Cash remains top-of-wallet! International evidence from payment diaries

• Published in: Economic modelling Vol. 69; pp. 38 - 48
• Main Authors: Arango-Arango, Carlos A., Bouhdaoui, Yassine, Bounie, David, Eschelbach, Martina, Hernandez, Lola
• Format: Journal Article
• Language: English
• Published: Elsevier B.V 01-01-2018; Elsevier
• Subjects: ATM access; Cash management; Money demand; Payment instruments; Quantitative Finance; E42; E41; Money demand; Payment instruments; E47; E58; ATM access; Cash management; C61
• ISSN: 0264-9993; 1873-6122
• DOI: 10.1016/j.econmod.2017.09.002

In recent years, many studies have emphasized the cost-saving potential of electronic payments. Yet, cash is still heavily used to pay for point-of-sale transactions in many developed economies. We introduce a model of optimal cash holdings and payments that exploits survey payment diaries from Austria, Canada, France, Germany, the Netherlands and the United States. Our results provide evidence that differences in incentives, such as the relative cost of cards compared with cash, and differences in ATM withdrawal costs, are key factors explaining why cash remains top-of-wallet across many developed economies. Indeed, we show that once obtained, cash goes first because it ”burns” in consumers’ wallets.
•Economists emphasize the cost-saving potential of digital payments.•However, cash still dominates as a payment instrument.•We use consumer payment diaries from Austria, Canada, France, Germany, the Netherlands and the United States.•We show that the relative costs of cards and cash are significant in explaining cash usage.•Our model explains the high level of use of cash in countries without policies encouraging card adoption.