them up in person, talks a lot about convenience: a Sears spokesman, for instance, is quoted talking about customers’ “need for immediacy”, while a chap from the Container Store conjures up a mom running errands with kids in the car, who just wants to pick stuff up and move on.

But it seems to me that the convenience here runs just as much the other way. Yes, there are people who are shopping online, who want whatever they just bought, and who want it now. These are people who would be shopping online anyway, and who just don’t want to wait to get their goods.

But there are many more people, I think — in number if not in purchasing power — who limit themselves to cash or its functional equivalents, and who welcome the idea of being able to browse and shop online. Shopping at Walmart is never exactly fun, and if you can just punch in an order online — especially if you can simply re-enter your family’s regular weekly shopping list — that saves time in the store and also makes it less likely that you’ll be tempted by some impulse purchase. This kind of customer isn’t using a different fulfillment channel for what would otherwise be a regular online order; instead, they’re basically just using a more convenient way of picking out the stuff they want at a store they’d visit anyway.

At Walmart, clicking the “pay with cash” option doesn’t literally mean you’re going to pay with cash:

In the first weeks of the cash option, Walmart noticed that a different set of customers also found the service appealing. About 40 percent of the customers who paid with cash when ordering online ended up using noncash options, like a credit card or check, when they arrived at the store. They simply had not wanted to provide that financial information online. “There’s still a large segment of people out there afraid of identity theft or just plain putting their credit card online,” Mr. Anderson said.

My gut feeling here is that although fear of identity theft might be part of what’s going on, another part is simply good financial self-discipline. If you want to keep track of where your money is, and if you want to minimize temptation, a “never buy anything online” rule is simple and effective. If you can enter a card number online to pick goods up at a store, then you can enter the same card number online to buy things from just about any website in the world. And many people simply can’t afford to open themselves up to those kind of opportunities.

15 comments

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The best thing to do with credit cards is to pay off all outstanding at the end of every month. I think that’s the best of both worlds – you get a 45 day rolling payment system that helps you plan your finances as well as limits you from making huge purchases because you have to pay-off when the bill comes

is there a better way?

Posted by InfiniteThought | Report as abusive

Well, that was certainly interesting, FS. An entire segment of society lacking in financial self-control, and doing what’s necessary to find some – good. More interesting is that a professional business-person and finance writer like Megan McArdle would need to resort to such an ‘elementary school’ kind of cash management to keep her personal finances above water. I mean – WTF?

Posted by MrRFox | Report as abusive

InfiniteThought, for most so-called “subprime” credit cards, the kind that working class people who have limited incomes or damaged credit get, the companies actually use a billing period shorter than thirty days, so you definitely don’t get “a 45 day rolling payment system”.

Yes, I think everyone agrees that the best way to use credit cards for consumer purchases is to pay all outstanding balances at the end of every month. Besides being banal, you’re missing the point here.

Did you miss the recent series of articles that showed about 28% of American families have no emergency fund? You can read about it at bankrate.com.

The “families living paycheck-to-paycheck” who are most exposed to the “stress and danger” of using credit cards are those who don’t have an adequate emergency fund to pay for things like a sudden unplanned expense. Say, the transmission goes out on the single family car, and to fix it costs three grand.

Well, the family breadwinner(s) need the car to get to work, so they’ll pay for the repair by charging it, and voila! At the end of the month they won’t have the ability to pay the balance in full, and they start down the debt snowball of paying down a significant debt at double digit interest rates.

A lot of people never get out from under the debt avalanche that starts with that simple snowball, which is why things like payday lending is so profitable.

Posted by Strych09 | Report as abusive

@InfiniteThough – I will second your thought and add that one can set up automatic bill pay to debit one’s bank account each month for the full credit card bill. It’s not economically different from making that payment in full otherwise but could help people think of each month’s credit card bill as a “must pay” item rather than a “might pay” item. I’ll also add that using a no annual fee card with a rewards/points program is in essence a discount to paying with cash if one doesn’t carry any balance month-to-month.

That said, I do understand that this way of looking at things is from the perspective of having a certain amount of disposable income and not scraping by paycheck-to-paycheck. I second MrRFox’s “WTF” because I’d expect Megan McArdle to be in this group.

Posted by realist50 | Report as abusive

@MrFox, I’ve observed little correlation between a person’s education, intelligence, and economic savvy and their ability to manage personal finances. If Megan McArdle recognized that she had a problem and found a way that works for her, more power to her.

For whatever reason, I emerged into adulthood as a natural saver (a behavior which many in the economic profession disdain). On the other hand, I find just about anything more interesting than budgeting. Those behaviors leave money on the table, but life is too short to spend just about any time at all following the last dollar.

Posted by Curmudgeon | Report as abusive

I think the explanation for the switch from choosing “cash” when ordering online to using credit card or debit card when picking up the order is quite simple: clicking “pay cash” online and then swiping a credit or debit card at the store is easier than bothering with entering card info online.

Plus, if you aren’t certain you will want the items you ordered, there’s no hold on your credit or debit account for the cost of your order.

As a bonus, here’s several simple explanations for the growing number of people ordering online and picking up in the store: you don’t have to pay shipping for in-store pickup; you don’t have to go to the store to look for the item and determine if it is in stock; and you don’t have to worry about delivery problems like packages left where they might be stolen, packages that require a signature for delivery, or packages held in an apartment manager’s office with inconvenient hours.

The ability to pick up the item withing a few hours of ordering sometimes matters, but that is an in-store benefit that exists independent of online shopping. Customers go to stores for same-day “delivery”. They order online before going to the store to ensure that the trip won’t be wasted and to enjoy the convenience of having the store pick the items off the shelf before you arrive.

