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Cash Usage: Reports of My Death Have Been Greatly Exaggerated

by Margaret Weichert

Tags: Federal Reserve, Consumer Payments Research Center, Survey of Consumer Payment Choice, cash, checks, prepaid

Despite years of predictions suggesting that cash would one day disappear, recent data suggests cash is not only here to stay, but its usage may in fact be on the rise. Many pundits have long believed that dirty, "inefficient" paper money would soon be replaced by plastic cards, mobile payments, and possibly even biometric payments (has anyone seen "Demolition Man"?).

However, new Federal Reserve data from the Consumer Payments Research Center's "Survey of Consumer Payment Choice" shows once again that cash is the most familiar and frequently used payment type. And though typical cash transaction amounts have gotten smaller over time, the frequency of cash usage and the average amount of cash in use appears to be rising in the U.S. population overall.

Many payment industry wonks (myself among them), were skeptical when first told of this trend. After all, most of us are tried-and-true users of electronic payments in all forms: plastic cards, online bill pay, direct payroll deposit, even mobile payments. But it turns out that readers of PYMNTS.com may not be representative of the U.S. population overall when it comes to cash usage.

In fact, there are two key macro trends that may help explain this shift, despite the proliferation of many new electronic payment vehicles.

- Demographics: The first explanatory trend is demographic in nature. The two largest growth segments in the U.S. population overall -- millenials and Hispanics -- both have a high propensity to use cash. Some of their cash usage can be explained by attitudinal factors (aka fear or dislike of credit, lack of understanding/familiarity with checks) that cause both of these groups to index lower on their usage of both paper checks and credit cards than the population overall. In addition, these two populations are high users of another related area of payment growth -- in-person bill payments (e.g. for mobile phones, utilities, etc.). However, these two demographic groups both use debit cards and prepaid cards at very high rates and have been among the early adopters of mobile banking solutions, suggesting that they are not averse to electronic payment solutions.

- Decline in direct deposit rates: The few employment growth areas in recent years have been in service sector hourly jobs, many of which do not offer direct deposit as an option to hourly employees. Moreover, many of these jobs (particularly in restaurants) involve a significant amount of compensation being delivered in cash in the form of tips. These factors may have an important impact on the utility/access to electronic payments for individuals who are not receiving direct payroll deposits via the Automated Clearinghouse (ACH) system, since it may be easier for consumers to simply cash their entire paycheck and spend the cash, rather than deposit the money and then use a debit card, use online bill pay or other forms of electronic payment.

- Card acceptance by small businesses/service sector: Despite the introduction of many payment innovations targeted at small businesses, this sector is still heavily paper-based when it comes to payments. Small retailers, even when they accept card payments, often surcharge for the use of cards or impose minimums, that may encourage cash usage. As the result of recent regulatory intervention, these practices, once prohibited by the networks, may become more common.

In addition, there are a number of other economic factors at play, particularly in the current recessionary environment that may influence societal cash usage in the United States. Several interesting hypotheses for this cash increase trend include:

- Cash-based budgeting: Many nationally recognized "consumer financial advocates" (Suze Orman ring a bell?) have encouraged consumers to cut up their credit cards and get back to "cash based personal accounting... using budgeting tools like envelopes to track spending and minimize the "Starbucks Effect" of spending too freely and too often on expensive little treats. Despite behavioral economic evidence that suggests this type of "budgeting" does not necessarily improve the overall economic health of consumers, there may well be a number of consumers who eschew electronic payments in order to pursue this type of strategy.

- "Mattress Effect": As the credit crisis worsened in 2008-2009, the failure of both large and small banks made national headlines, creating nervousness and uncertainty among many consumer deposit holders. Some observers suggest that this may have caused a portion of the population to avoid the traditional banking sector and keep their savings/reserves on hand in the form of cash.

- Increase of "informal economic activity": With greater unemployment and economic uncertainty, the incidence of cash usage to avoid government tracking/tax implications may be on the rise, as individuals pursue casual employment opportunities "under the table" or small businesses look to avoid increased tax burdens by reducing the electronically traceable portion of their overall receipts.

Ultimately, this trend is extremely interest and important as a matter of payments strategy and even economic policy. Particularly in light of the Fed's recent Durbin Amendment ruling on debit card interchange, one can envision an environment where banks have even less incentive to provide attractive electronic alternatives to cash now that most of the fee income associated with debit and prepaid products have been eliminated.

And back to issue of my own cash usage... I'm going to do a survey of my own, because now that I think of it, my own cash usage may be rising on both an absolute and relative basis... due in large part by the cash preferences of my 20-year-old au pair and my "tweenage" son! Guess what they requested for Christmas (besides an iPad!) -- CASH OF COURSE! (Related Article: Cash: The Perfect Gift Western Union Survey Says More Than Half of Americans Prefer to Receive the Gift of Cash)

Twelve Days of Christmas

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