In an Increasingly Digital World, Cash Still King & Reigns Supreme
Even as the number of digital payment methods available to consumers continues to rise, cash is still king. Cash remains the number one choice for a large number of transactions. Some people prefer the ease of cash in completing transactions. Others feel more confident in the security offered by using cash. A minority of customers aim for perks and discounts by being a cash-oriented shopper. With that in mind, the use of physical money is likely going to stay in the mainstream for the foreseeable future.
A recent study1 indicated that when people are looking to pay someone back for borrowed funds, cash is still king. In fact, it is the payment form de jour 78 percent of the time. That means that, despite the best efforts of various banks and online payment management systems touting the ability to send money to anyone with an email address (you know who you are!), almost four out of five people would rather hand over cash to repay friends and family members over sending funds electronically.
Other areas where cash is king include convenience store purchases and snacks away from home. Grocery store purchases, small business purchases, and restaurant bills also see cash taking the lead.
Though the number of payment alternatives only rises, general consumer sentiment seems to suggest that using cash for many transactions is going to stay the norm well into the future. Hence, cash is still king and will reign supreme for quite some time.
Tipping in Cash
A cash tip is often logical when the bill will be paid in cash. However, cash tipping on card-based transactions also occurs frequently. For example, the aforementioned survey showed that 53 percent of restaurant-goers paid in cash. Even though 48 percent of the customers used credit, cash tipping was common for 78 percent of those surveyed.
While tipping is not restricted to restaurants alone, many consumers choose to pay tips in cash due to a variety of other factors. Some consumers do not care for the idea of mandatory tip sharing, or pooled tips. They feel that, by paying in cash, there is a higher likelihood their server will keep their fair share.
Even though certain pooling practices are technically illegal, it does not guarantee the activity will not occur. Similarly, removing a percentage of a waiter’s tips to cover the corresponding exchange fees on card-based transactions is also illegal, but has been seen to occur.
Cash for Budgeting
One reason cash seems to stay a critical part of the financial marketplace is its ability to act as a built-in budgeting mechanism. The envelope system2, a budgeting technique pushed into the limelight by personal finance gurus such as Dave Ramsey, functions by having followers shift to a predominantly cash-based way of living.
Once a person determines how much of the funds available from their paycheck will be allocated to certain expenses, they physically place the corresponding funds in an envelope labeled for that purpose. The method states that, once an envelope is empty, no additional spending is allowed in that category. Spending can continue once until the envelope funds are replenished with their next salary payment.
The survey also supported the fact that Millennials are not as resistant to paying in cash as the rumor mill would have you believe. Not only do many Millennials use cash as a method for staying on budget, they do so more often than those belonging to the Baby Boomer generation at a rate of 40 percent to 30 percent.
Women are more likely to take part in this cash budgeting trick than men, at a rate of 39 percent and 29 percent respectively, though the practice has decent footing across the board.
Confidence in Consumer Banking Institutions
Though budgeting is a significant contributor to the use of cash by Millennials, it is only part of the story. In 2014, a study was completed between San Diego State University and the University of Georgia3. The study determined one of the biggest influencers of the use of cash among this youngest working generation is the general distrust of banks and other financial institutions 4.
This distrust is bred from the constant flow of predominately negative information about business practices in the financial industry. The ability to feel connected with a large digital network of others who feel similarly amplifies this effect. The feeling of connectedness makes younger generations feel more empowered that they can make a difference, as they are more aware of the number of like-minded people.
Recent high-profile data breaches5, such as the Target data breach in reported in 20136, have also increased consumer anxiety around the use of card-based payment methods, such as debit or credit card purchases, leading to an increase in the number of cash sales. Security concerns were most notably expressed by older generations but were also a significant presence across every generation.
Cash Offers Security
When it comes to a secure payment method for closing out a transaction, cash is almost unbeatable. You do not have to worry about someone gaining access to your bank account when you hand the cashier a $20. This remains true regardless of what happens to the store’s point-of-sale system on the backend.
Cash has maintained its popularity for smaller retail transactions, generally defined as those below $20. Transactions under $10 are completed in cash about two-thirds of the time based on a study conducted by the Federal Reserve whose results were published in 2014 7. In contrast, across all transactions, mobile and text-based payment options only accounted for less than 0.005 percent of all payment activities.
