Paying With Cash: A Common Practice
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Antonio Alba Meraz, Extension Educator — Family Resiliency
In this era of using of technology in money transactions, how common is paying with cash in the United States? Researchers from the Federal Reserve Bank of San Francisco (2014) concluded that U.S. consumers use cash with more frequency (in 40 percent of their transactions) than any other type of payment in their spending. Among those who do not have a bank or credit union checking account, using cash is an even more common practice, and consumers who earn less than $25,000 use cash for a wider diversity of transactions compared to consumers with higher incomes.
Why Pay With Cash?
Several factors drive the decision to pay with cash rather than through a bank service.
Bank minimum deposits and banking fees, particularly those for bounced checks, are too costly for those with limited resources.
Migrant workers and other people who do not live in stable housing may find it easier to use alternative financial services rather than a bank or credit union. Many low-income neighborhoods and communities in both urban and rural areas, as well as American Indian reservations, may not have a bank or credit union located nearby. For some people, alternative financial outlets may be more conveniently located, open during convenient times, and offer needed services, such as money orders and remittance options.
Low-wage workers living paycheck to paycheck cannot afford and may not see the value of a bank account. A 2014 study from the Federal Reserve Bank of San Francisco found that consumers with household incomes under $25,000 showed a stronger preference for paying in cash. They made 55 percent of their payments with cash, while consumers with a household income of over $200,000 made 10 percent of their payments in cash. The study also showed that low-income consumers preferred paying utility and other household bills in cash (Federal Reserve Bank of San Francisco, 2014).
Amount of the Transaction
Cash as an instrument to pay for goods and services is influenced by the amount of the transaction. Study results have shown that whether a consumer preferred paying by cash or card, the probability of paying with cash increased when the transaction was less than $20. The probability of paying with cash decreased when the transaction was greater than $20 (O'Brien, 2014).
Demographic and Socio-Economic Factors
Latinos (Hispanics) and African Americans have shown a greater preference for using cash as an instrument for paying goods and services than other demographic groups in the United States. Likewise, according to a study cited by O'Brien (2014), some demographic groups in European countries, such as Germany, preferring to pay with cash — making as many as 80 percent of their transactions in cash.
The age of a consumer is another important factor that increases the probability of using cash for payments. For example, studies have shown that consumers under 24 are more likely to make cash payments than consumers over 25 (Bennet et al., 2014)
Financial Experience and Culture
Consumers' cultural background influences the choice to pay in cash and avoid banks in several ways. For example:
- Immigrant, refugee, or other foreign-born Americans may mistrust banks due to negative banking experiences in their former homelands.
- Immigrants often lack necessary identification or information required to open a bank account.
- U.S. banks may not have bilingual staff to explain banking terms or communicate in general with non-English speakers.
- A banking practice such as paying or earning interest may conflict with religious belief.
Why Open a Bank Account?
While paying with cash has its advantages in some situations, it's beneficial to have bank accounts, too. Using banking services offers a number of advantages to individuals and families, including the opportunity to build a credit history, access to cost-free check cashing services, use of economic bank wire transfers or remittances services, and the ability to keep their money safe, build up a nest egg, avoid predatory lenders, and create a relationship with a reliable financial institution. This, in turn, will enable them to safely make large purchases, such as a car or home, or open a line of credit at reasonable interest rates.
Understanding why consumers pay with cash while steering them toward using bank services, too, will help them build wealth for themselves, their families, and the future.
Federal Reserve Bank of San Francisco. (2014). Cash continues to play a key role in consumer spending: Evidence from the diary of consumer payment choice.
Federal Reserve Bulletin. (2012). Use of financial services by the unbanked and underbanked and the potential for mobile fnancial services adoption.
Federal Reserve Bank of San Francisco. (2014). Consumer preferences and the use of cash: Evidence from the diary of consumer payments choice — working paper.
Center for Financial Services Innovation. (2005). Breaking the savings barrier: How the federal government can build an inclusive financial system.
Cash-Based Payment Options: What's Right for You? — Find out what cash-based payment methods are available and how to conduct commercial transactions safely.
Sending Money Home: Remittance — Find out about remittances, the challenges of remittances, and why remittances are sent; particularly useful for people working with Latino groups.
The Benefits of Using Cash — People spend more using credit cards than cash; there are no splurges when the money is gone. Transcript and audio (1:56)