U.S. Markets closed

How ATMs affect how we pay for things

Aarthi Swaminathan
Finance Writer

As we move towards an increasingly cashless economy, a new study highlights a key factor that determines whether we pay with cash or card.

In a new working paper by the Atlanta Fed, researcher Oz Shy found that the minimum amount you’re allowed to withdraw from an ATM in particular — which is generally $20 — has a “strong effect on consumer payment choice.”

Hence, when a consumer is faced with a bill that’s below $20, they’d generally opt to pay cash, the study argued. But if the bill came up to $21, they’d use their card.

Customers use a JPMorgan Chase & Co. bank ATM. (Photo: Patrick T. Fallon/Bloomberg/Getty Images)

How many times do you use an ATM each year?

Shy determined the threshold, which he defines as the point “which there are significant drops in cash payments relative to card payments,” by looking at data from the 2016 Diary of Consumer Payment Choice by the Boston Fed.

He first identified that respondents on average made about 43 ATM withdrawals a year — with $10 being the lowest and $1,005 was the highest amount.

He then found that the share of cash payments peaked at $1 — where 91% of people used cash — and had a sharp drop off after $20.

"Disregarding the $1 threshold, $20 is the only threshold which shows a drop of over 27 percent in the probability of cash use." (Source: Atlanta Fed)

Shy also found that around 50% of people would use cash for payments between $19 and $20, but only 31% would use cash for anything above $24.

Another chart, Figure 3, illustrates this $19-$20 threshold — in addition to generally showing “how the share of cash use declines with the transaction value.”

"The vertical axis of Figure 3 displays the relative share of payments made with cash, credit, and debit cards. The horizontal axis measures actual payment dollar amounts in $1 intervals (total 45 intervals)." (Source: Atlanta Fed)

Shy wrote that “perhaps, the most striking observation in Figure 3 is the upward jump in the share of cash use in payment amounts between $19 and $20.”

There are 1.8 billion $20 notes in circulation with a value of $183.8 billion. The note has an average lifespan of 7.9 years.

It’s all about the Benjamins

The $20 minimum withdrawal amount is commonplace among ATMs across the U.S.

But many of the top consumer banks — such as Chase, PNC and Wells Fargo — have made exceptions that allow customers to withdraw smaller increments.

An employee checks stacks of USD notes at the US Treasury's Bureau of Engraving and Printing in Washington, DC July 20, 2018.(Photo: EVA HAMBACH/AFP/Getty Images)

The most frequently withdrawn amount from ATMs — the researcher found — was $100. That bill also happens to be the most widely circulated denomination, beating out the $1 bill.

The other most common withdrawals were $40, $20, and so on.

But “all these amounts are multiples of $20,” the researcher noted, which then became the basis of the study.

Shy also added that when the payment amount was very low — such as below $5 — “some merchants refuse to get paid with cards for low-value transactions due to high credit card processing costs.”

Aarthi is a writer for Yahoo Finance. Follow her on Twitter @aarthiswami.

Read more:

Follow Yahoo Finance on Twitter, Facebook, Instagram, Flipboard, LinkedIn, YouTube, and reddit.