Article

Fed study spells out importance of cash to consumers

A study of US consumer spending preferences reveals strong cash use across all incomes and age groups.

May 12, 2014 by Suzanne Cluckey — Owner, Suzanne Cluckey Communications

“It’s commonplace these days to predict the demise of cash.”

Judging by the first line of a new Fed report, members of the nation's central bank have been reading the MasterCard Cashless Pioneers blog. However, the report, “Cash Continues to Play a Key Role in Consumer Spending: Evidence from the Diary of Consumer Payment Choice,” makes it clear that the Fed doesn't actually subscribe to the cashless point of view:

[C]onsumers choose to use cash more frequently than any other payment instrument, including debit or credit cards. Cash plays a dominant role for small-value transactions, is the leading payment instrument for many types of purchases, and stands as the key alternative when other options are not available.

The report is based on findings from the Diary of Consumer Payment Choice, a study developed jointly by the Boston Fed’s Consumer Payments Research Center, the Federal Reserve’s Cash Product Office in San Francisco, and the Payments Studies Group at the Richmond Fed.

The study was based on a random sample of 2,468 respondents from across the United States conducted in October 2012, with responses weighted to match national population estimates according to the Census Bureau’s Current Population Survey.

A summary of key results from the study reveals that cash remains a healthy and essential means of payment among Americans.

Following is a condensed version of the findings; the full 15-page report is available for downloadfrom the Federal Reserve Bank of San Francisco website.

Cash is the most used retail payment instrument. 

Of 59 transactions, including purchases and bill payments, 23 involved cash. Cash makes up the single largest share of consumer transaction activity at 40 percent, followed by debit cards at 25 percent, and credit cards at 17 percent. Electronic methods (online banking bill pay and bank account number payments) account for 7 percent, while checks make up 7 percent.  All other payments represent less than 5 percent of monthly transaction activity, with text and mobile payments barely registering at less than one half of one percent. 

Cash is the dominant instrument for low-value payments. 

According to the study, consumers make “a lot” of low-value transactions each month — usually in cash. About one-third of monthly payments involve transactions of less than $10, and the average consumer uses cash for two-thirds of these transactions, and overall, for half of all transactions of less than $50.

Cash is widely used, even where other payment options are typically available.

Cash is the leading payment instrument for several expenditure categories, including gifts and other transfers between people; food and personal care supplies; entertainment and transportation; medical, educational, and personal services; and government and nonprofit expenditures.

Food and personal care supplies make up 60 percent of all cash transactions, with entertainment and transportation, general merchandise, and auto and vehicle related expenditures collectively accounting for an additional 26 percent of cash transactions.

Consumers who prefer cash are a diverse group.

Consumers of all age groups list cash as their preferred payment instrument. Contrary to conventional wisdom, 40 percent of 18–24-year-olds actually prefer cash, the highest percentage of any age group.

Young adults actually use cash far more frequently than they do debit cards, which is their most frequently preferred payment instrument.

Income exerts a strong influence on payment preference.

Of consumers with household incomes less than $25,000 per year, 55 percent prefer cash over non-cash payment instruments. On the other hand, households making more than $200,000 per year exhibit a very strong preference for credit cards.

The preference for cash declines sharply once household income exceeds $25,000 per year, with debit cards cited as the preferred payment instrument for all those in household income groups between the two extremes.  

What is surprising, however, is that, despite the declining preference for cash as income rises, all income groups use cash for around 22 transactions per month.  

Low income consumers use cash differently.

Those making less than $25,000 annually use cash for a much wider variety of transactions than do those with higher household incomes. Consistent with this, the total value of low-income consumers’ cash spending, at $558 per month, is much higher than any other income group’s cash spending.

This finding is not surprising in light of various studies of “unbanked and underbanked” U.S. consumers, many of whom also fall into the lower-income category.

Cash is the preferred back-up payment instrument.

Not only does cash play an important role in small value transactions and as the primary payment instrument for low-income consumers, it also plays a significant role as the fallback payment instrument for most consumers. Cash was second to debit cards as consumers’ payment instrument of choice.

Consumers who typically do not use cash for higher ticket transactions (i.e., those with relatively high household incomes) tend to use cash differently (i.e., for higher values) in use cases where other options are not as readily available.

Conclusion

While debit and credit cards are growing strongly, and cash’s share of total consumer transactions may well be declining, the 2012 Diary results suggest that cash still plays a very significant role in the consumer payments landscape.

cover photo: ptmoney

About Suzanne Cluckey

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Suzanne’s editorial career has spanned three decades and encompassed all B2B and B2C communications formats. Her award-winning work has appeared in trade and consumer media in the United States and internationally.