Did COVID19 Finally Kill Cash Usage in the US?
For years, many in the financial services industry have been predicting that the US would go cashless in a very short while. Generally, these people work for digital payments companies, so they clearly have a biased viewpoint. Some recent articles have been touting that Covid19 brought the United States to the tipping point, or in other words, put the final nail in the coffin. But what do the facts say?
Numerous articles have been written about the imminent demise of cash. All of them seem to approach the question of “is cash dead?” from the perspective that the answer is of course “yes.” Here are some example of headlines:
Fortune Magazine June 2020: Cash is still the second-most-used form of payment in America today after debit cards. But many advocates for “going cashless” believe that the paper dollar’s time is nearly up.
Fortune Magazine July 2020: PayPal cites ‘death of cash’ as firm posts record earnings.
Maybe not in the USA, but Europe getting closer… Cash usage by consumers had already dropped more than 13% since 2012 in France, according to a new publication from them French central bank [Sifted August 2020]
PayPal CFO John Rainey 2019: We’ve been talking about the death of cash for years — and now ‘it’s here’.
The desire of a cashless society may be driving the push for a cashless society. Many of these articles use anecdotes and select facts to make their point. However, the truth is… in the facts.
In this article, I’ll examine the question about the demise of cash from three different perspectives to see what the facts say.
What are trends of cash in circulation?
What are trends with consumer payments?
What are trends with ATM withdrawals?
Cash in Circulation
First, let’s look at Federal Reserve data about cash in circulation, something the government tracks in great detail. The chart below shows the amount of currency in circulation for the last 100 years. Anyone who has graphed lots of data trends, will be able to identify this graph’s shape as a classical exponential function.
Conclusion One: Cash in circulation is not declining, instead it’s accelerating. In fact, last year saw the largest increase in cash in circulation since WWII, due to the massive government stimulus package. One can only assume the pattern will continue with another massive 2021 stimulus program under way.
Chart 1 – Currency in Circulation (St. Louis Federal Reserve; February 2021)
Chart 2 – Annual Change in Currency in Circulation (St. Louis Federal Reserve; February 2021)
Now, I know there will be critics out there saying that most US currency is held overseas, and that used to be true. Thankfully, the Federal Reserve and the Bureau of Economic Analysis track that metric too. In the latest reporting from February 2021, these government agencies report that 39% of US dollars are held outside the United States. That is a sizeable percentage, but that figure is down from 60% only 14 years ago in 2007. In those 14 years, the amount of cash in circulation has increased by 160%. Clearly, more cash is being kept in circulation within the country. Now, some increase is expected naturally with population growth, inflation, and wage increases, but not this level of growth.
Let’s Examine Consumer Payment Choices Next
The Federal Reserve conducts an annual study of consumer payment choices, the latest release using 2019 data. In that study, the FED found that US consumers made an average of 69 transactions per month. Card payments dominate at over 60%, with cash or checks accounting for 1 in 4 payments.
The FED noted the “cash or check” category was down 2% from the prior year, so there is some indication that cash payments are slowing.
That same study states that more than half of consumers used mobile banking, and about three-quarters used online banking. The adoption of these remote banking tools clearly has taken hold, and this was pre-Covid19 lockdowns that likely increased usage levels further.
Half of consumers had at least signed up for one online payment method, such as PayPal, Venmo, or Zelle, so digital payments were now at least an option for most of us.
Further, three-quarters of consumers paid electronically from a bank account. That group includes people using their financial provider’s bill payment option and those people who gave their information to a third party, which includes those previously mentioned digital payment services.
The last points I’ll make from this study is that half of consumers made at least one person-to-person (P2P) payment in a month, and about 40% of those P2P payments were made with a card or electronically, likely facilitated by one of many payment apps.
Some other relatively recent research points out other important facts:
In a Pew Research study: In 2018, about 30% of Americans didn’t use cash in the previous week, up from 24% three years earlier. I find that a striking number.
This same Pew Research study also presents some of the greatest hurdles to US society going cashless. The study reported that high-income households (>$75K) were more than twice as likely (41% vs. 18%) to not use cash than low-income households (<$30K). Pew's Andrew Perrin, the study author, notes "Conversely, lower-income Americans are about four times as likely (29% vs. 7%) as higher-income Americans to say they make all or almost all of their purchases using cash."
As you might expect age plays a factor too. One-third of consumers under age 50 typically use no cash, compared to one-quarter of those over age 50.
Conclusion 2: All this data shows consumers have an increasing comfort in using digital payments for some transactions but paying in cash still is part of the mix.
