Related Links

• Diary of Consumer Payment Choice

Transcript

Tim Sablik: My guests today are Doug Borland and Stephanie Mehlhouse. Doug is an assistant vice president of cash services and Stephanie is a senior cash manager, both at the Charlotte branch of the Richmond Fed. Doug and Stephanie, welcome to the show.

Doug Borland: Tim, thanks for having us today.

Stephanie Mehlhouse: We're excited to be here.

Sablik: Today, we're going to be talking about the latest trends in consumer payments, with a particular focus on cash. Facilitating payments is one of the Fed's core responsibilities. As part of that mission, we also monitor changes in payment use, and a key source of information for this is the Diary of Consumer Payment Choice.

To start things off with our discussion, could you tell us a bit more about the diary? How did it get started, and what does it track?

Borland: Sure, Tim. The diary started back in 2016. It was to better understand consumer payments [and] their habits, and has been a collaboration of efforts between the Federal Reserve Bank of Boston and the Federal Reserve Bank of Atlanta, in addition to heavy involvement from the Federal Reserve Financial Cash Services.

The study centers around nationally representative respondents who detail their holdings and flow of cash over a specified period of time in October. They report all the payments they make during that survey window.

Tim, I'll ask you and the listeners today, if you think about how much you have in your pocket right now, what would your answer be? I have roughly $100 in my pocket. I keep that as a secondary source when I'm traveling.

The diary participants report how much cash they have on hand and how much they have stored — maybe in a drawer, under a mattress, wherever they want to store it at home. While cash is a difficult payment and method to trace, this study does provide insight on how consumers use cash.

Sablik: Yeah, I think you've got me beat. I think I've got about $10 in my wallet. [Laughter]

Based on the information from this study, how has the number of consumer payments changed over the years?

Mehlhouse: The average number of payments has increased, since 2021 in particular. As you can imagine, payments did dip a little bit with COVID-19. The most recent study conducted in October of 2024 saw the highest reported number of payments in the diary's history, at an average of about 48 payments per month. To put that in context, in the previous year there were about 46 payments per month, the lowest amount being during COVID with 35 payments per month.

Sablik: Doug, you mentioned cash already. Which payment method is generating the most of this growth that we're seeing?

Borland: The study shows growth in consumers' use of credit cards, both in person and remotely. Mobile phones were used for 23 percent of all payments in 2024. While this increased for all age groups, adults aged 18 to 24 were more likely to pay with a mobile phone, using it for 45 percent of all their payments.

Sablik: And how has cash use changed in recent years?

Mehlhouse: Well, we've seen that cash usage has remained pretty consistent over the past several years — since COVID, so since 2021 — at seven payments per month. That has remained steady, so we're looking at that as kind of our new floor of where we think payments are going.

Overall, cash use has decreased as a share of total payments by about half compared to when the study began. When the study began in 2016, people were using cash about 31 percent of the time. Now it's only about 14 percent, so it's gone down by about half. It went from the most used payment in that very first study in 2016 to now it's the third most used in 2024, behind credit and debit card usage.

Debit and ACH payments remained the same throughout the course of the study. However, we've seen a big increase in credit card payments, as Doug just mentioned, more rapidly than payments overall. Those made up 35 percent of all payments in 2024, which is a 17-percentage-point increase from the 2016 study.

We've basically seen cash and credit swap over time when it comes to what the most used payment method has been.

Sablik: What about cryptocurrencies? That's something that we hear a lot about in the news. Does the study capture how those are being used in payments?

Mehlhouse: It does. Part of the study shows the share of participants who used each payment instrument in the last 30 days. Cryptocurrency only made up about 3 percent of that. In contrast, credit [was] 88 percent, so a big difference.

Sablik: What sort of factors affect someone's choice of a payment method? Does the study offer any insights there?

Borland: What we get from the study is there really are four factors to be considered as likely contributing factors into a consumer's payment choice. These include location, preference, who you're paying it to, and the value.

So, if we break that down a little bit, location — is the payment being made in person or remotely? Remotely can mean using your phone, computer, paying by mail. These types of payments are increasing every year, which means there is less opportunity to make a cash payment. Technology improvements continue to drive the reason mobile payments continue to increase.

