No Checks. No Cash. No Fuss?

By THOMAS McCARROLL

Leigh Anderson is getting rid of her cash. She uses a bank-issued debit card to buy everything from groceries and gasoline to stamps at the post office. "I used to keep spare change for coffee, but the 7-Eleven just started accepting the card," says the 33-year-old education consultant. She shuns checks too, having signed up for a new computer service called ScanFone that lets her pay her credit-card, utility and 17 other bills in just 10 minutes by tapping a few numbers on the keypad of a high-tech telephone that sends instructions to the company's central computer. "I guess you don't have to see your money to have it or spend it," she says. "It's a little weird, but dollars aren't clean anyway."

Ever since 1888, when philosopher Edward Bellamy foresaw a utopian world where money would be replaced by a card based on the "credit" built up by workers with their labor, financial prognosticators have hailed the coming of the cashless society. Club Med founder Gilbert Trigano tried to create some cashless utopias of his own by asking his guests to pay for things with beads as part of their tropical vacations. But in everyday life, consumers until now have largely chosen to hold on to their coin purses, dollar bills and checkbooks, reflecting an atavistic, under-the-mattress reluctance to part with their purchasing power.

These days it looks as though more Americans than ever are willing to let go. They are traveling through coinless tollbooths, banking at branchless banks, riding in tokenless subways and paying for everything from taxi rides to mortgages with the swipe of a card or the blip of an electronic transfer. Such transactions accounted for 18% of the $55 trillion total that consumers, corporations and governments spent last year. But the number of electronic transfers has increased nearly 200% since 1986, in contrast to a 17% rise in the number of check and cash transactions. And the volume of household bills paid through automated systems such as ScanFone and Checkfree Corp. has doubled since 1991, to 800 million last year; 20% of utility bills, 16% of auto loans and 17% of mortgage installments are now paid electronically.

Retailers of all kinds are going the cashless way. Supermarkets such as Safeway and Giant, fast-food restaurants such as Wendy's and Burger King, newspaper stands in Philadelphia's CoreStates Bank Plaza and even some taxis in Manhattan are now accepting credit cards. The New York City transit authority has joined the Washington Metro and the Bay Area Rapid Transit line in installing a fare-card system, which has contributed to a 40% drop in fare beating this year and could soon be used to introduce different price levels that reward frequent riders. Some states, among them Maryland, are replacing food stamps and welfare checks with bank cards that give welfare recipients access to prearranged monthly sums. At the New York City synagogue Ohab Zedek, members can have their monthly donations electronically deducted directly from their bank accounts. "This makes giving more painless," says Sol Zalcgendler, the congregation's executive director.

Meanwhile, fewer checks are in the mail. More than a third of all U.S. workers have their paychecks directly deposited into their bank accounts, compared with 8% in 1988. Almost half of the Federal Government's annual budget is transferred electronically -- to pay the salaries of 1.9 million people (or 86% of its civilian payroll) as well as benefits for war veterans and subsidies for farmers. This year the Internal Revenue Service will send refunds to the bank accounts of 10.5 million taxpayers, 7% more than last year. And in the private sector, computers are now handling 10% of the $50 billion in money transfers between corporations and their suppliers.

So has the cashless era of the philosophers finally arrived? So far, with every advance made by encoded plastic cards and automated billing systems, there have also been glitches or concerns about fraud and privacy. At Chemical Bank, for example, automated teller machines mistakenly deducted a total of $16 million from 100,000 customer accounts in February because of a typographical error in a single line of computer code. The bank bounced 430 checks as a result of the malfunction.

Or consider the problem of fraud, which high-speed computers can unwittingly abet. According to the IRS, the number of fraudulent electronic filings doubled to 26,000 last year, at a cost to the government of nearly $54 million, as computers spat out refunds before IRS examiners could go over the returns. Such incidents have led critics to warn that the rush to automated payment systems is proceeding too fast even for computer experts. "The demands on software are far outpacing the development of software," says Dain Gary, a manager at the Software Engineering Institute at Carnegie-Mellon University.

Small wonder that the advance toward a cashless society has created a new category of frustrated consumers. Hudson Hendren, an engineer in Herndon, Virginia, was mortified last summer when the phone company shut off his service after failing to receive a payment he had made through the ScanFone system. In New York City, hundreds of subway passengers complained last month that the new electronic fare cards were double-charging them for rides or failing to let them through the automated turnstiles. A spokesman for the Metropolitan Transportation Authority blamed the confusion on riders who had not yet learned to use the cards properly and were running them twice through the bar-code reader at the turnstile.