Posted by ottnott | Report as abusive

Part of the problem with credit cards for people very carefully managing a budget is that it takes so long for payments to clear and show up on statements or on the website. Then it’s a huge inconvenience to not know how much you’ve spent in the past few days. Perhaps as mobile banking apps get better and people can constantly access an accurate transaction log this situation will improve. Most of the new pay-by-phone type systems do this much better than credit cards.

Posted by albertsun | Report as abusive

Strych09: I agree to your sentiments here. The ability to pay-off entire credit card outstanding is a luxury for most. However, it is also a habit change for a lot of folks to avoid buying expensive and sometimes high cost products and choose generic options

I completely agree that for families that live paycheck to paycheck, there isn’t a backup but credit cards are the worst possible back-up option of the lot.

Posted by InfiniteThought | Report as abusive

“The ability to pay-off entire credit card outstanding is a luxury for most.”

Yes and no… Let’s say a family with $40k income is carrying $10k of credit card debt. (That would be pretty bad, no? And nearly impossible to pay off?) Now back it up ten years. Over that ten years, if their balance has been steady, they have paid more than $10k in interest. Moreover, they have earned (and spent) $400k of income. Reduce expenditures by 2% and you put aside $8k of emergency savings. Then when the car dies, you don’t need to run up the credit card balance.

The problem isn’t that expenditures can’t be trimmed by 2%, it is that when you are living on an exceptionally tight budget, the utility of that 2% is high. So it is very tempting to live on the margin, perhaps even a little beyond the margin, and hope that future income improves enough to bail you out of the hole.

It is very difficult to put money in an emergency savings account, and leave it there, when doing so means going without “basic necessities” (even if they aren’t TRULY necessary). The problem is that once you run up that credit card bill, the interest cost cuts into your spendable income. Thus you ultimately end up going without those “basic necessities” *and* lacking an emergency fund.

Except, of course, for those whose circumstances improve sufficiently to eliminate the debt without reducing the lifestyle. And how often has that been happening in this economy?

Posted by TFF | Report as abusive

TFF, that was an insightful comment. Are you saying that the hypothetical family is going to have to maintain that 2% reduction in expenditures for the full ten years?

If so, then that’s part of the problem that makes high balances for credit card debts so difficult to pay off for working class families. It’s easy to calculate how much you need to reduce your expenditures by, but of course over the course of ten years all kinds of other “things are going to happen” that also require large, unplanned expenditures.

We agree that families should have an emergency fund so that they don’t need to incur credit card debt when a large, unplanned expense strikes. However, as the article I referred to above notes:
http://www.bankrate.com/finance/consumer -index/many-americans-emergency-fund.asp x

“Not surprisingly, earning more than $75,000 per year vastly increases the odds of hitting the minimum recommendation of six months [of living expenses, the amount of cash to cover which is the minimum family emergency fund rule of thumb]; 45 percent of high-income earners say they’ve reached or surpassed that mark.”

“Only 9 percent of these high earners say they have no rainy-day fund, compared to 52 percent of those earning less than $30,000.”

I think this says something profound about the manner in which the capitalist marketplace operates to separate people of lesser means from their assets (or keep them in debt), not their morals or “lack of financial self-control” that those people somehow have according to commenters like MrRFox.

Posted by Strych09 | Report as abusive

You’re right, Strych09, things happen. My wife just ended up back in the hospital again, and even with insurance that will cost us ANOTHER $1k. On a $40k budget, that’s your 2% for a year and then some.

I tell my students (and my kids) that they should try to live on 2/3 of their income. That isn’t terribly realistic, especially at the low end of the income scale, but it is a large enough margin that there ought to be a little left over even after over-optimism, gas price shocks, unexpected expenses, and occasional splurges. If you budget to spend 90% or more of your income, there is a really good chance that you’ll end up going into the red. (Same is true for businesses. Budgeting simply isn’t an exact science.)

When considering statistics on this, recognize that you are taking a two-dimensional slice from a multi-dimensional picture. The young are most likely to be carrying credit card debt. The young are also most likely to be earning less than $30k. It takes a while (and experience funding your personal lifestyle) to figure out how to budget effectively. It also takes a while to build up a five-figure emergency fund.

Most households with $75k+ of income have two (or more) people working to earn that money. Not surprising that married couples in their 30s, 40s, and 50s are more financially stable than kids fresh out of college.

Also, income typically rises over your working lifetime (at least until you get into your fifties and your employer decides to cut costs). The two points in your life when your income typically FALLS:

(1) You leave your parents’ household.
(2) Retirement.

The first is a major lifestyle adjustment, and the most common period of life for running up large debts.

Posted by TFF | Report as abusive

“If you can’t live on $50 a week, you can’t live on $500.” (one of the old-timers – can’t recall who)

More or less true, IMO – past mistresses have proven it, to my satisfaction. (Catch the double entendre there, did ya’, TFF/Strych?)

Posted by MrRFox | Report as abusive

Not sure about the insights here Felix.
I mean, who would have thought that Amazon’s “Buy now with 1 click”(TM) was for THEIR benefit, not mine.
Astonishing!

Posted by TinyTim1 | Report as abusive

“I wrote on Monday about the downside of painless payments, which is that they make it too easy to spend money.”

And that’s not a bug, it’s a feature. For the payment processors and card issuers. They _know_ this, they study it and do everything they can to exploit it. More spend = more fees, more interest payments.

That’s enough reason to pay cash.

Posted by Moopheus | Report as abusive

An insightful article and a whole bunch of very helpful comments. Am I really on the Internet?

I think this exchange of ideas begins to approach the gold standard. Good for Reuters and its readers.

Posted by nikacat | Report as abusive