ATM Transaction Trends
The third perspective I want to explore deals with ATM transactions, which have always been an indicator of cash usage.
According to Mercator Advisory Group’s 2019 ATM Benchmark study, there were about 470,000 ATMs in the United States that year. Those numbers translate into about one machine for every 700 people nationwide, a rate 3.5 times higher than the global average of one machine per 2400 people. People in the US are accustomed to having easy access to cash via the ubiquitous ATM.
Meanwhile, RBR reports that global ATM counts slipped in 2019 by about 0.5% or 15,000 machines. But I find that headline misleading as China saw a decline of 30,000 machines to 3.23 million machines, so the rest of the world saw an increase. That same report did indicate a slight decline in the US and Canada. “In both countries, key drivers for the decline in ATM numbers are bank branch closures and consolidation among non-bank deployers,” according to RBR researcher Rowan Berridge.
According to the 2019 Federal Reserve Payments Study, ATM cash withdrawals have been declining at nearly 1% annually since 2015. But that rate of decline has slowed from earlier in the decade when many of the alternative digital payments were introduced to the marketplace.
But while transaction volumes have been declining slightly, the total value of those transactions continues to climb by about $10 billion annually with the average withdrawal reaching $156 in 2018, up $10 from the last study three years earlier.
Digging deeper into this research shows something else too. On-us cash withdrawals (transactions on your bank or credit unions machines) made up 2/3 of all transactions, growing about 3% annually during the last reporting period 2015-2018. At the same time, foreign (non-customer) transactions declined by nearly 4% annually, so fewer consumers are willing to pay transaction fees. This trend may be problematic for third-party ATM owners as demand for surcharge-free transactions grows.
There has been reporting that last year’s Covid19 lockdowns had a dramatic impact on ATM volumes. Cardtronics, the world’s largest ATM owner reported on this impact.
The lockdown clearly limited retail operations as most people stayed at home, but Cardtronics noted that since the beginning of June 2020 “total cash dispensed at our U.S. ATMs on a same-unit basis is up nearly 10% versus June the last year,” so clearly cash isn’t going away anytime soon.
The only conclusions one can draw are that in the US the number of ATMs is likely to decline, as third-party machine operators reduce unprofitable sites. Consumers will continue to seek out cash for payments in the coming years. Remember, the decline in volume is driven by non-customer transactions. I’ve written about the important role of remote ATMs in bank and credit union networks recently. As branches continue to close, these remote ATM sites become even more important for your customer experience.
Conclusion 3: Consumers are making fewer ATM transactions but for larger amounts, so the total cash dispensed is somewhat flat, again pointing to the fact that cash isn’t going away in the US anytime soon.
Let’s Recap
I promised to look at the future of cash from three perspectives, and here is what the facts say.
Cash in circulation continues to increase, and in fact, is accelerating not declining. Last year’s stimulus boosted cash in circulation and this year’s stimulus is likely to do the same.
Consumers have adopted the new digital payment options to great degrees, just as they did with the introduction of online and mobile banking when those channels were launched. In my experience, consumers collect channels as they want options, but they don’t necessarily trade one off for another. While there has been an increase in people choosing a digital payment option, logical in a pandemic lockdown, it doesn’t mean they have given up on cash.
ATM transactions continue to decline slightly, but the value of those transactions continues to climb, so the same amount of cash is being dispensed.
Several societal barriers exist to reaching a cashless society as not all consumers have payment accounts nor smartphone devices. These barriers are real and critical to resolve.
Paraphrasing Mark Twain, the reports of the death of cash are largely exaggerated. Cash is not going away anytime soon in the US. However, it is becoming less relevant to the younger generations. They have a higher comfort level with technology and are more comfortable going cashless. For us Baby Boomers who still carry a money clip I wouldn’t worry too much.
The rest of the world appears ahead of the US on this front though. Look for a follow-up article on that global perspective soon.
Let me finish with this statement from Rose Eveleth who wrote for the BBC In Depth magazine in 2015, “Physical money has been with us for thousands of years for a reason. Cash is essentially untraceable, it’s easy to carry, it’s widely accepted and it’s reliable. If the power goes out, or there’s a blip in the electronic systems that make the online commerce world go round, cash is there. If someone wants to buy something without anybody tracing it back to her, cash is the way to do it. If someone wants to be certain that their form of payment will be accepted, cash is the best bet. Even with advances in technology, some of the aspects of cash simply aren’t reproducible with bits just yet.”
