Why Our Form of Payment Matters

Money is similar and different.

All money can serve as a unit of value, a store of value, and a medium of exchange. But, because our forms of payment differ, so too does our incentive to spend.

Forms of Payment

87 percent of us said we used cash at least once during the past 30 days:

And yet, when we look at the value and number of transactions, cash becomes less important. Instead, we used credit, debit, and prepaid cards for close to three-quarters of our transactions:

Still, the kind of money we use depends on what we are buying. Comparing cash, checks, credit and debit cards, we would see where our money preferences differ. (We should keep in mind that the Fed does not define a credit card as money because we use money to pay for credit card bills.)

Shown in the following table, building contractors, plumbers and the people that help us at home receive our checks. However, it is more likely that we will use our debit cards for groceries and other retail transactions. And, for accommodations and air fares, we use credit cards:

Our Bottom Line: Spending Incentives

Researchers have observed that the pain receptors in our brain can be activated when we spend cash. A behavioral economist would say the reason is loss aversion. By contrast, because spent money is invisible when we use plastic or our smart phones, our loss aversion diminishes.

In addition, it is so easy to pay with a phone that economists say we have a frictionless transaction. With mobile as a form of payment, shoppers carried fewer cards and saved approximately 10 seconds when paying for an item. Perhaps, as a result, according to a 2023 paper with data from one bank, consumers charged 9.4 percent more after adopting mobile payments.

At this point we can ask if we will have the incentive to increase our spending when we use less cash and more mobile?

My sources and more: For the facts about forms of payment, this recent Federal Reserve paper is ideal. as was this 2023 report. Then for some analysis of the data, this Washington Post article and this NPR program came in handy.