With so much media attention on mobile payments and credit card security, it is easy forget that cash is still the king of retail. There are a few reasons why cash continues to be an important part of retail transactions, representing the largest category of financial activity.
Why cash is still responsible for the majority of all transaction activity
The Financial Brand pointed out that, as per a study by the Cash Product Office of the Federal Reserve, one reason society is still heavily reliant on cash is because it is the preferred method for making payments in small transactions. Another reason is that a substantial portion of the population simply does not use debit and credit cards. According to a Fed study, cash represents 40 percent of all purchases and bill payments. Debit cards account for 25 percent of that activity and credit cards contribute 17 percent. Electronic payments and checks are tied at 7 percent, with other forms of making payments representing less than 5 percent of all transaction activity.
"Cash is the preferred method for making payments in small transactions."
The Federal Reserve Bank of San Francisco also mentioned the Fed study and noted that approximately one-third of the average consumers' monthly transaction activity is due to small-value payments - transactions of $10 or less. Interestingly, for transactions of $50 and less, approximately 16 percent of consumers continue to pay using cash.
For certain payments, cash just seems right
According to The Financial Brand, cash still predominates a number of expenditure categories, such as gifts, food items, personal care supplies, educational services and government or nonprofit expenses. Considered to be day-to-day expenses, most of the categories listed witness heavy use of cash because, for the average consumer, it is just easier that way. Debit cards were also used frequently for these purchases, which goes to show that it is not for lack of payment options that consumers prefer cash.
Of particular significance was the fact that consumers hardly use checks for day-to-day expenses, noted FRBSF. Alternatively, person-to-person gifts rely strongly on the use of cash. With over two-thirds of gifts being paid for in cash, it is the most favored method. However, it should be mentioned that person-to-person gifts only represent six percent of all cash transactions.
More reasons why cash is a big deal
Perhaps the most surprising statistic of all to come to light, however, is that according to FRBSF, young people prefer to use cash. The Fed research found that 40 percent of consumers between the ages of 18 and 24 use cash. One would think that the young are more technologically inclined, but it seems that the younger portions of the population sometimes have limited access to banking services. As a result, young people go to cash because it is accessible and reliable.
The Financial Brand also pointed out that many consumers today want to rely on payment methods other than cash, with 43 percent indicating they would rather use their debit card, and 22 percent saying credit cards better suit their needs. However, for most consumers, cash is the second choice. In other words, cash is the main backup payment method amongst survey respondents. It is noteworthy that approximately 60 percent of consumers who endorsed debt or credit cards as their primary payment method also said that cash was their second choice - not another card option.
Considering all the information given, and factoring in all the changes taking place in financial services industry, decision makers should make sure that their business models reflect what consumers want and need. Any investments in electronic payment technology and digital banking solutions should be matched with investment in cash recyclers, smarter ATMs and other equipment that facilitates the access and use of cash.