It has never been easier to go cash-free, but for all the digital wallets, smartphone apps and (by now) old-fashioned plastic out there today, for many consumers, cash is still king.
It is the most used retail payment instrument, the dominant instrument for low-value payments and often preferred even when other options are available, according to a recent report from the Federal Reserve Bank of San Francisco.
The report, titled “Cash Continues to Play a Key Role in Consumer Spending,” relied on evidence from the Diary of Consumer Payment Choice (DCPC) survey conducted by the Boston, Richmond and San Francisco federal reserve banks.
According to the DCPC, cash accounted for 23 of the average American consumer’s 59 transactions in October 2012, and cash clocks in at 40 percent as the most popular payment method, followed by debit cards at 25 percent and credit cards at 17 percent. Electronic methods tied with checks for just 7 percent of total payments.
But the value of the payments also matters. Cash is the dominant vehicle for low-dollar payments, averaging just $21 per transaction and accounting for half of all transactions valued under $50. As the value of the transaction rises, the preference for cash wanes. Electronic payment methods accounted for 30 percent of payments $100 and over, the Fed’s report said.
“We have multiple payment options, and it seems for as much as we think some systems might be retired, they aren’t,” said Nessa Feddis, the American Bankers Association’s deputy chief counsel for consumer protection and payments. “The only payment channel we’ve ever known to disappear is travelers’ checks.”
A Membership Card
Plastic may be a little better instrument than cash for banks, partly because it offers an easy source of noninterest income – interchange fees – that they don’t have to charge directly to their customers. More significantly, a debit card is emblematic of a customer’s relationship with a given bank.
“It is a symbol of your membership with that particular bank. You might have three credit cards and a couple of sports club cards and a CVS card and a lot of plastic from a lot of different merchants, but chances are, there’s only one debit card in your wallet,” said Robert M. Mahoney, president and CEO of Belmont Savings Bank.
While the debit card confers membership, automatic bill pay and other electronic payment methods create stickiness, said Glen White, chairman and CEO of Mutual Bank in Whitman.
Like many of its peers, Mutual Bank offers its customers little incentives or bonuses – an interest rate bump, say, or a credit to the iTunes store – for using their debit cards a certain number of times each month, or enrolling in automatic bill pay.
The Cost Of Cash
Cash is physical, fungible and anonymous – to a point. It may be ideal for small-dollar transactions or gift-giving, but for all its benefits, the costs of cash are highest not for banks, but for those who fall outside the mainstream banking system.
That’s the conclusion of “The Cost of Cash,” the first of a four-part series on the costs and benefits of using cash worldwide. The first installment, which focuses on the United States, was published late last year and authored by Bhaskar Chakravorti, senior associate dean of International Business & Finance at Tufts University’s Fletcher School, and Benjamin D. Mazzotta, a postdoctoral research fellow. The team also has studies forthcoming on the cost of cash in Egypt, India and Mexico.
Their research in the United States reveals essentially a two-tiered system in terms of the cost of access to cash, Mazzotta told Banker & Tradesman. Those costs of cash are measured in terms of the time and fees spent getting to that cash and in the efforts spent mitigating the risk of loss or theft. Unlike plastic, once that cash is gone, it’s gone.
And that brings the story back to a question that banks haven’t totally figured out how to answer: that of the unbanked.
“The story is pretty simple. If you have a good bank, you can avoid paying fees for cash if you want to,” Mazzotta said. “If you don’t have a good bank, then sooner or later you’re going to pay a fee, either to get access to your money or to send it to somebody who’s far away.”
Email: lalix@thewarrengroup.com
