Cash and checks often get lumped together as relics of the pre-digital era. At a time when a 21-year-old can raise $30 million to build a mobile payments app, it's hard to envision a bright future for any paper-based payment method.
But new research from the nation's Federal Reserve banks suggests this line of thinking is a bit too simplistic. Checks do appear headed toward the dustbin of history, at least for in-store payments, but bills and coins seem likely to have more staying power.
The survey of U.S. consumers by three regional Fed banks found some surprising differences in how older and younger Americans pay at the cash register. Most notably, consumers who are under 25 are far more likely to use cash to pay for goods and services than their parents are. And young adults are going to be participating in the economy for much longer than senior citizens are.
"I think it pushes against kind of the conventional wisdom, or the buzz out there, about younger people," says Douglas Conover, a senior manager at the Fed's Cash Product Office, of the survey's results.
By any measure, checks are fading fast.
The survey found that just 8% of Americans ages 65 and older prefer to pay by check. For everyone ages 44 or younger, the percentage of respondents who prefer checks was so small that the Fed reported it as 0%.
Contrast that with the Fed's findings on cash. Among 18 to 24 year-olds, 40% prefer to pay with greenbacks. That percentage shrinks among older age groups. Only 25% of Americans ages 55 and older prefer cash, according to the survey.
To be sure, cash is losing popularity, despite its continued prevalence among younger adults. A new report by Javelin Strategy and Research finds that cash fell from 22% of total point-of-sale payment volume in 2012 to 20% last year.
What's more, there's reason to think that young adults will rely far less on cash as they get older. Many young people use cash because they can't qualify for a credit card, or because they don't have a bank account that would provide them a debit card. As they age, many of these consumers will likely switch to plastic.
However, the next generation of young adults may face similar barriers to the use of electronic forms of payments that today's Millennials do.
The Fed's report, which is based on a survey of 2,468 respondents in October 2012, finds that cash remains by far the most popular method of payment for small-dollar purchases.
Cash is used for 66% of purchases under $10, and for 45% of purchases between $10 and $24.99. "Lots of different people continue to use cash for lots of different things, because it's convenient," Conover says.
One reason cash gets used so frequently for small purchases is that lots of merchants that specialize in those transactions don't accept plastic cards. A shopkeeper's profits on a $6 sandwich purchase can be wiped out by swipe fees. And mobile payments don't necessarily solve this problem, because those emerging payment methods often rely on the existing debit-card and credit-card rails.
Looking five years ahead, analysts at Javelin project that the use of checks will wane much more quickly than the use of cash.
Between 2013 and 2019, the company expects the volume of retail point-of-sale check payments to fall by 35%, while for cash the decline will be 10%.
"Cash for small-ticket items is still the most frictionless," says Nick Holland, retail payments practice leader at Javelin. "It's still the most readily accepted."
Of course it's in the interest of banks to speed the demise of cash and checks, since they don't generate the revenue that debit cards, credit cards and prepaid cards all do.
One way banks can help hasten the transition away from paper-based payments is by training customers in how to use chip-and-PIN credit cards, Holland says. As that technology rolls out in the United States, consumers will have to become comfortable inserting their credit cards into readers, rather than swiping them.
"Otherwise they may default back to more archaic payment types," Holland says.