Paying Cash: A Common Practice?
Antonio Alba, 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 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: consumers that earn less than $25,000 use cash for a wider diversity of transactions compared to consumers with higher income. So what’s behind this practice?
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.
People who do not live in a stable housing situation and migrant workers may find it easier to use alternative financial services rather than a bank or credit union. Many low-income urban and rural areas as well as American Indian reservations may not have a bank or credit union located in their community.
Alternative financial outlets may be more conveniently located, open during convenient times, and may offer other needed services like money orders and remittance options in a single community location.
Low-wage workers living paycheck to paycheck may not feel a need for the money storage that a bank account provides. A 2014 study from the Federal Reserve Bank of San Francisco found that consumers with household incomes under $25,000 showed the stronger preference for paying in cash. They make 55 percent of payments with cash, compared to 10 percent of payments by consumers with a household income of over $200,000. Low income consumers use much cash in their spending even for payments of utility and other bills (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 among both consumers who prefer cash payment and those who prefer card payment, the probability of paying with cash increases when the transaction is less than $20. The probability of paying with cash decreases when the transaction is greater than $20 (O’Brien, 2014).
Demographic and Socio-Economic Factors
Latinos (or Hispanics) and African Americans have shown a greater preference for using cash as an instrument for paying goods and services than other groups in the United States. According to study cited by O’Brien (2014), in some countries of Europe, paying with cash is the main payment instrument: 80 percent of transactions are paid in cash.
The age of the consumers is another important factor that increases the probability of using cash for payments. For example, studies have shown that youth consumers younger than 24 years old are more likely to make cash payments than consumers older than 25 years old (Bennet et al., 2014)
Financial Experience and Culture
Consumers’ cultural background influences the choice to avoid banks in many ways.
- Immigrant, refugee, or other foreign-born Americans may mistrust banks due to negative banking experiences in their former homeland.
- Immigrants often lack necessary identification or information required to open a bank account.
- U.S. banks may not have bilingual staff. Financial terminology may not exist in the immigrant’s native language.
- A banking practice such as paying or earning interest may conflict with religious belief.
Why Pay With Bank Services?
Using bank services brings commercial advantages. In 2012, the Federal Deposit Insurance Corporation (FDIC) estimated that 7.7 percent or 9.6 million of American families are “unbanked,” which means they have no accounts with financial institutions. Millions more people may be “underbanked,” which means they both have accounts and also use alternative financial service providers such as a check cashing outlets. African Americans are over four times more likely to be unbanked than whites (Stuhldreher & Tescher, 2005). And according to the FDIC, over one-third of all Latin-American immigrants were unbanked in 2013.
It is evident that most people, depending on their age and their financial experience, use cash payment for many small amount transactions is very common. However, using bank services gives individuals the opportunity to save money on check cashing, keep their money safe, and start building relationships with a financial institution that may open the door to future commercial transactions such as buying a car or a home, and other types of credits. Teaching consumers about the benefits of using bank services and addressing reasons they pay with cash listed above can help consumers gain confidence about the bank system and build wealth for themselves, their families, and the future.
Bennett, B., Conover, D., O’Brien, S., & Advincula, R. (2014). Cash Continues to Play a Key Role in Consumer Spending: Evidence from the Diary of Consumer Payment Choice. Federal Reserve Bank of San Francisco.
Gross, M.G., Hogarth, J.M., and Schmeiser, M.D. (2012). Use of Financial Services by the Unbanked and Underbanked and the Potential for Mobile Financial Services Adoption. Federal Reserve Bulletin. Board of Governors of the Federal Reserve System. 98(4).
O’Brien, S. (2014). Consumer Preferences and the Use of Cash: Evidence from the Diary of Consumer Payments Choice – Working Paper. Federal Reserve Bank of San Francisco.
Stuhldreher, A, & Tescher, J. (2005). Breaking the Savings Barrier: How the Federal Government Can Build an Inclusive Financial System. The Center for Financial Services Innovation.
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)