By Patti Murphy
ProScribes Inc.
Payments are the fuel that drives economic engines. And despite the proliferation of electronic alternatives, cash remains an ever-popular way to transact business. Precise figures on spending with cash are difficult to ascertain, but the Federal Reserve estimated the value of U.S. currency in circulation, worldwide, reached $1 trillion in 2011. And in an economic letter published that same year, economists with the Federal Reserve Bank of San Francisco predicted the volume of cash in circulation would grow 1.7 percent a year through 2021.
Now there's a new paper from the San Francisco Fed – Consumer Preferences and the Use of Cash: Evidence from the Diary of Consumer Payments Choice – that puts cash usage into perspective. It revealed that nearly three in 10 (29.6 percent) of Americans consider cash their primary payment preference.
In fact, even consumers who say they prefer credit or debit cards use cash for a significant number of transactions, particularly low-dollar transactions. For example, a majority (53.1 percent) of consumers who indicated a preference for credit cards use cash for transactions under $10; 33 percent use cash for transaction amounts of $10 to $25. The comparisons are similar relative to debit cards (55.2 percent of payments under $10 and 36.4 percent of payment amounts between $10 and $25 are paid with cash).
"Once consumers sort themselves into their respective 'payment preference populations,' they tend to use their preferred payment instrument most of the time, followed by cash," the paper concluded. The paper contains extensive analysis of factors that influence the use of cash. This, in turn, should offer insights on how to move additional cash payments to cards and other electronic methods.
"The variables that have the largest correlation with an increased probability of cash payment are age, spending category and amount," the San Francisco Fed wrote. For example, consumers age 45 and older are more likely to use cash than those under the age of 45. Among those who prefer to pay with cash, they do so extensively for food and personal care items. There is also a greater likelihood of cash being used for gifts and other person-to-person transactions, entertainment and transportation, according to the data analysis.
Consumer Preferences and the Use of Cash: Evidence from the Diary of Consumer Payments Choice is an update of data analysis first published by the San Francisco Fed in April 2014. "By value, cash accounts for a relatively small share of total consumer transaction activity," about 14 percent, compared to 27 percent for electronic methods and 19 percent for checks, the April paper stated.
"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," the paper stated. "In contrast, cash is used quite often, but primarily for low-value transactions." Using an analysis of consumer-initiated payments in October 2012, the paper revealed the average cash transaction amount across demographics was $21; the average check payment was for $168; the average debit card payment was $44.
Demographically, strong correlations exist between cash usage and income. "Although all consumers use cash approximately the same number of times a month regardless of income, those making less than $25,000 annually use cash for a much wider variety of transactions than those with higher incomes," the San Francisco Fed wrote. For example, 35 percent of automobile loan payments by low-income consumers are paid with cash; the only method preferred more frequently for this purpose is debit cards, with a 44 percent share of such auto loan payments.
Not only is cash a primary choice for certain types of transactions and among low-income consumers, it's also the fallback method for most consumers (regardless of income) when they can't use their first choice for making payments. Among all consumers who prefer debit cards, for example, 60 percent identified cash as their second choice.
So how does cash usage in the United States compare to other developed countries? It's remarkably similar to at least six countries: Australia, Austria, Canada, France, Germany and the Netherlands.
The Federal Reserve Bank of Boston addressed this in a report – Consumer Cash Usage: A Cross-Country Comparison with Payment Diary Survey Data – published in March 2014.
"During the past several decades, payment systems worldwide have become increasingly electronic, transformed by innovations in financial markets and information technology," the Boston Fed wrote. "However, new research is revealing the emergence of an ironic consensus: during the transformation of payments from paper to electronics, cash holding and use has not disappeared."
In most countries, the ratios of currency in circulation to nominal gross domestic product declined during the 1980s and into the early 1990s. "Since then, however, these ratios have stayed flat or even increased," the report stated.
One reason may be economic uncertainties. Although increasing now, consumer credit card usage fell between 2006 and 2009, according to Federal Reserve payment studies. Debit and prepaid card usage, meanwhile, has been growing rapidly since the turn of the century, and now eclipses credit card use. The unbanked and underbanked are a large and growing segment of the U.S. population. Most of these folks don't have debit cards because they don't have checking accounts; they are even less likely to have credit cards. Then there are people like me. I prefer to use cash (and prepaid debit cards) because it helps me to better manage my money. Also, because cash has no enemies; rare is the person who does not accept it.
But lest we forget, the biggest users of cash remain underground businesses, and more recently legally ambiguous operations like marijuana dispensaries. Presently, about 20 U.S. states have legalized marijuana, mostly for medical purposes. The Washington-based National Cannabis Industry Association estimates that legal marijuana sales in the United States could reach $3 billion this year.
Most of that money is transacted as cash because of potential repercussions from federal statutes outlawing pot sales. That's beginning to change, however. According to several published reports, there are now 105 banks and credit unions working with legal marijuana sellers in accordance with guidance federal regulators released earlier this year. With billions of dollars in potential transactions up for grabs, I doubt it will be long before ISOs and acquirers start working this new market opportunity. 
Patti Murphy is Senior Editor of The Green Sheet and President of ProScribes Inc. She is also the founder of InsideMicrofinance.com. Email her at patti@greensheet.com.
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