10 February 2016

Cash is here to stay says US Federal Reserve

30 April 2014  |  6139 views  |  5 back of one dollar note

While Finextra Future Money delegates debate the future of cash and the UK's Halifax predicts its slow decline, the Federal Reserve Banks release fresh data which shows that US consumers choose to use notes and coins more frequently than any other payment instrument, including debit or credit cards

Citing evidence from the Diary of Consumer Payment Choice (DCPC), conducted in October 2012, the Boston, Richmond, and San Francisco Federal Reserve Banks highlight the key and enduring roles cash continues to play in consumer transactions.

"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," notes the report. "In certain cases, including that of mostly lower-income consumers who lack access to alternative payment options or find them too costly or difficult to obtain, cash is also used for relatively larger-value transactions."

In October 2012, the average American consumer had 59 transactions, including purchases and bill payments, and 23 of these 59 payments involved cash. At 40%, cash makes up the single largest share of consumer transaction activity, followed by debit cards at 25%, and credit cards at 17%. Electronic methods (online banking bill pay and bank account number payments) account for seven percent, while cheques make up seven percent. All other payments represent less than five percent of monthly transaction activity, with text and mobile payments barely registering at less than one half of one percent.

By value, cash accounts for a relatively small share of total consumer transaction activity at 14%, while electronic methods make up 27% and cheques 19%. These findings suggest that although consumers don't use electronic methods or cheques very often, when they do, it tends to be for much higher-value transactions. In contrast, cash is used quite often, but primarily for low-value transactions. In fact, the average value of a cash transaction is only $21, compared with $168 for cheques and $44 for debit cards.

Contrast this data with figures released by the UK's Halifax yesterday, which shows that debit cards are now used in 56% of all transactions. For every £100 customers spend, over a quarter (£28.87) goes on debit cards, with a further quarter (£27.72) accounted for by automated payments, with direct debits alone taking £19.90 of every £100 spent.

However, cash usage continues to decline, both as a proportion of transactions - representing just 17% of activity (down 1.8% in the last year) and £17.99 of every £100 spent (down £3.03 in the last year). And while cheque payments account for £11.28 of every £100 spent, they only enjoy a 1.7% share in terms of the number of transactions.

Nonetheless, over at Finextra's Future Money conference in Canary Wharf today, the Convergent Commerce panel seems to agree that cash is here to stay, with Zapp's Peter Keenan noting that projections are that cash usage will remain flat and it's not dying anytime soon. This is partly convenience but also cost, with card payments still considered too expensive for low value transactions.

The Federal Reserve data appears to back up this view, with consumers choosing cash for half of all their transactions valued at less than $50. About one-third of the average consumer's monthly payments involve transactions with a 'ticket size' less than $10, and the average consumer uses cash for two-thirds of these transactions.

Concludes the Fed: "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."

Comments: (5)

Nebo Djurdjevic - Lina Consulting Inc. - Toronto | 30 April, 2014, 13:10

This confirms that consumer convenience is not enough to drive new payment methods and form factors for cash replacement. Merchants are in best position to influence consumer's with respect to the payment method they choose for a particular transaction - they are the only one having face-to-face contact in the overall payments processing chain. As long as the cost of electronic processing of small paymetns is not significantly reduced to be acceptable to the merchants we will continue to see this behaviour. There are new technologies being rolled that address this very issues, so we should see some movement in the coming months.

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Chris Yaldezian - IBM (Software Group) - San Ramon | 30 April, 2014, 19:07

Many smaller merchants in the US require a miniumum purchase (uaully $5) to use a debit or credit card. So, I agree, cash is not going away, anytime soon.

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John Candido - Black Cabs - Melbourne | 01 May, 2014, 12:30

Cash will go. Give it time and it will be forever gone.

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Ketharaman Swaminathan - GTM360 Marketing Solutions - Pune | 01 May, 2014, 19:23

Having predicted that The Death Of Cash Is At Least 190 Years Away, I'm not surprised by Fed's naming cash to the #1 position. But I'm shocked to learn from this report that mobile payments account for a measly 0.5% of retail payments - after 100s of millions of $ of investment poured into them for nearly a decade. I'm tempted to paraphrase John Maynard Keynes in predicting that "the world will stay with cash for longer than mobile payment vendors will stay solvent."

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Chris Yaldezian - IBM (Software Group) - San Ramon | 01 May, 2014, 20:52

Mobile payments will catch on. Given time. Even if most mobile vendors will not make it.  But, cash is here to stay. It is anonymous, quick and easy and most important, almost always accepted (although airlines are moving away from it while in flight).

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