Above all, high-tech payment systems create new problems of privacy even as they increase convenience and efficiency. Maryland became the first state to provide debit cards for welfare clients last year when it issued its "Independence Card" to 170,000 households that received public aid. The cards enable recipients to shop at supermarkets such as Giant and Safeway as well as at 3,500 other stores around the state; families on welfare can also use the cards to withdraw cash from ATM machines and to pay utility bills and rent for public housing. Among other benefits, these cards have virtually eliminated the expense of preparing and distributing welfare checks.

But privacy advocates fear that state bureaucrats could use the cards to pry into the personal lives of welfare recipients by tracing their electronic purchases. "Poor people are an easy mark," says Robert Ellis Smith, who publishes the Privacy Journal, a monthly periodical in Providence, Rhode Island. "They're resented by the public, which thinks they should be monitored."

The push for a cashless society is gaining momentum, however, if only because making money disappear is also a way of saving money. There are about 12 billion pieces of U.S. paper currency, worth $150 billion, circulating worldwide, which works out to about $30 for every person on earth. Keeping all that paper in use is a costly chore for the government. Most $1 bills wear out after about 18 months. To retire, destroy and replace all aging currency costs the government an estimated $200 million a year. Currency is cumbersome for businesses as well. People have to count it, armored cars have to carry it, bank vaults have to store it and security guards have to protect it.

Checks too are expensive to handle. About 55 billion checks are written every year (more than 37% of all consumer payments), and the processing costs the nation's financial institutions about $1.30 each. Banks end up losing money on about half of all checking accounts, since the handling costs often exceed the interest earned on lending out the deposits. An electronic transfer, on the other hand, costs only 15 cents per blip.

Some of the biggest users of electronic transfers have thus reaped substantial benefits. The Federal Government saved $133 million last year by paying 47% of its 815 million bills by computer rather than by mail. And General Electric, which received 40% of its $60 billion in revenues electronically in 1993, expects to spend $2.5 million less for stamps and envelopes this year because it is using computers to pay 1,000 of its suppliers.

But savings are not the only reason Americans are warming to the idea of parting with their cash. Electronic transfers are starting to become convenient. These days 23% of homes have personal computers, in contrast to 11% five years ago. As a result, some 900,000 subscribers are signed up with banking services via online information systems like Prodigy. "I don't know how I got along without it all this time," says Floraine Alba, a grandmother in New Providence, New Jersey. Alba used to write 50 checks a month. But she now uses ScanFone and willingly pays $11.95 a month to cut three to four hours off her bill chores. "Spending all day writing checks and stuffing envelopes was bad enough," adds Alba. "I then had to go stand in line at the post office."

The main weapon against cash and checks is plastic -- credit cards, bank debit cards and so-called smart cards. Together they represent 9% of total consumer payment transactions and are expected to reach 15% by 2001. Besides taxicabs and newsstands, credit cards are employed in parking garages and movie theaters and could soon be the way that Americans pay their taxes, if industry lobbyists prevail. But since card issuers charge an average of 16.5% while the irs extracts only 7% for late payments, consumer groups warn that taxpayers should be wary. So far, stiff interest rates have done little to curb the use of plastic. The number of Visa and MasterCards in use has climbed 3% in the past year, to 225 million, while credit-card transactions have jumped 7.3%, to 1.7 billion.

But the fastest-growing charge cards are the ones that automatically deduct money from checking accounts. The amounts riding on such debit-card use could zoom nearly 600% over the next eight years, according to H. Spencer Nilson of the Nilson Report, an Oxnard, California, newsletter that follows this industry.While Visa's credit-card business grew 16% last year, the use of its "CheckCard" debit service jumped 47%, as consumers sought to avoid finance and interest charges.

Both credit and debit cards could one day be eclipsed by smart cards, which look like conventional bank plastic but store information on computer chips instead of magnetic stripes. Such cards could hold, say, the profile of an airline passenger, including his frequent-flyer points and seat preferences. With a single swipe of a card through an airline's electronic reader, a traveler could make a reservation and get a seat assignment.

The card can also carry specific dollar values. Newspapers like the Philadelphia Inquirer are testing $10 cards that would deduct 50 cents each time they are inserted in news racks. No more fumbling for loose change. Telephone companies are issuing cards good for so many minutes of calling time. And a brand-new electronic highway toll system developed by AT&T and Lockheed in Orange County, California, lets drivers pay without stopping. Radio receivers pick up signals from dashboard-mounted cards as vehicles zip through toll lanes. The fees are deducted directly from the drivers' bank accounts. Says Bob Bess, a customer-service representative who lives in Trabuco Canyon, California: "It's kind of fun to whiz by at 60 miles an hour while others are waiting in line."

Not everyone striving to be cashless has achieved this sense of breezy convenience. But the vision seems only a few mishaps and controversies away.