Cash Continues to Play a Key Role in Consumer Spending: Evidence from the Diary of Consumer Payment Choice
INTRODUCTION
It’s commonplace these days to predict the demise of cash. After all, consumers’ use of the other major physical payment instrument, the check, has plummeted over the last decade in favor of payment cards, especially debit (Figure 1). And with rapid growth in online commerce, it may not be too far-fetched to assume that consumers won’t even be able to use a physical payment instrument in the future. However, evidence from the Diary of Consumer Payment Choice (DCPC), conducted in October 2012 by the Boston, Richmond, and San Francisco Federal Reserve Banks suggests otherwise. Not only is cash a very different payment instrument than checks, but consumers 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. 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. Using the DCPC data, this paper explores where, how, and why people use the various payment options and highlights the key and enduring roles cash continues to play in consumer transactions.
SUMMARY OF KEY RESULTS
Cash is the most used retail payment instrument.
In October 2012, the average American consumer had 59 transactions, including purchases and bill payments, and 23 of these 59 payments involved cash. Figure 2 shows that, at 40 percent, cash makes up the single largest share of consumer transaction activity, 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.
By value, cash accounts for a relatively small share of total consumer transaction activity at 14 percent, while electronic methods make up 27 percent and checks 19 percent. These findings suggest that although consumers don’t use electronic methods or checks 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 checks and $44 for debit cards.
Cash is the dominant instrument for low-value payments.
As Figure 3 shows, consumers have a lot of low-value transactions each month, and typically use cash for these payments. 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. In fact, consumers use cash for half of all of their transactions valued at less than $50. Interestingly, both the actual number of cash transactions and cash’s share of all transactions fall as the ticket size rises, while the number of card payments remains roughly the same regardless of ticket size.1 As ticket size rises above $100, the number and share of electronic payments and checks take a significant leap, in part due to the influence of bill payments.
Cash is widely used, even where other payment options are typically available.
As shown in Figure 4, cash is the leading payment instrument for several expenditure categories, including gifts and other transfers between people (P2P); food and personal care supplies; entertainment and transportation; medical, educational, and personal services; and government and nonprofit expenditures. It is the second most frequently used payment instrument for all other categories except housing (and a distant second for financial and professional services). The average ticket size (see Appendix 1) for many of these expenditure categories is relatively low, suggesting that the reason cash is the most or second-most frequently used payment instrument is because small value transactions tend to dominate these categories. Moreover, the fact that debit cards tend to be used frequently for these expenditures as well indicates that cash usage likely is not the result of a lack of access to alternative payment options.
