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U.S.: Cash Payments’ Share Increased in 2021

Categories : Cash is also a store of value, Cash is available to all users, Cash is the first step of financial inclusion, Cash is the most widely used payment instrument
June 20, 2022
Tags : Consumer Payment Choice, Covid-19, Federal Reserve, US
Cash payments in the United States grew in 2021, following a sharp decline in 2020, according to the Federal Reserve’s 2022 Diary of Consumer Payment Choice.
Guillaume Lepecq

Chair, CashEssentials

This post is also available in: Spanish

Cash Payments Bounced Back in 2021

The 2021 Diary of Consumer Payment Choice, carried out in October 2020, showed that consumers’ payment behaviour in the United States changed dramatically during the Covid-19 pandemic. Total payments, cash, and non-cash declined by 20%, primarily due to the drop in low-value transactions (under $25). The former disproportionately affected cash, which historically accounted for most small payments.

The 2022 Diary of Consumer Payment Choice indicates that cash payments have bounced back slightly from 19% of all transactions in 2020 to 20% in 2021. This is notable as it is the first increase since the Diary was launched in 2016 and suggests that cash payments hit a low point in the first year of the pandemic. The findings also contradict statements from Visa and Mastercard that the shift toward digital payments during the pandemic is permanent.

Graph 1. United States: Share of Payments Use for All Payments (by number), 2022.

Source: Cubides, O’Brien (2022: 6).

The Federal Reserve Bank of San Francisco conducted the study in October 2021, when the Covid-19 pandemic weighed heavily on consumers’ behaviour, and the average number of payments remained well below pre-pandemic levels. The average number of COVID-19 infections per day in the U.S. ranged from nearly 110,000 on October 1, 2021, to approximately 72,000 on October 31, 2021.

The decline in payments under $25 is the main reason both total and cash payments have declined since 2019. Changes to everyday habits (like stopping for a cup of coffee on the way to work or eating out) are likely a significant contributor to this decline. However, small-value cash payments are unlikely to increase to pre-pandemic levels because such transactions have decreased annually since 2016.

The Cash Paradox Is Still Strong

Between October 2016 and October 2019, currency in circulation increased by approximately $300 billion, an average of 7% per cent annually. During the Covid-19 pandemic, from October 2019 to October 2021, cash in circulation increased by more than $423 billion, or 12% annually. The trend is not limited to the U.S. and has been described as the cash paradox: cash is used less for day-to-day transactions, but its demand as a store of value keeps growing.

Graph 2. United States: Currency in Circulation, 2008-2022 (billions of dollars).

Source: FRED (2022).

Consumers’ average cash holdings as store-of-value have increased more rapidly since 2018, with increases of 22% in 2019, 24% in 2020, and 20% in 2021. The average value of cash held as a store-of-value continued to increase, reaching $347 per person in October 2021, a 16% year-on-year increase. The significant increase since 2019 shows that aggregate demand for U.S. currency increased during times of uncertainty.

Cash Is Essential for Low-Income Households

The report stresses that transactional cash use decreased for all income groups across the pandemic, except for households with incomes below $25,000.

Back to a New Normal?

The report does not make any predictions about cash demand. However, three factors are likely to influence future cash demand.

  1. The return of inflation will increase the opportunity cost of holding cash and may encourage consumers and businesses alike to reduce their store of value holdings of cash.
  2. Economic uncertainty remains high due to geopolitical tensions and ongoing global supply chain issues, which may lead to heightened demand for cash as a store of value.
  3. Lastly, as the purchasing power crisis steps in, consumers may be encouraged to return to ‘envelope budgeting’ – or placing cash in envelopes labelled for various spending categories like rent, utilities, school, groceries etc. An early signal may be that #cashstuffing and #cashenvelopes are trending on TikTok and Youtube.

This post is also available in: Spanish