Cash and Debit are NOT the Same
The use of cash should not be confused with the use of debit card. The electronic component associated with debit cards automatically increases the risk associated with the transaction. Debit cards offer direct access to any cash you have associated with that bank account. This includes any overdraft protection in place. However, the nature of how the transaction completes sets it apart.
If an unscrupulous person gains access to your debit card number and your PIN, they essentially gain unfettered access until you or your bank notice something seems amiss. In contrast, if someone steals $50 from you, the thief has access to $50, and that is it. There is no more risk to your funds beyond the amount that was specifically taken.
Additionally, banks that offer consumer deposit accounts are also subject to hacking attempts and malware. This is demonstrated by the discovery of an international hacking ring in 2015. The ring was responsible for stealing as much as $1 billion from over 100 banks 8. This helps cement the fact that even if a debit card is like using cash, it is not as safe as actually having cash-in-hand to pay for items.
The risk is associated with how the funds are stored (digitally in an account versus as paper money in your hand). It has nothing to do with whether the funds are considered functionally like cash or an extension of credit.
The Disappearance of the Check
While the check hasn’t officially disappeared from the payment option landscape, it has certainly lost a significant amount of ground. In 2014, grocery retailer Whole Foods expanded their no-check policy to include stores in the Southwest region of the United States9. The continues the trend in place with major retailers, including Gap Inc. stores. Additionally, many specialty stores, such as Lululemon Athletica, also do not accept checks.
In fact, the Federal Reserve estimated a decline of over 50 percent in the number of checks written between the years 2003 and 201310. This decline is partly due to the reduction in checks being accepted at the point of sale. The rise in popularity of the debit card is also a factor. However, checks remain common for payments of large-value consumer bills.
Customers who preferred checks as a form of payment generally shifted to either use cash or debit card.
Debit Cards versus Credit Cards
There are instances where credit cards can offer more security than its debit card brethren11. Credit purchases often come with higher levels of fraud protection. Additional benefits may also be available to credit card users. This includes institutionally offered cash back or travel rewards.
Some cards include special access based on the card issuer in use. For example, American Express is often the most famous for this, especially in relation to the infamous “Black Card”12. Often, these extra offerings cannot fully offset the challenges associated with a compromised card. Benefits also do not compensate for the costs associated with taking on, and carrying a debt.
Cash Only Small Businesses
Even in today’s digital age, some small businesses choose to run as cash-only businesses or retailers. The most common benefit is avoiding transaction fees associated with credit and debit card purchases. It can also lead to simpler bookkeeping requirements 13.
Additionally, the likelihood the business will be the subject of various fraudulent transaction attempts is also limited. Fewer fraudulent transactions may translate into lower prices.
If a consumer is interested in items from a cash only small business, they will have to pay in cash or walk away without making the purchase. Many would consider this risky, as a business may lose customers in the process. A business can mitigate the risk through installing on-site ATMs.
Small Businesses and On-Site ATMs
For businesses that choose to use a cash only payment model, adding an on-site ATM can be enticing. A buyer who would otherwise not have the cash on-hand can withdraw the funds to complete the purchase.
Many service oriented businesses lead the way when it comes to on-site ATMs. These ATMs are often designed to have a low surcharge, or be surcharge free. Most commonly, these ATMs are seen in service-based businesses such as barber shops, hair salons, and nail salons. The practice is also common in small bars as well as casinos.
Adding on-site ATMs shows to be profitable for many small businesses14. This is supported by the fact that many retail transactions are still completed in cash. An on-site ATM allows customers easy access to their funds without requiring a card as the form of payment at the point of sale.
Additionally, an on-site ATM is often more cost-effective for small businesses. It provides an alternative to those who would otherwise be unable to support the transaction fees associated with accepting debit or credit cards. It can also help a business to run more efficiently. There is no need to dedicate the time to verify a customer’s information to assess whether a check or card-based transaction is initiated by an authorized account holder when cash is the payment method.
The cash market continues to show enough strength to keep many of these businesses running. This suggests we will not see the end of cash in the marketplace any time soon.
Cash Payer Discounts and Card-Based Surcharges
In 2013, updated agreements between credit card giants MasterCard and Visa changed the terms associated with processing card-based transactions. The processing costs are referred to as interchange fees.
Many retailers passed this increase on to consumers through surcharges. The surcharge (at times called the innocuous sounding “convenience fee”) is designed to help cover the costs associated with increased interchange fees.
