Payments Evolution from Paper to Electronic Payments by Merchant Type 
Although US consumers have been moving away from making payments with cash and checks and toward using cards and electronic methods for many years, maybe even decades, the majority still hold checks, and almost every consumer continues to use cash. This transition from paper payment instruments to cards and electronic payments has been so gradual because, among other reasons, consumers and merchants are both heterogenous and no single payment method serves all consumers or all types of merchants. The authors use data from the Diary of Consumer Payment Choice, a detailed diary of consumer payment behavior collected from a representative sample of US consumers, to analyze changes in payment-method use from 2017 to 2020 across different merchant types. The sample includes data collected before and during the COVID-19 pandemic, enabling the authors to analyze its effect on the use of different payment instruments.
Key Findings
- Cash use declined faster than check use in large part because, in addition to shifting from paper to electronic methods during the sample period, payments shifted from in person to remote.
- The share of payments made remotely increased for several payment instruments, most notably for checks and credit cards, especially in 2020, during the COVID-19 pandemic.
- While the cash-use share of transactions dropped for almost all merchant types, changes in check use were much more heterogenous.
- COVID-19 accelerated the payments evolution away from cash for some merchant types, in particular those whose transactions are typically conducted in person, such as fast-food restaurants or arts and entertainment venues.
- Similar to the raw data, regression analysis controlling for transaction and payer characteristics shows that the probability of using either cash or checks declined significantly in 2019 and 2020.
Implications
The COVID-19 pandemic accelerated the payments evolution away from paper instruments for some merchant types, as merchants and consumers both tried to avoid virus transmission by shifting transactions that previously were paid in cash to other methods that do not require direct contact. If consumers who switched to electronic forms of payment during the pandemic continue to use electronic payment methods instead of returning to cash, the COVID-19–induced faster pace of payments evolution trends could be sustained.
Abstract
The use of paper instruments—cash and checks—has been declining in the United States, and consumers have been gradually replacing paper with cards and electronic payments. Stavins (2021) examines the evolution of payments from paper to cards and electronic payments, while Shy (2020) shows the payments landscape across merchant types. This paper combines the cross-sectional analysis across merchants with the aggregate time series study to analyze the evolution of consumer payments by merchant type. Using data from a representative diary survey of US consumers collected annually over the past several years, we examine changes for each merchant type to assess which transactions shifted from paper to electronic payments and from in-person to remote transactions. We find that cash use declined faster than check use, in large part because transactions shifted from in person to remote. While the cash-use share of transactions dropped for almost all merchant types, changes in check use were much more heterogenous across merchants. COVID-19 accelerated the payments evolution away from cash for some merchant types, as their drop in cash payments was much larger during the pandemic than prior to it. Merchants whose transactions are typically conducted in person experienced the largest decline in cash payments during the pandemic. Regression results show that the probability of using either cash or checks declined significantly in 2019 and 2020, even after controlling for merchant types, the dollar value of transactions, and consumers’ socio-demographic attributes.