Don't Give Up on Cash Just Yet

retail store cashWith the media coverage of new technology, it seems consumers have more options for making purchases today than ever before, including payments made straight from smart phones or key fobs. The adoption of credit and debit cards is nearly universal for all ages. It seems as if the use of cash is fading quickly in today's society.

But two economists from the Federal Reserve of Richmond discovered something different. Zhu Wang and Alexander Wolman write in an April 2014 report that cash remains popular for lower-dollar transactions because of its convenience and that certain populations of people remain underbanked, leaving them few or no alternatives to cash.

The data was taken from “a large discount retailer with thousands of stores” in most U.S. states with a median sale of slightly less than $7. The data consisted of about 2 billion transactions. After examining the demographics and purchasing habits of shoppers, the researchers estimated that cash usage would drop 2.54 percentage points per year over the next few years from its current level of 75%.

So, what exactly does this mean? Interestingly, the Fed data does highlight differences in populations that can help retailers and others who handle large volumes of cash predict how many bills may flow through their systems.

Women, those living in robbery prone areas and people who have higher incomes tend to use credit and debit cards more. Areas with more bank branches saw cash usage drop as well, indicating that people have access to alternative methods of payment. The study found that areas with higher minority populations of black, Native American or Hispanic people had more cash transactions than other neighborhoods.

As the purchase amount climbed, more people chose to pay via credit or debit card, indicating that many customers carry only small amounts of currency.  For sales of $1 and below, 93% of payments were in cash when data from the median zip code was analyzed. When the amount rose to $50, about half of transactions were still cash. Wang and Wolman also found that those who made less money tended to use cash more often.

Retailers located in areas with higher cash usage may need to find ways to better controls and improve efficiencies to account for the larger number of bills flowing through their stores. For operations managers looking across their retail locations, it makes sense to examine each store's population area when making cash management decisions.

What is clear from the report is that despite the increase in credit and debit card usage, cash will remain the predominate method of payment for many years to come.