This led to some retailers to essentially offer discounts to cash customers. This trend was most noticeable as people drove their cars up to the pump for fuel. While the price difference between cash and card-based payments for gasoline may vary, it is not uncommon to see a difference of about $0.10 per gallon.
The discount to cash payers functions as a reward for not using the other systems. It also looks to encourage more consumers to see cash as king. This operates, psychologically, in a similar fashion to offering a sale15. Consumers enjoy feeling as though they have gotten a deal, even if it is as small as 3 or 4 percent.
This is not the case in all states. Some, including California and New York, have banned the use of credit card surcharges.
- “Cash Remains a Leading Payment Form,” CardTronics.com, January 14, 2016, accessed August 29, 2016, https://web.archive.org/web/20171016082641/http://ir.cardtronics.com/releasedetail.cfm?ReleaseID=950285.
- “Dave Ramsey’s Envelope System,” DaveRamsey.com, accessed August 29, 2016, http://www.daveramsey.com/blog/dave-ramseys-envelope-system/.
- “Study: Millennials Less Trusting Then Gen x Was,” CBSNews.com, September 4, 2014, accessed August 29, 2016, http://www.cbsnews.com/news/study-millennials-less-trusting-than-gen-x-was/.
- “6 Money Myths for Millennials to Stop Believing,” HuffingtonPost.com, last modified May 19, 2015, accessed August 29, 2016, http://www.huffingtonpost.com/learnvest/6-money-myths-that-millen_b_6902078.html.
- Paula Rosenblum, “In Wake of Target Data Breach, Cash Becoming King Again,” Forbes.com, March 17, 2014, accessed August 29, 2016, http://www.forbes.com/sites/paularosenblum/2014/03/17/in-wake-of-target-data-breach-cash-becoming-king-again/#5956194242ec
- “Target: 40 Million Credit Cards Compromised,” CNN.com, December 19, 2013, accessed August 29, 2016, http://money.cnn.com/2013/12/18/news/companies/target-credit-card/index.html
- Barbara Bennett et al., “Cash Continues to Play a Key Role in Consumer Spending,” FRBSF.org, April, 2014, accessed August 29, 2016, http://www.frbsf.org/cash/files/FedNotes_Evidence_from_DCPC.pdf.
- “Whole Foods Market Is Latest Retailer to Reject Checks,” DallasNews.com, August 25, 2014, accessed August 29, 2016, https://web.archive.org/web/20160911151010/http://www.dallasnews.com:80/business/retail/20140825-whole-foods-market-is-latest-retailer-to-reject-checks.ece.
- Mike Snider and Kaja Whitehouse, “Banking Hack Heist Yields up to $1 Billion,” USAToday.com, February 16, 2015, accessed August 29, 2016, http://www.usatoday.com/story/tech/2015/02/15/hackers-steal-billion-in-banking-breach/23464913/.
- “The 2013 Federal Reserve Payment System Study,” FRBServices.org, December 19, 2013, accessed August 29, 2016, https://web.archive.org/web/20170829101043/https://www.frbservices.org/files/communications/pdf/research/2013_payments_study_summary.pdf.
- “4 Reasons Credit Cards Are Better Then Cash,” HuffingtonPost.com, last modified November 15, 2014, accessed August 29, 2016, http://www.huffingtonpost.com/simple-thrifty-living/4-reasons-credit-cards-ar_1_b_5824482.html.
- Patrick Morris, “American Express Black Card: The Wild Benefits of the Credit Card That Costs $2,500 a Year,” Fool.com, August 24, 2014, accessed August 29, 2016, http://www.fool.com/investing/general/2014/08/24/american-express-black-card-the-wild-benefits-of-t.aspx.
- Lou Hirsh, “Importance of Atm Machines in a Small Business,” Chron.com, accessed August 29, 2016, http://smallbusiness.chron.com/importance-atm-machines-small-business-63116.html.
- “Accepting Cash Only,” SBA.gov, accessed August 29, 2016, https://www.sba.gov/managing-business/running-business/managing-business-finances-accounting/accepting-cash-only.
- Anita Campbell, “Pros and Cons of Offering Discounts for Paying in Cash,” SmalBizTrends.com, July 11, 2013, accessed August 29, 2016, http://smallbiztrends.com/2013/07/pros-cons-discounts-for-paying-in-cash.html.