If you look at the next factor as far as preference, your preferred method is the one people typically stick to for most of their payments. This can be influenced by the type of payment, the ease of use, and demographic factors as well. The amount of people indicating they prefer to use cash is decreasing, according to this study. Cash is often used as a backup to the preferred method of cards. If you recall, I mentioned I had $100 in my pocket because I'm traveling and I wanted to have that secondary source.

The third factor is for the payee. [That] means the type of retailer or payee influences that choice. For example, cash is used more often at grocery stores and fast-food locations.

The last main factor is value. Cash is most likely to be used for payments of less than $25. However, cards are becoming more popular with the small types of payments as well.

Sablik: Are there other factors that influence the decision to use cash, such as demographics or income?

Mehlhouse: Yes, we've definitely seen both demographics and income play a role, according to the data we're seeing in this study.

Looking at demographics, consumers aged 55 and older are the ones that are most likely to use cash. The study did show that [consumers] 55 and older are using cash 19 percent of the time, compared to the younger age groups averaging about 10 to 14 percent of the time. This is very different compared to when the study began, when all the age groups were using cash approximately 30 percent of the time. So again, we're seeing that usage go down by about half in most of the demographics, sometimes even to a third.

Household income also [has] an impact when people are deciding what payment choice they're going to use. It could be credit availability, access to liquidity, and access to certain banking services that all play a role in determining what type of payment somebody's going to choose to use.

Other household decisions like budgeting practices and payment preferences, those may also be a determining factor. In 2024, consumers in households earning less than $25,000 per year relied on cash for 24 percent of their payments, whereas looking at the higher income houses — those making over $150,000 a year — they use cash [for] only 9 percent of their payments.

Sablik: Stephanie mentioned earlier that cash use seems to have reached a steady floor in recent years. Does the diary provide any insight into why that is?

Borland: Consumers' steady use of cash since 2020 may be attributed to its unique characteristics. First thing, it is anonymous, so it's hard to trace. I think we mentioned that earlier. Accessibility and being able to get cash, reliability [are other characteristics].

And then there's something that we're seeing more and more: absence of marginal transaction costs. There are transaction costs for using cards, so some consumers use cash so that they can bypass those costs. So, it is used as a secondary payment option and, as we mentioned earlier, a store of value.

Sablik: On the topic of cash as a store of value, does the diary show any changes in how and why people are holding cash?

Mehlhouse: The study does highlight a couple of things that indicate how or why people may be holding onto cash.

Keeping cash as a store of value has remained elevated from pre-pandemic levels. We kind of touched on this with COVID, where we saw a big decrease in the amount of payments. But what we did see was people were pulling money out of their banks and keeping it on their person or in their homes. Even as pandemic impacts subsided, consumers continued to hold more cash, both as cash available for spending and as cash held elsewhere in savings for use of an emergency.

We see this play out in our cash operation as well. We pay attention to weather events like a snowstorm or a hurricane that may impact our area, and we often see an increase in orders of cash with our customers — those customers are depository institutions. The power goes out oftentimes in a hurricane, so people definitely preemptively go to their bank and pull out cash.

Sablik: So, it feels like with this data from the diary that there's these two interesting trends with cash. On the one hand, cash used as a form of payment has been declining, although it's been steady in recent years. But it's still being held as this secondary form of payment. Do you see any possibility of cash eventually continuing to fade away in the future?

Borland: You know, the old saying is, "Cash is king." While that may not have the same flair as it once did, we don't see it going away. There is less usage of it as far as transactional value, but it'll continue to play an important role for consumers and retailers for the foreseeable future.

In 2024, the Federal Reserve order and deposit volumes remained fairly level, with a less than 2 percent decrease compared to 2023, reflecting an ongoing demand across financial institutions, retailers, and consumers. The Federal Reserve fulfilled orders for over 29.9 billion notes from more than 8,000 depository institutions and received 29.2 billion notes in deposits. So, still a lot of activity there.

Sablik: Doug and Stephanie, thank you so much for joining me today to talk about cash and payments.