Small transactions are missing out on the contactless wave
The migration away from cash to other forms of payment has been a steady progression over the past decade.
The Federal Reserve’s 2019 Diary of Consumer Payment Choice found that consumers only use cash for 26% of transactions, down from 30% in 2017. For purchases greater than $25, the number drops to 10%. Yet despite the purported death of cash, there is one area of the economy where cash still reigns: small-dollar transactions. The same report found that cash makes up nearly half of all payments under $10 and 42% of payments less than $25.
Despite the dominance of cash in small-dollar transactions, recently there has been an emphasis on going digital for all amounts of transactions. Whether for avoidance of using cash for health and safety reasons in the wake of COVID-19 or minimizing trips to the ATM and utilizing a readily available card, there has been a transition into higher frequency of small-dollar transactions.
In fact, fintech apps have seen an increase in usage of apps to 72% as a result of the coronavirus. Even when the virus begins to ebb, we believe this behavior will stick around for both ease of use as well as continued safety precaution. This is the trend of going digital for transactions in the U.S., but we are also seeing this behavior adapted in other countries.
For instance, Northwestern University published a research paper, “Shocks and Technology Adoption: Evidence From Electronic Payment Systems” on the impact India's 2016 cash availability crisis had on consumer behavior there. Researchers Nicolas Crouzet and Filippo Mezzanotti found that electronic payments in India soared after the unexpected cash crunch in 2016, demonstrating how quickly consumers can change their preferred behavior.
The research looked at the usage of an electronic payment system in India similar to Venmo: “In the months before the shock, the weekly growth in the usage of the wallet technology had been positive on average, but relatively modest. However, in the weeks following the demonetization the shift towards this payment method was dramatic. In particular, in the week after the demonetization the number of transactions grew by more than 150%, while the value of transactions increased by almost 200%. Furthermore, for the whole month after the shock, weekly growth rates were consistently around 100%.”
To truly bridge the gap for moving small-dollar transactions to mobile and contactless,l vast areas of the retail industry will need to adapt to accept cashless transactions. Unattended retail, such vending machines and coin-operated laundry facilities, have millions of legacy devices that cannot accept mobile payments. Gas station pumps still lag retail for accepting contactless transactions, and many smaller businesses have not been able to invest in POS terminals that can accept mobile and contactless payments.
However, the payments industry can help bridge this gap. The payment networks have not made small-dollar transactions as high a priority, and retailers have resisted moving away from cash for a variety of reasons. But as more consumers experiment with mobile and contactless payments during the pandemic, the long-term behaviors will change.
Rather than letting pennies and dimes pile up, people will only increase their usage of mobile for convenience, especially as the machines and methods of accepting payments continue to expand digital capabilities.
Now is the time to bring the non-networked parts of retail into the mobile payments network and continue the pattern of expanding digital capabilities that make the world more a little more convenient.