People have been predicting the demise of cash for years. Like mostly everything else that comes in paper form (our news, bills, books, etc.), advances in technology — the advent of the mobile wallet, in particular —would surely mean the end of greenbacks, too.
But despite a long line of formidable foes, cash is still king. Here’s why:
1. Cash still rules small transactions.
It is true that most Americans aren’t carrying a lot of cash in their wallets these days — $50 or less, according to recent report by Bankrate. But cash is still the go-to form of payment in 40% of consumer transactions, according to an April report by the San Francisco Federal Reserve Bank. After asking 2,500 Americans to log three days’ worth of purchases, researchers found consumers relied on cash for two-thirds of transactions under $10 and nearly half of transactions under $25 (see chart below).
2. Credit cards are still expensive for small businesses.
Credit card companies charge up to 3% in fees every time a business lets a customer charge a purchase. Retailers that mostly deal in large transactions may be willing to eat those costs, but chances are we’ll be seeing “Cash Only” signs on corner stores and mom and pop shops for some time to come. In fact, a 2012 report by Intuit shows that more than half of the 27 million small businesses in the U.S. don’t take plastic at all.
3. Credit is hard to get when you’re young.
With little to no credit history, it’s still tough for young people to get access to credit. Despite the perception that young adults are more inclined to adopt new payment technologies than other groups, they are actually the most likely to say they prefer cash (40%) out of any other age group, according to the San Francisco Fed report. “I think that pushes against the conventional wisdom that cash isn’t being used by younger generations,” said Doug Conover, co-author of the report.
4. There are still millions of Americans who don’t bother with banks at all.
Most people think of using cash as a choice, but for as many as 10 million households, it’s simply the only form of currency they use. That’s the number of households still unbanked in the U.S., according to the latest data by the Federal Deposit Insurance Corporation. More than twice as many households – 24 million — were considered “underbanked” in 2011, up 18.2% from 2009. Underbanked households typically only have a savings or a checking account, but not both. Silicon Valley can keep churning out mobile wallet technology all it wants, but as long as there are still millions of people who can never take advantage of them, cash will never die.
5. Cash users have the benefit of anonymity.
As last December’s data breach at Target showed, our penchant for plastic comes with serious risks. Credit cards do come with fraud protections that reimburse consumers for fraudulent charges, but criminals were able to lift customer names, mailing addresses, email addresses and phone numbers as well — crucial puzzle pieces for identity thieves.
But sometimes hackers don’t even need to get through a retailer’s firewall to get their hands on sensitive customer information. Retailers actually sell a lot of the information about their customers to marketing agencies, which then use that information to target advertising (you can learn how to prevent that here). Even Bitcoin users found out their identities weren’t as secret as they may have hoped.
6. Cash is a useful bargaining chip for homebuyers.
A lot goes into making a winning bid on a new home, but cash can definitely give you an edge in today’s housing market. In the first quarter of 2014, all-cash home sales made up a record 43% of new sales, up from 38% in the previous quarter and up from 19% in the same period last year, according to RealtyTrac.
Unfortunately, the majority of these cash-loving buyers are hedge funds and individual investors looking to make a profit. Since the housing crisis, buyers have faced much tighter lending standards. That was a big boon for real estate investors, who could easily elbow out individual homebuyers with tantalizing all-cash offers. This isn’t great news for first-time buyers, most of whom rely on financing, but if you have managed to scrape together enough cash for a new home, the advantage is yours.
7. Cash makes it way easier to keep your spending in check.
The “all-cash” diet is a favorite budgeting tool of many a budget-conscious consumer out there, and it’s become the gospel of personal finance gurus like Dave Ramsey. And it’s not just a gimmick. Behavioral economists have long studied the psychological effects of using cash over credit and find that people are less likely to spend more than they earn when they use cash. Stephan Meier, a professor of behavioral economics at Columbia University’s School of Business, calls it the “pain of paying.”
“There is a huge psychological difference in how you perceive the cost of paying with a credit or debit card vs. cash,” Meier told us. “It feels ‘cheaper’ to pay with the card because the pain of paying is not as large,” says Meier.
So, is cash really going to reign supreme forever?
We love the ease of swiping a credit card as much as the next shopaholic, but there is some evidence that shows Americans are moving away from cash slightly more each year. Researchers at the Richmond Federal Reserve Bank spent two years analyzing more than 2 billion transactions made at a major U.S. discount retail chain between 2010 and 2012. They found that while cash was still used in the vast majority (75%) of transactions, its popularity is slowly waning. By 2020, they predict cash will account for 57% of transactions at a declining rate of 2.5% each year.
Still, 57% is nothing to sniff at. We’re willing to bet the greenback will live on for many decades to come.